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BASIS FOR CONCLUSIONS ON IFRS 3 BENEFITS AND COSTS

BASIS FOR CONCLUSIONS ON IFRS 3 BENEFITS AND COSTS

BASIS FOR CONCLUSIONS ON IFRS 3 BENEFITS AND COSTS: Employee benefits – assets and liabilities arising from an acquiree’s employee benefits arrangements are recognised and measured in accordance with IAS 19 Employee Benefits.

BASIS FOR CONCLUSIONS ON IFRS 3 BENEFITS AND COSTS: Disclosure of information about current business combinations

An acquirer is required to disclose information that enables users of its financial statements to evaluate the nature and financial effect of a business combination that occurs either during the current reporting period or after the end of the period but before the financial statements are authorised for issue. [IFRS 3.59]

Among the disclosures required to meet the foregoing objective are the following:

  • name and a description of the acquiree
  • acquisition date
  • percentage of voting equity interests acquired
  • primary reasons for the business combination and a description of how the acquirer obtained control of the acquiree
  • description of the factors that make up the goodwill recognised
  • qualitative description of the factors that make up the goodwill recognised, such as expected synergies from combining operations, intangible assets that do not qualify for separate recognition
  • acquisition-date fair value of the total consideration transferred and the acquisition-date fair value of each major class of consideration
  • details of contingent consideration arrangements and indemnification assets
  • details of acquired receivables
  • the amounts recognised as of the acquisition date for each major class of assets acquired and liabilities assumed
  • details of contingent liabilities recognised
  • total amount of goodwill that is expected to be deductible for tax purposes
  • details about any transactions that are recognised separately from the acquisition of assets and assumption of liabilities in the business combination
  • information about a bargain purchase
  • information about the measurement of non-controlling interests
  • details about a business combination achieved in stages
  • information about the acquiree’s revenue and profit or loss
  • information about a business combination whose acquisition date is after the end of the reporting period but before the financial statements are authorised for issue

BASIS FOR CONCLUSIONS ON IFRS 3 BENEFITS AND COSTS

BASIS FOR CONCLUSIONS ON IFRS 3 BENEFITS AND COSTS: Acquisition method

The acquisition method is used for all business combinations.

Steps in applying the acquisition method are:

  1. Identification of the ‘acquirer’
  2. Determination of the ‘acquisition date’
  3. Recognition and measurement of the identifiable assets acquired, the liabilities assumed and any non-controlling interest (NCI, formerly called minority interest) in the acquiree
  4. Recognition and measurement of goodwill or a gain from a bargain purchase

Identifying an acquirer

The guidance in IFRS 10 Consolidated Financial Statements is used to identify an acquirer in a business combination, i.e. the entity that obtains ‘control’ of the acquiree.

If the guidance in IFRS 10 does not clearly indicate which of the combining entities is an acquirer, IFRS 3 provides additional guidance which is then considered:

  • The acquirer is usually the entity that transfers cash or other assets where the business combination is effected in this manner
  • The acquirer is usually, but not always, the entity issuing equity interests where the transaction is effected in this manner, however the entity also considers other pertinent facts and circumstances including:
    • relative voting rights in the combined entity after the business combination
    • the existence of any large minority interest if no other owner or group of owners has a significant voting interest
    • the composition of the governing body and senior management of the combined entity
    • the terms on which equity interests are exchanged
  • The acquirer is usually the entity with the largest relative size (assets, revenues or profit)
  • For business combinations involving multiple entities, consideration is given to the entity initiating the combination, and the relative sizes of the combining entities.

Acquisition date

An acquirer considers all pertinent facts and circumstances when determining the acquisition date, i.e. the date on which it obtains control of the acquiree. The acquisition date may be a date that is earlier or later than the closing date.

BASIS FOR CONCLUSIONS ON IFRS 3 BENEFITS AND COSTS: IFRS 3 must be applied when accounting for business combinations, but does not apply to:

  • The formation of a joint venture.
  • The acquisition of an asset or group of assets that is not a business, although general guidance is provided on how such transactions should be accounted for .
  • Combinations of entities or businesses under common control (the IASB has a separate agenda project on common control transactions).
  • Acquisitions by an investment entity of a subsidiary that is required to be measured at fair value through profit or loss under IFRS 10 Consolidated Financial Statements.

Annual Improvements to IFRSs 2011–2013 Cycle, effective for annual periods beginning on or after 1 July 2014, amends this scope exclusion to clarify that is applies to the accounting for the formation of a joint arrangement in the financial statements of the joint arrangement itself.

BASIS FOR CONCLUSIONS ON IFRS 3 BENEFITS AND COSTS :Acquisition method

The acquisition method (called the ‘purchase method’ in the 2004 version of IFRS 3) is used for all business combinations.

Steps in applying the acquisition method are:

  1. Identification of the ‘acquirer’
  2. Determination of the ‘acquisition date’
  3. Recognition and measurement of the identifiable assets acquired, the liabilities assumed and any non-controlling interest (NCI, formerly called minority interest) in the acquiree
  4. Recognition and measurement of goodwill or a gain from a bargain purchase

Identifying an acquirer

The guidance in IFRS 10 Consolidated Financial Statements is used to identify an acquirer in a business combination, i.e. the entity that obtains ‘control’ of the acquiree.

