Business Combination

What is a business?
• consists of inputs and processes applied to those inputs that have
the ability to create outputs.
• Although businesses usually have outputs, outputs are not
required for an integrated set to qualify as a business.
 Elements of a Business
• Input – Any economic resource that creates, or has the ability to create,
outputs when one or more processes are applied to it.
• Process – Any system, standard, protocol, convention or rule that when
applied to an input or inputs, creates or has the ability to create outputs.
• Output – The result of inputs and processes applied to those inputs that
provide or have the ability to provide a return in the form of dividends,
lower costs or other economic benefits directly to investors or other owners,
members or participants.
 Are outputs necessary for an entity, asset, group of
assets or set of activities to be considered a business?
• An integrated set of activities and assets in the development stage might not have outputs.
If not, the acquirer should consider other factors to determine whether the set is a business.
Those factors include, but are not limited to, whether the set:
a) has begun planned principal activities;
b) has employees, intellectual property and other inputs and processes that could be applied
to those inputs;
c) is pursuing a plan to produce outputs; and
d) will be able to obtain access to customers that will purchase the outputs.
 What is a business combination?
• This IFRS defines a business combination as a transaction or other event in
which an acquirer obtains control of one or more businesses.
 Manner of Acquiring Control
a) by transferring cash, cash equivalents or other assets (including
net assets that constitute a business);
b) by incurring liabilities;
c) by issuing equity interests;
d) by providing more than one type of consideration; or
e) without transferring consideration, including by contract alone
 Structure
a) one or more businesses become subsidiaries of an acquirer or the net assets of
one or more businesses are legally merged into the acquirer;
b) one combining entity transfers its net assets, or its owners transfer their equity
interests, to another combining entity or its owners;
c) all of the combining entities transfer their net assets, or the owners of those
entities transfer their equity interests, to a newly formed entity (sometimes referred
to as a roll-up or put-together transaction); or
d) a group of former owners of one of the combining entities obtains control of the
combined entity.
 Identifying a business combination
• An entity shall determine whether a transaction or other event is a
business combination by applying the definition in this IFRS,
which requires that the assets acquired and liabilities assumed
constitute a business.
 Accounting for business combinations
• IFRS 3, par. 4 provides – “An entity shall account for each business
combination by applying the acquisition method.”
• Applying the acquisition method requires:
a) identifying the acquirer;
b) determining the acquisition date;
c) recognizing and measuring the identifiable assets acquired, the liabilities assumed and
any non-controlling interest (NCI) in the acquiree; and
d) recognizing and measuring goodwill or a gain from a bargain purchase.
 (A) Identifying the acquirer
• By transferring cash or other assets or by incurring liabilities - the acquirer is
usually the entity that transfers the cash or other assets or incurs the
liabilities.
• By exchanging equity interests - the acquirer is usually the entity that issues
its equity interests. (exception: reverse acquisition)
 Transfer to OWNERS
of B, 80 shares of A

100 shares, par P100 60 shares, par P150

Subsidiary-
Parent-acquiree
acquirer
(A)
(B)

Transfer to A of 60 shares
of B shares.
 (A) Identifying the acquirer
• Other pertinent facts and circumstances shall also be considered in identifying the
acquirer in a business combination effected by exchanging equity interests,
including:
a) the relative voting rights in the combined entity after the business combination.
b) the existence of a large minority voting interest in the combined entity if no other owner
or organized group of owners has a significant voting interest.
c) the composition of the governing body of the combined entity.
d) the composition of the senior management of the combined entity
e) the terms of the exchange of equity interests
 (A) Identifying the acquirer
• The acquirer is usually the combining entity whose relative size (measured in,
for example, assets, revenues or profit) is significantly greater than that of
the other combining entity or entities.
• In a business combination involving more than two entities, determining the
acquirer shall include a consideration of, among other things, which of the
combining entities initiated the combination, as well as the relative size of
the combining entities.
