2. PRESENTATION
AGENDA
OBJECTIVE
DISTINCTION BETWEEN IFRS 3 & IFRS 10
DETERMINING BUSINESS COMBINATION
ACQUISITION METHOD: OVERVIEW
ACQUISITION METHOD: 4 STEPS
ILLUSTRATION: GOODWILL & NON-CONTROLLING INTEREST
IFRS 3: BUSINESS
COMBINATIONS
ADDITIONAL GUIDANCE: SPECIFIC TRANSACTIONS
3. OBJECTIVE
IFRS 3:
More specifically, IFRS 3 establishes principles and
requirements for how the acquirer:
Recognizes and measures the IDENTIFIABLE ASSETS
acquired, the LIABILITIES assumed and ANY NON-
CONTROLLING INTEREST in the acquiree;
Recognizes and measures the GOODWILL acquired in the
business combination, or a gain from a bargain purchase;
Determines what INFORMATION TO DISCLOSE about the
business combination.
BUSINESS COMBINATIONS
The objective of IFRS 3 Business Combinations is
to improve the relevance, reliability and
comparability of the information that a reporting
entity provides in its financial statements about a
business combination and its effects.
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”
4. OBJECTIVE
SUMMARIZED IFRS 3: BUSINESS
COMBINATIONS
IFRS 3 BUSINESS COMBINATIONS
MEASURING ASSETS, LIABILITIES
& NON-CONTROLLING INTEREST
RECOGNIZING GOODWILL DISCLOSURES
5. DISTINCTION
IFRS 3 & IFRS 10
But while IFRS 10 DEFINES A CONTROL and prescribes
specific CONSOLIDATION PROCEDURES, IFRS 3 IS MORE
ABOUT THE MEASUREMENT OF THE ITEMS in the
consolidated financial statements, such as goodwill, non-
controlling interest, etc.
Both standards deal with business combinations and their
financial statements.
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”
NOTE:
If you need to deal with the
consolidation, then YOU NEED
TO APPLY BOTH STANDARDS,
not just one or the other.
6. DETERMINING
BUSINESS COMBINATION
Any investor who acquires some investment needs to determine
whether this transaction or event is a business combination or not.
A business consists of 3 elements:
Input = any economic resource that creates or can create outputs
when one or more processes are applied to it, e.g. non-current
assets, etc.;
Process = any system, standard, protocol, convention or rule that
when applied to an input(s), creates outputs, e.g. management
processes, workforce, etc.
Output = the result of inputs and processes applied to those inputs
that provide or can provide a return in the form of dividends,
lower costs or other economic benefits directly to investors or
other owners.
IFRS 3 requires that assets and liabilities acquired NEED TO
CONSTITUTE A BUSINESS, otherwise it’s not a business
combination and an investor needs to account for the transaction
in line with other IFRS.
1. INPUT
3. OUTPUT
2. PROCESSES
(PPE, Inventories…)
(Production, workforce…)
(Dividends, cost savings…)
BUSINESS
7. ACQUISITION
METHOD:
Once the investor acquires a subsidiary, it has to account for
each business combination by applying THE ACQUISITION
METHOD.
When you prepare your consolidated
financial statements, you must start with
the correct application of the acquisition
method, and then continue with the
eliminating the mutual intra-group
transactions, etc.
Now you may ask: what is the
difference between the acquisition
method and consolidation
procedures?
The acquisition method is simply a
part of all consolidation
procedures one needs to perform.
ISSUE
SOLUTION
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OVERVIEW
8. ACQUISITION
METHOD: 4STEPS
01
02
03
04
IDENTIFYING THE ACQUIRER
DETERMINING THE ACQUISITION DATE
Recognizing and measuring the IDENTIFIABLE ASSETS ACQUIRED, THE
LIABILITIES ASSUMED AND ANY NON-CONTROLLING INTEREST in the acquiree
Recognizing and measuring GOODWILL OR A
GAIN FROM A BARGAIN PURCHASE
25%
50%
75%
100%
9. STEP 1:
IDENTIFYING THE ACQUIRER
01
02
03
04
Sometimes, it is not so clear. The most common example is a merger.
When two companies merge together and create just 1 company, the
acquirer is usually the bigger one – with larger fair value.
However, IFRS 3 provides the application guidance in its appendix.
Most of the time, it’s straightforward – the acquirer is usually the
INVESTOR WHO ACQUIRES an investment or a subsidiary.
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”
10. STEP 2:
DETERMINING THE ACQUISITION DATE
01
02
03
04
The ACQUISITION DATE is the date on which the acquirer
obtains control of the acquiree.
It is generally the date on which the acquirer legally transfers
the consideration (=the payment for the investment),
acquires the assets and assumes the liabilities of the acquiree
– THE CLOSING DATE.
