Accounting For Business Combination

Business Combinations (Part 1)
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Accounting for
Business
Combination
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Defined Terms
 A business combination is the term applied to external

expansion in which separate enterprises are brought together
into one economic entity as a result of one enterprise obtaining
control over the net assets and operations of another enterprise.
 IFRS 3 defines business combination as a transaction or event

in which an acquirer obtains control of one or more businesses.
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Defined Terms
 Acquiree
 The business or businesses that the acquirer obtains control of in a business
combination.
 Acquirer
 The entity that obtains control of the acquiree
 acquisition date
 The date on which the acquirer obtains control of the acquiree.
 Business
 An integrated set of activities and assets that is capable of being conducted and managed
for the purpose of providing goods or services to customers, generating investment
income (such as dividends or interest) or generating other income from ordinary activities.
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Defined Terms
 contingent consideration
 Usually, an obligation of the acquirer to transfer additional assets or equity interests to the
former owners of an acquiree as part of the exchange for control of the acquiree if specified
future events occur or conditions are met. However, contingent consideration also may give
the acquirer the right to the return of previously transferred consideration if specified
conditions are met.
 equity interests
 For the purposes of this IFRS, equity interests is used broadly to mean ownership interests
of investor-owned entities and owner, member or participant interests of mutual entities.
 fair value
 Fair value is the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date. (See IFRS 13.).
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Defined Terms
 goodwill
 An asset representing the future economic benefits arising from other assets
acquired in a business combination that are not individually identified and
separately recognised.
 identifiable
 An asset is identifiable if it either:
 (a) is separable, ie capable of being separated or divided from the entity and sold,
transferred, licensed, rented or exchanged, either individually or together with a related
contract, identifiable asset or liability, regardless of whether the entity intends to do so;
or
 (b) arises from contractual or other legal rights, regardless of whether those rights are
transferable or separable from the entity or from other rights and obligations.
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Defined Terms
 intangible asset
 An identifiable non-monetary asset without physical substance.
 mutual entity
 An entity, other than an investor-owned entity, that provides dividends,
lower costs or other economic benefits directly to its owners, members or
participants. For example, a mutual insurance company, a credit union
and a co-operative entity are all mutual entities.
 non-controlling interest
 The equity in a subsidiary not attributable, directly or indirectly, to a
parent.
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IFRS 3
 The objective of this IFRS 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. To accomplish that,
this IFRS establishes principles and requirements for how the acquirer:
 (a) recognises and measures in its financial statements the identifiable assets
acquired, the liabilities assumed and any non-controlling interest in the acquiree;
 (b) recognises and measures the goodwill acquired in the business combination
or a gain from a bargain purchase; and
 (c) determines what information to disclose to enable users of the financial

statements to evaluate the nature and financial effects of the business
combination.
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The Acquisition Method
 An entity shall account for each business combination by applying

the acquisition method. (IFRS 3)
 Applying the acquisition method requires:

 (a) identifying the acquirer;
 (b) determining the acquisition date;
 (c) recognising and measuring the identifiable assets acquired, the
liabilities assumed and any non-controlling interest in the acquiree; and
 (d) recognising and measuring goodwill or a gain from a bargain
purchase.
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 Identifying the Acquirer

 For each business combination, one of the combining entities shall be identified as the
acquirer.
 The entity that obtains control of another entity, ie the acquiree.
 Determining the acquisition date

 The date on which the acquirer obtains control of the acquiree is 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. For example, the
acquisition date precedes the closing date if a written agreement provides that the
acquirer obtains control of the acquiree on a date before the closing date. An acquirer
shall consider all pertinent facts and circumstances in identifying the acquisition date.
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 Recognising and measuring the identifiable assets acquired, the

liabilities assumed and any non-controlling interest in the
acquiree
 As of the acquisition date, the acquirer shall recognise, separately
from goodwill, the identifiable assets acquired, the liabilities
assumed and any non-controlling interest in the acquiree.
 The acquirer shall measure the identifiable assets acquired and the
liabilities assumed at their acquisition-date fair values.
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 Measurement Principle
 For each business combination, the acquirer shall measure at the
acquisition date components of non-controlling interests in the
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 at either:
 (a) fair value; or
 (b) the present ownership instruments’ proportionate share in the

recognised amounts of the acquiree’s identifiable net assets.
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 Recognising and measuring goodwill or a gain from a bargain purchase
 GOODWILL = Consideration Transferred + Amount of NCI – Net Assets Recognized
 If resulting amount is POSITIVE.

 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 this IFRS, which generally requires acquisition-
date fair value;
 (ii) the amount of any non-controlling interest in the acquiree measured in accordance with this IFRS; and
 (iii) in a business combination achieved in stages, 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 this IFRS.
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 Recognising and measuring goodwill or a gain from a bargain purchase
 GOODWILL = PRICE PAID > FAIR VALUE OF NET ASSETS

 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 this IFRS, which generally requires
acquisition-date fair value;
 (ii) the amount of any non-controlling interest in the acquiree measured in accordance with this
IFRS; and
 (iii) in a business combination achieved in stages, 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 this IFRS.
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 GAIN ON BARGAIN PURCHASE = Consideration Transferred +

Amount of NCI – Net Assets Recognized
 Resulting amount is NEGATIVE
 Bargain Purchase
 The gain shall be attributed to the ACQUIRER
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EXAMPLE
 P pays 800 to acquire an 100% interest in the ordinary shares of

S. The aggregated fair value of 100% of S's identifiable assets
and liabilities (determined in accordance with the requirements
of IFRS 3) is 600.
Consideration 800
Net Assets (600)
Goodwill / (Gain) 200
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EXAMPLE
 P pays 800 to acquire an 100% interest in the ordinary shares of

S. The aggregated fair value of 100% of S's identifiable assets
and liabilities (determined in accordance with the requirements
of IFRS 3) is 600.
Consideration 800
Net Assets (600)
Goodwill / (Gain) 200
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EXAMPLE
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Business Combinations (Part 1)

 A business combination is the term applied to external

 IFRS 3 defines business combination as a transaction or event

 The objective of this IFRS is to improve the relevance, reliability and

 (c) determines what information to disclose to enable users of the financial

 An entity shall account for each business combination by applying

 Applying the acquisition method requires:

 Identifying the Acquirer

 Determining the acquisition date

 Recognising and measuring the identifiable assets acquired, the

 (b) the present ownership instruments’ proportionate share in the

 Recognising and measuring goodwill or a gain from a bargain purchase

 GOODWILL = Consideration Transferred + Amount of NCI – Net Assets Recognized

 If resulting amount is POSITIVE.

 Recognising and measuring goodwill or a gain from a bargain purchase

 GOODWILL = PRICE PAID > FAIR VALUE OF NET ASSETS

 GAIN ON BARGAIN PURCHASE = Consideration Transferred +

 Resulting amount is NEGATIVE

 P pays 800 to acquire an 100% interest in the ordinary shares of

 P pays 800 to acquire an 100% interest in the ordinary shares of

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