 (A) Identifying the acquirer
• A new entity formed to effect a business combination is not necessarily the
acquirer. If a new entity is formed to issue equity interests to effect a
business combination, one of the combining entities that existed before the
business combination shall be identified as the acquirer by applying the
guidance provided in the foregoing slides. In contrast, a new entity that
transfers cash or other assets or incurs liabilities as consideration may be the
acquirer.
 (B) Determining the Acquisition Date
• the date on which the acquirer obtains control of the acquiree.
• Generally: the date on which the acquirer legally transfers the consideration,
acquires the assets and assumes the liabilities of the acquiree—the closing
date.
• However, the acquirer might obtain control on a date that is either earlier or
later than the closing date.
 (C) Recognizing and measuring the identifiable assets
acquired, the liabilities assumed and any NCI in the acquiree

• As of the acquisition date, the acquirer shall recognize,

separately from goodwill, the identifiable assets acquired,
the liabilities assumed and any non-controlling interest in
the acquiree.
 Recognition conditions
• To qualify for recognition as part of applying the acquisition method, the
identifiable assets acquired and liabilities assumed must meet the definitions
of assets and liabilities in the Framework for the Preparation and
Presentation of Financial Statements at the acquisition date.
• In addition, to qualify for recognition as part of applying the acquisition
method, the identifiable assets acquired and liabilities assumed must be part
of what the acquirer and the acquiree (or its former owners) exchanged in
the business combination transaction rather than the result of separate
transactions
 Recognition conditions
• The acquirer’s application of the recognition principle and conditions may
result in recognizing some assets and liabilities that the acquiree had not
previously recognized as assets and liabilities in its financial statements.
 Exception to the Recognition Principle
• IAS 37 Provisions, Contingent Liabilities and Contingent Assets defines a
contingent liability as:
a) a possible obligation that arises from past events and whose existence will be
confirmed only by the occurrence or non-occurrence of one or more uncertain future
events not wholly within the control of the entity; or
b) a present obligation that arises from past events but is not recognized because:
(i) it is not probable that an outflow of resources embodying economic benefits will be
required to settle the obligation; or
(ii) the amount of the obligation cannot be measured with sufficient reliability.
Note: Recognized as of the acquisition date if: (1) it’s a present obligation arising from past events; (2) its
FV can be measured reliably
 Exception to the Recognition Principle and
Measurement Principle
• Income Taxes - in accordance with IAS 12 Income Taxes.
Example:
An entity undertaken a business combination which results in the recognition of goodwill in accordance
with IFRS 3 Business Combinations. The goodwill is not tax depreciable or otherwise recognized for tax
purposes.

As no future tax deductions are available in respect of the goodwill, the tax base is nil. Accordingly, a
taxable temporary difference arises in respect of the entire carrying amount of the goodwill. However, the
taxable temporary difference does not result in the recognition of a deferred tax liability because of the
recognition exception for deferred tax liabilities arising from goodwill.
 Exception to the Recognition Principle and
Measurement Principle
• Employee benefits - IAS 19 is to prescribe the accounting and disclosure for
employee benefits, requiring an entity to recognize a liability where an
employee has provided service and an expense when the entity consumes the
economic benefits of employee service.
 Exception to the Recognition Principle and
Measurement Principle
• Indemnification assets - The seller in a business combination may
contractually indemnify the acquirer for the outcome of a contingency or
uncertainty related to all or part of a specific asset or liability.
➢ The acquirer shall recognize an indemnification asset at the same time that it recognizes
the indemnified item measured on the same basis as the indemnified item, subject to
the need for a valuation allowance for uncollectible amounts. (valuation basis = FV on
acquisition date)
 Exception to the Recognition Principle and
Measurement Principle
• Reacquired rights - The acquirer shall measure the value of a reacquired right
recognized as an intangible asset on the basis of the remaining contractual term of
the related contract regardless of whether market participants would consider
potential contractual renewals in determining its fair value.