However, it can be earlier or later than the closing date, too. It
depends on the contractual arrangements in the written
agreement, if something like that exists.
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”
11. STEP 3:
RECOGNIZING AND MEASURING THE IDENTIFIABLE ASSETS ACQUIRED, THE
LIABILITIES ASSUMED AND ANY NON-CONTROLLING INTEREST IN THE ACQUIREE
01
02
03
04
Be careful, because sometimes, there’s some unrecognized asset in an acquiree, and an
investor needs to recognize this asset if it meets the criteria for the recognition. For example,
a subsidiary can have some unrecognized internally generated intangible assets meeting
separability criterion. In such a case, an acquirer needs to recognize these assets, too.
3.1 Acquired assets and liabilities
An acquirer or investor shall recognize all identifiable assets acquired, liabilities
assumed and non-controlling interests in the acquiree separately from goodwill.
All assets and liabilities are MEASURED AT ACQUISITION-DATE FAIR VALUE.
Often, investors need to perform “FAIR VALUE ADJUSTMENTS” at acquisition date, because
assets and liabilities are often valued in a different way – either at cost less accumulated
depreciation, at amortized cost, etc.
However, there are some exceptions from fair value measurement rule:
Contingent liabilities (IAS 37); Income taxes (IAS 12); Employee benefits (IAS 19); Indemnification assets; Reacquired
rights; Share-based payment transactions (IFRS 2); Assets held for sale (IFRS 5).
12. STEP 3:
RECOGNIZING AND MEASURING THE IDENTIFIABLE ASSETS ACQUIRED, THE
LIABILITIES ASSUMED AND ANY NON-CONTROLLING INTEREST IN THE ACQUIREE
01
02
03
04
For example, when an investor acquires 100% share in a company, then there’s no non-
controlling interest, because the investor owns subsidiary’s equity in full.
However, when an investor acquires less than 100%, let’s say 80%, then there’s non-
controlling interest of 20%, as the 20% of subsidiary’s net assets belong to someone else.
3.2 Non-controlling interest
Non-controlling interest is the equity in a subsidiary not attributable, directly
or indirectly, to a parent.
IFRS 3 permits 2 METHODS OF MEASURING NON-CONTROLLING INTEREST:
FAIR VALUE, or
The PROPORTIONATE SHARE in the recognized acquiree’s net assets.
Selection of method for measuring non-controlling interest directly impacts the amount of goodwill recognized, as
you can see in the illustrative example after Step 4.
13. STEP 4:
RECOGNIZING AND MEASURING GOODWILL OR A
GAIN FROM A BARGAIN PURCHASE
01
02
03
04
GOODWILL is an asset representing the future economic benefits
arising from other assets acquired in a business combination that are
not individually identified and separately recognized.
It is calculated as a difference between:
The aggregate of:
The fair value of the consideration transferred;
The amount of any non-controlling interest;
In a business combination achieved in stages: the
acquisition-date fair value of the acquirer’s previously-
held equity interest in the acquiree;
and
The acquisition-date amounts of net assets in an Acquiree.
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14. STEP 4:
RECOGNIZING AND MEASURING GOODWILL OR A
GAIN FROM A BARGAIN PURCHASE
01
02
03
04
The goodwill can be both positive and negative:
If the goodwill is POSITIVE, then you shall recognize it as an intangible asset and
perform annual impairment test;
If the goodwill is NEGATIVE, then it is a gain on a bargain purchase. You should:
Review the procedures for recognizing assets and liabilities, non-controlling
interest, previously held interest and consideration transferred (i.e. check
whether they are error-free);
Recognize a gain on bargain purchase in profit or loss.
GOODWILL vs. NEGATIVE GOODWILL
FAIR VALUE OF
CONSIDERATION
TRANSFERRED
NON-CONTROLLING
INTEREST
FV OF PREVIOUS
EQUITY INTEREST
FV OF S’s NET
ASSETS
Consideration transferred is measured at fair value, including any contingent consideration. Subsequent change
in a consideration transferred is accounted for depending on the initial recognition of the contingent consideration.
15. ILLUSTRATION
GOODWILL & NON-CONTROLLING INTEREST UNDER IFRS 3
Illustrative example –Goodwill & Non-controlling interest
Mommy Corp. acquires 80% share in Baby Ltd. for the cash payment of GBP 100 000.
On the acquisition date, the aggregate value of Baby’s identifiable assets and liabilities in line with IFRS 3 is GBP 110,000.
The fair value of non-controlling interest (the remaining 20% share) is GBP 25 000. This amount was determined with the
reference of market price of Baby’s ordinary shares before the acquisition date.