If the guidance in IFRS 10 does not clearly indicate which of the combining entities is an acquirer, IFRS 3 provides additional guidance which is then considered:

  • The acquirer is usually the entity that transfers cash or other assets where the business combination is effected in this manner
  • The acquirer is usually, but not always, the entity issuing equity interests where the transaction is effected in this manner, however the entity also considers other pertinent facts and circumstances including:
    • relative voting rights in the combined entity after the business combination
    • the existence of any large minority interest if no other owner or group of owners has a significant voting interest
    • the composition of the governing body and senior management of the combined entity
    • the terms on which equity interests are exchanged
  • The acquirer is usually the entity with the largest relative size (assets, revenues or profit) [
  • For business combinations involving multiple entities, consideration is given to the entity initiating the combination, and the relative sizes of the combining entities.

BASIS FOR CONCLUSIONS ON IFRS 3 BENEFITS AND COSTS: IFRS 3 establishes principles and requirements for how an acquirer in a business combination:

  • recognises and measures in its financial statements the assets and liabilities acquired, and any interest in the acquiree held by other parties;
  • recognises and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and
  • determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.

The core principles in IFRS 3 are that an acquirer measures the cost of the acquisition at the fair value of the consideration paid; allocates that cost to the acquired identifiable assets and liabilities on the basis of their fair values; allocates the rest of the cost to goodwill; and recognises any excess of acquired assets and liabilities over the consideration paid (a ‘bargain purchase’) in profit or loss immediately.  The acquirer discloses information that enables users to evaluate the nature and financial effects of the acquisition.

BASIS FOR CONCLUSIONS ON IFRS 3 BENEFITS AND COSTS

BASIS FOR CONCLUSIONS ON IFRS 3 BENEFITS AND COSTS : The objective of the IFRS is to enhance the relevance, reliability and comparability of the information that an entity provides in its financial statements about a business combination and its effects. It does that by establishing principles and requirements for how an acquirer:

  1. recognises and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree;
  2. recognises and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and
  3. determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.

BASIS FOR CONCLUSIONS ON IFRS 3 BENEFITS AND COSTS

BASIS FOR CONCLUSIONS ON IFRS 3 BENEFITS AND COSTS : An acquirer of a business recognises the assets acquired and liabilities assumed at their acquisition-date fair values and discloses information that enables users to evaluate the nature and financial effects of the acquisition.

A business combination must be accounted for by applying the acquisition method, unless it is a combination involving entities or businesses under common control or the acquiree is a subsidiary of an investment entity, as defined in IFRS 10 Consolidated Financial Statements, which is required to be measured at fair value through profit or loss. One of the parties to a business combination can always be identified as the acquirer, being the entity that obtains control of the other business (the acquiree). Formations of a joint venture or the acquisition of an asset or a group of assets that does not constitute a business are not business combinations.

BASIS FOR CONCLUSIONS ON IFRS 3 BENEFITS AND COSTS

BASIS FOR CONCLUSIONS ON IFRS 3 BENEFITS AND COSTS : The IFRS establishes principles for recognising and measuring the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree. Any classifications or designations made in recognising these items must be made in accordance with the contractual terms, economic conditions, acquirer’s operating or accounting policies and other factors that exist at the acquisition date.

Each identifiable asset and liability is measured at its acquisition-date fair value. Non-controlling interests in an acquiree that are present ownership interests and entitle their holders to a proportionate share of the entity’s net assets in the event of liquidation are measured at either fair value or the present ownership instruments’ proportionate share in the recognised amounts of the acquiree’s net identifiable assets. All other components of non-controlling interests shall be measured at their acquisition-date fair values, unless another measurement basis is required by IFRSs.

BASIS FOR CONCLUSIONS ON IFRS 3 BENEFITS AND COSTS

BASIS FOR CONCLUSIONS ON IFRS 3 BENEFITS AND COSTS : The IFRS provides limited exceptions to these recognition and measurement principles:

  1. Leases and insurance contracts are required to be classified on the basis of the contractual terms and other factors at the inception of the contract (or when the terms have changed) rather than on the basis of the factors that exist at the acquisition date.
  2. Only those contingent liabilities assumed in a business combination that are a present obligation and can be measured reliably are recognised.
  3. Some assets and liabilities are required to be recognised or measured in accordance with other IFRSs, rather than at fair value. The assets and liabilities affected are those falling within the scope of IAS 12 Income
  4. There are special requirements for measuring a reacquired right.
  5. Indemnification assets are recognised and measured on a basis that is consistent with the item that is subject to the indemnification, even if that measure is not fair value.

BASIS FOR CONCLUSIONS ON IFRS 3 BENEFITS AND COSTS

BASIS FOR CONCLUSIONS ON IFRS 3 BENEFITS AND COSTS : The IFRS requires the acquirer, having recognised the identifiable assets, the liabilities and any non-controlling interests, to identify any difference between:

  1. the aggregate of the consideration transferred, any non-controlling interest in the acquiree and, in a business combination achieved in stages, the acquisition-date fair value of the acquirer’s previously held equity interest in the acquiree; and
  2. the net identifiable assets acquired. The difference will, generally, be recognised as goodwill. If the acquirer has made a gain from a bargain purchase that gain is recognised in profit or loss.

BASIS FOR CONCLUSIONS ON IFRS 3 BENEFITS AND COSTS

BASIS FOR CONCLUSIONS ON IFRS 3 BENEFITS AND COSTS : The consideration transferred in a business combination (including any contingent consideration) is measured at fair value.

In general, an acquirer measures and accounts for assets acquired and liabilities assumed or incurred in a business combination after the business combination has been completed in accordance with other applicable IFRSs. However, the IFRS provides accounting requirements for reacquired rights, contingent liabilities, contingent consideration and indemnification assets.

BASIS FOR CONCLUSIONS ON IFRS 3 BENEFITS AND COSTS

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