• Share-based payment awards- The concept of share-based payments is broader than
employee share options. IFRS 2 encompasses the issuance of shares, or rights to
shares, in return for services and goods. The issuance of shares in a business
combination should be accounted for under IFRS 3 Business Combinations.
However, care should be taken to distinguish share-based payments related to the
acquisition from those related to continuing employee services
 Recognizing and Measuring: Goodwill or
Bargain Purchase
• The acquirer shall recognise goodwill as of the acquisition date measured as the
excess of (a) over (b) below:
a) the aggregate of:
i. the consideration transferred measured in accordance with IFRS 3, which generally requires
acquisition-date fair value;
ii. the amount of any NCI in the acquiree measured in accordance with IFRS 3; and
iii. in a business combination achieved in stages (Step-Acquisition), the acquisition-date fair value
of the acquirer’s previously held equity interest in the acquiree.
b) the net of the acquisition-date amounts of the identifiable assets acquired and the
liabilities assumed measured in accordance with IFRS 3. (FV of net identifiable assets)*
*IFRS 3, par 32
 Recognizing and Measuring: Goodwill or
Bargain Purchase
• In a business combination in which the acquirer and the acquiree (or its former
owners) exchange only equity interests, the acquisition-date fair value of the
acquiree’s equity interests may be more reliably measurable than the acquisition-date
fair value of the acquirer’s equity interests.
• Exchange of equity instruments – base on FV of acquiree’s equity interest
• No consideration transferred - The acquirer should measure the acquisition-date fair
value of its interest in the acquiree using one or more valuation techniques that are
appropriate in the circumstances and for which sufficient data are available.
 Recognizing and Measuring: Goodwill or
Bargain Purchase
• Occasionally, an acquirer will make a bargain purchase, which is a business
combination in which the FV of net identifiable assets exceeds the
consideration given (with NCI and previously held shares).
• The acquirer shall then review the procedures used to measure the amounts
this IFRS requires to be recognized at the acquisition date for all of the
following:
 Recognizing and Measuring: Goodwill or
Bargain Purchase
a) the identifiable assets acquired and liabilities assumed;
b) the non-controlling interest in the acquiree, if any;
c) for a business combination achieved in stages, the acquirer’s previously held equity
interest in the acquiree; and
d) the consideration transferred.
 Consideration Transferred
• Shall be measured at fair value, which shall be calculated as the sum of the
acquisition-date fair values of the assets transferred by the acquirer, the
liabilities incurred by the acquirer to former owners of the acquiree and the
equity interests issued by the acquirer.
• When the acquired assets and liabilities’ carrying amounts (CA) ≠ FV, the
acquirer shall remeasure the transferred assets or liabilities to their fair values
as of the acquisition date and recognize the resulting gains or losses, if any,
in profit or loss.
 Consideration Transferred
• However, sometimes the transferred assets or liabilities (consideration)
remain within the combined entity after the business combination and the
acquirer therefore retains control of them. In that situation, the acquirer
shall measure those assets and liabilities at their carrying amounts
immediately before the acquisition date and shall not recognize a gain or loss
in profit or loss on assets or liabilities it controls both before and after the
business combination.
 Contingent Consideration
• The acquirer shall classify an obligation to pay contingent consideration as a
liability or as equity on the basis of the definitions of an equity instrument
and a financial liability in paragraph 11 of IAS 32 Financial Instruments:
Presentation, or other applicable IFRSs
 Acquisition Method for Particular Types of
Business Combination: Step Acquisition
• An acquirer sometimes obtains control of an acquiree in which it held an
equity interest immediately before the acquisition date.
• The acquirer shall remeasure 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.
 Acquisition Method for Particular Types of
Business Combination: Step Acquisition
• In prior reporting periods, the acquirer may have recognized changes in the
value of its equity interest in the acquiree in other comprehensive income. If
so, the amount that was recognized in other comprehensive income shall be
recognized on the same basis as would be required if the acquirer had
disposed directly of the previously held equity interest.
