Applying International Financial Reporting Standards
Summary of the lectures of Advanced Financial Accounting with topics such as business combinations, consolidation, foreign currency, joint arrangements and associates, income taxes, financial instruments and presentation and disclosure.
Book "Applying IFRS Standards" chapters 6, 7, 14, 16, 20, 21...
Lecture 10 – Financial instruments and crypto-assets
Lecture 11 – Financial instruments tutorial
Lecture 12 – Presentation and disclosure
, Lecture 2 – Business combinations
Various forms of business combinations
- Acquisition of shares in another entity
- Acquisition of a business without acquiring shares. Production facilities, employees,
intangibles acquisition, but not buying the shares is also an example of a business
combination.
- Or both.
A business combination is a transaction or other event in which an acquirer obtains control of
one or more businesses.
Definitions
- Group = a parent and its subsidiaries
- Parent = an entity that controls one or more entities. There is only one parent in the
group (investor)
- Subsidiary = an entity that is controller by another entity (investee)
Reasons for consolidation
1. Supply or relevant information (relevant to investors in the parent entity)
2. Comparable information
3. Accountability
4. Reporting of risks and benefits
Scoped out of IFRS 3
The following examples are not included in the scope of IFRS 3 Business Combinations.
- Common control business combinations. The combination doesn’t mean very much.
From a group perspective, nothing has changed between before and after. From
subsidiary A’s perspective, things have changed, because after they have a subsidiary.
Sub A and B are under common control of the holding before and after.
- Formation of joint arrangements (joint ventures)
So A and B decide to bring their businesses together; joint venture.
,Step acquisition
- Acquirer may already have an interest in the acquiree.
o E.g. A has 20% in B and now acquires the remaining 80% and gets control
- This is a business combination. They are getting control. You are acquiring control.
- IFRS considers this a transaction where the 20% interest is sold and 100% of the
acquired company is acquired in a business combination (change of relationship)
- Consequences:
o 100% IFRS 3 business combination.
o Book gain or loss on the 20% already owned.
Step acquisition example
1. 40% does not give you control, you don’t have the majority, so you don’t consolidate.
2. Then you acquire additional 30% total 70%. Then you have a business combination.
You sold the 40%; book gain or loss. Business combination of 70%. This is because you
gained control. Minority interest of non-controlling interest of 30%.
3. After a few years; you acquire the additional 30% that was held by the non-controlling
interest. You do not gain or lose control you already had control and you retained
control. There is no change in nature, no change in relationship. So this is not accounted
for as a business combination. What is this transaction then? An equity transaction.
Transaction between shareholders in the group. Minority interest, which was equity, is
sold out. The only thing that happened, is that we bought equity instruments. Whatever
we pay for the NCI is deducted from equity and the remain is also booked in equity. It
does not have an effect on profit or loss, just an equity transaction.
4. Equity transaction is the 4th example. Gain or loss on 80% held.
5. You had control 80%, and then you don’t have no control anymore (40%). We account
for the 40% at fair value, any difference is booked in profit/loss. You went from control
to no control, so there is a change in the relationship. So you book a gain or loss on the
40% of what we kept. You take a loss on the entire 80%.
, So if you go from no control to control, then you account for as a business combination and you
book gain or loss for already owned.
In summary
What is a business?
- Integrated set of activities and assets that is capable of being conducted and managed for
the purpose of providing a return in the form of dividends, lower costs or other
economic benefits directly to investors or other owners, members or participants
- So not only share deals, also acquisitions of businesses by buying assets and assuming
liabilities in combination with activities
- Even if no revenue yet (start-ups, R&D activities)
- Clarification by IASB (effective 2020):
o At least an input and one substantive process
o Optional concentration test: If substantially all of the fair value of the gross assets
acquired is concentrated in a single asset or group of similar identifiable assets, it
is not a business combination. If not, further analysis required
Is this a business (combination)?
- Case 1 - Entity E issues shares to the shareholders of entity F in return for which they
give 100% of the shares of F to E. F is a chain of supermarkets
o Yes, E acquires control over F and F is a business (inputs are stores and
employees, activities are selling goods) the acquirer is E, F is the acquiree.
- Case 2 - Entity A buys 100% of the shares of entity B, a single property company
o No, there are no activities. Although A acquires control over B, there is only an
input, but no activity.
- Case 3 - Entity X buys a hotel, including personnel, contracts and customer list from
entity Z
o Yes, although there is no entity, that is not a condition, and there is inputs
(employees, contracts) and there is an activity (providing hotel services)
Purchase method (acquisition accounting) steps
1. Identify the acquirer
2. Measure the value of the business acquired (normally consideration given up)
3. Determine the fair value of the assets acquired and liabilities and contingent liabilities
assumed
4. The difference is goodwill
The acquisition date is the date that the acquirer obtains control of the acquiree. A contract
already gives control.
Identifying the acquirer
- The acquirer is the combining entity that obtains control of the other combining entities
or businesses.
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