Goodwill and non-controlling interest have been calculated using both methods mentioned in Step 3 and the results are in the
following table. Please note the differences: 15,000
METHOD OF MEASURING NON-CONTROLLING INTEREST
Fair value
Proportionate Share on Baby's Net
Assets
Consideration transferred 100,000 100,000
add NCI 25,000 22,000
calculated as: (FV, reference to market price of B's shares) (20% of Baby's Net Assets of GBP 110,000)
Less: Baby's Net Assets (110,000) (110,000)
Goodwill 15,000 12,000
16. ADDITIONAL GUIDANCE
to SPECIFIC TRANSACTIONS
BUSINESS COMBINATION
ACHIEVED IN SATGES
ACQUISITION COSTS
PRE-EXISTING RELATIONSHIPS
REACQUIRED RIGHTS
CONTINGENT LIABILITIES
INDEMNIFICATION ASSETS
Besides the above rules on application of the acquisition method,
IFRS 3 provides guidance about the following transactions:
A BUSINESS COMBINATION ACHIEVED IN STAGES
ACQUISITION COSTS
PRE-EXISTING RELATIONSHIPS
REACQUIRED RIGHTS
CONTINGENT LIABILITIES
INDEMNIFICATION ASSETS
17. ADDITIONAL GUIDANCE
to SPECIFIC TRANSACTIONS
BUSINESS COMBINATION ACHIEVED IN SATGES
ACQUISITION COSTS
PRE-EXISTING RELATIONSHIPS
REACQUIRED RIGHTS
CONTINGENT LIABILITIES
INDEMNIFICATION ASSETS
The acquirer shall re-measure its previously held
equity interest in the Acquiree at its acquisition-
date fair value and recognize the resulting gain or
loss, if any, in profit or loss or other
comprehensive income, as appropriate.
“
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18. ADDITIONAL GUIDANCE
to SPECIFIC TRANSACTIONS
BUSINESS COMBINATION
ACHIEVED IN SATGES
ACQUISITION COSTS
PRE-EXISTING RELATIONSHIPS
REACQUIRED RIGHTS
CONTINGENT LIABILITIES
INDEMNIFICATION ASSETS
Costs of issuing debt or equity instruments are
accounted for under IAS 32 financial instruments:
presentation and IAS 39 financial instruments:
recognition and measurement/IFRS 9 financial
instruments. All other costs associated with an
acquisition MUST BE EXPENSED.
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19. ADDITIONAL GUIDANCE
to SPECIFIC TRANSACTIONS
BUSINESS COMBINATION
ACHIEVED IN SATGES
ACQUISITION COSTS
PRE-EXISTING RELATIONSHIPS
REACQUIRED RIGHTS
CONTINGENT LIABILITIES
INDEMNIFICATION ASSETS
If the acquirer and acquiree were parties to a pre-
existing relationship, this must be accounted for
separately from the business combination.
“
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20. ADDITIONAL GUIDANCE
to SPECIFIC TRANSACTIONS
BUSINESS COMBINATION
ACHIEVED IN SATGES
ACQUISITION COSTS
PRE-EXISTING RELATIONSHIPS
REACQUIRED RIGHTS
CONTINGENT LIABILITIES
INDEMNIFICATION ASSETS
A reacquired right recognized as an intangible asset
shall be amortized over the remaining contractual
period of the contract in which the right was granted.
An acquirer that subsequently sells a reacquired
right to a third party shall include the carrying
amount of the intangible asset in determining the
gain or loss on the sale.
“
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21. ADDITIONAL GUIDANCE
to SPECIFIC TRANSACTIONS
BUSINESS COMBINATION
ACHIEVED IN SATGES
ACQUISITION COSTS
PRE-EXISTING RELATIONSHIPS
REACQUIRED RIGHTS
CONTINGENT LIABILITIES
INDEMNIFICATION ASSETS
Acquirer recognizes a contingent liability in a
business combination, contrary to IAS 37, even when
the outflow of economic benefits to settle it is
remote. After initial recognition and until the liability
is settled, cancelled or expires, the acquirer shall
measure a contingent liability recognized in a
business combination at the higher of the amount
determined in accordance with IAS 37, and the
amount initially recognized less cumulative
amortization in line with IAS 18 Revenue.
“
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22. ADDITIONAL GUIDANCE
to SPECIFIC TRANSACTIONS
BUSINESS COMBINATION
ACHIEVED IN SATGES
ACQUISITION COSTS
PRE-EXISTING RELATIONSHIPS
REACQUIRED RIGHTS
CONTINGENT LIABILITIES
INDEMNIFICATION ASSETS
Indemnification assets recognized at the acquisition are
subsequently measured on the same basis of the
indemnified liability or asset, subject to contractual
impacts and collectability. Indemnification assets are
only derecognized when collected, sold or when rights
to it are lost.
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