 Acquisition Method for Particular Types of
Business Combination: Without Consideration
• An acquirer sometimes obtains control of an acquiree without transferring consideration.
The acquisition method of accounting for a business combination applies to those
combinations. Such circumstances include:
a) The acquiree repurchases a sufficient number of its own shares for an existing investor (the acquirer)
to obtain control.
b) Minority veto rights lapse that previously kept the acquirer from controlling an acquiree in which the
acquirer held the majority voting rights.
c) The acquirer and acquiree agree to combine their businesses by contract alone. The acquirer transfers
no consideration in exchange for control of an acquiree and holds no equity interests in the acquiree,
either on the acquisition date or previously. Examples of business combinations achieved by contract
alone include bringing two businesses together in a stapling arrangement or forming a dual listed
corporation.
 Acquisition Method for Particular Types of
Business Combination: Without Consideration
• In a business combination achieved by contract alone, the acquirer shall
attribute to the owners of the acquiree the amount of the acquiree’s net
assets recognized in accordance with IFRS 3. In other words, the equity
interests in the acquiree held by parties other than the acquirer are a non-
controlling interest in the acquirer’s post-combination financial statements
even if the result is that all of the equity interests in the acquiree are
attributed to the non-controlling interest.
 Measurement Period
• The measurement period is the period after the acquisition date during which the
acquirer may adjust the provisional amounts recognized for a business combination.
• If the initial accounting for a business combination is incomplete by the end of the
reporting period in which the combination occurs, the acquirer shall report in its
financial statements provisional amounts for the items for which the accounting is
incomplete.
• The acquirer shall retrospectively adjust the provisional amounts recognized at the
acquisition date to reflect new information obtained about facts and circumstances
that existed as of the acquisition date and, if known, would have affected the
measurement of the amounts recognized as of that date.
 Measurement Period
• The measurement period provides the acquirer with a reasonable time to obtain the
information necessary to identify and measure the following as of the acquisition
date in accordance with the requirements of IFRS 3:
a) the identifiable assets acquired, liabilities assumed and any non-controlling interest in the
acquiree;
b) the consideration transferred for the acquiree (or the other amount used in measuring
goodwill);
c) in a business combination achieved in stages, the equity interest in the acquiree previously
held by the acquirer; and
d) the resulting goodwill or gain on a bargain purchase.
 Measurement Period
• The acquirer recognizes an increase (decrease) in the provisional amount
recognized for an identifiable asset (liability) by means of a decrease
(increase) in goodwill.
• After the measurement period ends, the acquirer shall revise the accounting
for a business combination only to correct an error in accordance with IAS 8
Accounting Policies, Changes in Accounting Estimates and Errors.
 Determining what is Part of the Business
Combination Transaction
• The acquirer and the acquiree may have a pre-existing relationship or other
arrangement before negotiations for the business combination began, or they
may enter into an arrangement during the negotiations that is separate from
the business combination.
• The acquirer shall recognize as part of applying the acquisition method only
the consideration transferred for the acquiree and the assets acquired and
liabilities assumed in the exchange for the acquiree. Separate transactions
shall be accounted for in accordance with the relevant IFRSs.
 Determining what is Part of the Business
Combination Transaction
• The following are examples of separate transactions that are not to be
included in applying the acquisition method:
a) a transaction that in effect settles pre-existing relationships between the acquirer and
acquiree;
b) a transaction that remunerates employees or former owners of the acquiree for future
services; and
c) a transaction that reimburses the acquiree or its former owners for paying the
acquirer’s acquisition-related costs.
 Acquisition-Related costs
• Acquisition-related costs are costs the acquirer incurs to effect a business
combination. (e.g. broker’s fees, accounting, legal and other professional fees,
general administrative costs [including costs for an internal acquisition
department].
• These costs are expensed, not included in the consideration given.
• EXC: Stock Issuance Costs, charged against share premium, in its absence,
against retained earnings as a contra account thereto (presented as a separate
line item).
 Non-controlling Interest (NCI)
• IFRS 3 allows an accounting policy choice, available on a transaction by transaction
basis, to measure non-controlling interests (NCI) either at:
• fair value (sometimes called the full goodwill method), or
• the NCI's proportionate share of net assets of the acquiree.
• The choice in accounting policy applies only to present ownership interests in the
acquiree that entitle holders to a proportionate share of the entity's net assets in the
event of a liquidation. Other components of non-controlling interests at must be
measured at acquisition date fair values or in accordance with other applicable
IFRSs
Subsequent Measurement and Accounting
• In general, an acquirer shall subsequently measure and account for
assets acquired, liabilities assumed or incurred and equity instruments
issued in a business combination in accordance with other applicable
IFRSs for those items, depending on their nature. However, this IFRS
provides guidance on subsequently measuring and accounting for the
following assets acquired, liabilities assumed or incurred and equity
instruments issued in a business combination:
 Subsequent Measurement and Accounting
• (a) reacquired rights;
• (b) contingent liabilities recognized as of the acquisition date;
• (c) indemnification assets; and
• (d) contingent consideration.
 Guidance from other IFRS
• Other IFRSs that provide guidance on subsequently measuring and
accounting for assets acquired and liabilities assumed or incurred in a
business combination include:
(a) IAS 38 prescribes the accounting for identifiable intangible assets
acquired in a business combination. The acquirer measures goodwill at the
amount recognized at the acquisition date less any accumulated impairment
losses. IAS 36 Impairment of Assets prescribes the accounting for impairment
losses.
 Guidance from other IFRS
(b) IFRS 4 Insurance Contracts provides guidance on the subsequent
accounting for an insurance contract acquired in a business
combination.
(c) IAS 12 prescribes the subsequent accounting for deferred tax assets
(including unrecognized deferred tax assets) and liabilities acquired in a
business combination.
 Guidance from other IFRS
(d) IFRS 2 provides guidance on subsequent measurement and
accounting for the portion of replacement share-based payment awards
issued by an acquirer that is attributable to employees’ future services.
(e) IAS 27 provides guidance on accounting for changes in a parent’s
ownership interest in a subsidiary after control is obtained.
 Reacquired Rights
• 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.
 Contingent Liabilities
• 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:
(a) the amount that would be recognized in accordance with IAS 37; and
(b) the amount initially recognized less, if appropriate, cumulative amortization
recognized in accordance with IAS 18 Revenue.
This requirement does not apply to contracts accounted for in accordance with IAS 39.
 Indemnification Assets
• At the end of each subsequent reporting period, the acquirer shall
measure an indemnification asset that was recognized at the
acquisition date on the same basis as the indemnified liability or asset,
subject to any contractual limitations on its amount and, for an
indemnification asset that is not subsequently measured at its fair
value, management’s assessment of the collectability of the
indemnification asset. The acquirer shall derecognize the
indemnification asset only when it collects the asset, sells it or
otherwise loses the right to it.
 Contingent Consideration
• Changes resulting from events after the acquisition date, such as
meeting an earnings target, reaching a specified share price or
reaching a milestone on a research and development project, are not
measurement period adjustments. The acquirer shall account for
changes in the fair value of contingent consideration that are not
measurement period adjustments as follows:
 Contingent Consideration
• (a) Contingent consideration classified as equity shall not be
remeasured and its subsequent settlement shall be accounted for
within equity.
• (b) Contingent consideration classified as an asset or a liability that:
(i) is a financial instrument and is within the scope of IAS 39 shall be
measured at fair value, with any resulting gain or loss recognized either in
profit or loss or in other comprehensive income in accordance with that IFRS.
(ii) is not within the scope of IAS 39 shall be accounted for in accordance with
IAS 37 or other IFRSs as appropriate.
 Disclosures
• The acquirer shall disclose information that enables users of its
financial statements to evaluate the nature and financial effect of a
business combination that occurs either:
(a) during the current reporting period; or
(b) after the end of the reporting period but before the financial statements
are authorized for issue.