ACC 2342:

ADVANCED
FINANCIAL
ACCOUNTING &
REPORTING

1
 BUSINESS
COMBINATION
S (SLFRS 3) –
Lesson 4

PART 1

2
 LEARNING OUTCOMES
At the end of this chapter the students should be able to:
1. Discuss the nature of a business combination and its various forms
2. Explain the basic steps in the acquisition method of accounting for business
combinations
3. Account for a business combination in the records of the acquirer
4. Recognise and measure the assets acquired and liabilities assumed in the business
combination
5. Discuss the nature of and the accounting for goodwill and gain from bargain purchase
6. Account for shares acquired in the acquiree
7. Prepare the accounting records of the acquiree
8. Account for subsequent adjustments to the initial accounting for a business
combination
9. Apply the disclosures required under SLFRS 3
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 SLFRS 03-BUSINESS
COMBINATIONS
OBJECTIVE
Objective : To improve the relevance, reliability and comparability of
the information about a business combination and its effects.

 Principles and Requirements for

Measuring Assets,
Liabilities and Non- Recognise Goodwill Disclosures
Controlling Interest
(NCI)

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 Assets + Liabilities need to constitute a business.

Business or Assets/ Liabilities???

BUSINESS

SLFRS 3 3.
SCOPE 1.INPUT 2. PROCESS
OUTPUT

Do not apply :
-to the accounting for a joint arrangement
-to the acquisition of an asset or a group of assets that does
not constitute a business
- to the acquisition by an investment entity,
  A business combination is a transaction or
other event in which an acquirer obtains
control of one or more businesses.

WHAT IS Control exists when

 An investor is exposed, or has rights, to
BUSINESS variable returns from its involvement with
COMBINATI the investee and has the ability to affect
those returns through its power over the
ONS? investee
 ‘business’ should be distinguished from the
acquisition of group of assets that does not
constitute a business- and the acquisition of a
business

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 1. A Ltd acquires all the assets and liabilities of B Ltd.
B Ltd Continues as a company, holding shares in A Ltd.

2. A Ltd acquires all the assets and liabilities of B Ltd.

B Ltd liquidates

GENERAL
FORMS OF 3. C Ltd is formed to acquire all the assets and liabilities of
BUSINESS A Ltd and B Ltd. – A Ltd and B Ltd liquidate
COMBINATIONS
4. A Ltd acquires a group of net assets of B Ltd, the group of net
assets constituting a business, such as a division, branch or segment,
of B Ltd. – B Ltd continues to operate as a Company

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 Entity A Entity B

THE NATURE Sale of Mining Division to

OF A BUSINESS Entity A
COMBINATION

Issue of Shares to
Entity B

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SLFRS 3: ACCOUNTING FOR A BUSINESS COMBINATION: BASIC
PRINCIPLES

ACQUISITION METHOD

Steps:
1. Identify the Acquirer.

2. Determine the Acquisition Date.

3. Recognise and measure the identifiable assets acquired, the

liabilities assumed and any non-controlling interest in the
acquiree.

4. Recognise and measure goodwill or a gain from a bargain

purchase 9
ACQUISITION METHOD: STEP 1 – IDENTIFYING THE ACQUIRER

 The acquirer is the entity that obtains control of another entity (acquiree).
 Acquiree: The business or businesses that the acquirer obtains of in a business
combinations.
 Identification of acquirer:

* Easy to identify the acquirer (E.g., A acquires more than 50% of B: A has control over B)

* Sometimes, judgement may be required

E.g., Entity A combines with B, and a new company (entity C) is formed, which issues shares to acquire all the shares of
both entities A and B. Who is the acquirer? A, B or C

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  What are the relative voting rights in the combined entity
STEP 1 – after the business combination?
IDENTIFYING THE  Is there a large minority voting interest in the combined
ACQUIRER: entity?
 What is the composition of the governing body of the
combined entity?
 What is the composition of the senior management that
governs the combined entity subsequent to the
INDICATORS TO combination?
ASSIST IN  Which entity is the larger?
ASSESSING WHICH  Which entity initiated the exchange?
ENTITY IS THE  What are the terms of the exchange of equity interests?
ACQUIRER.
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STEP 2 – DETERMINING THE ACQUISITION DATE

The date on which the acquirer obtains control of the acquiree

(the business combination occurs at the date the assets or net assets are under the control of the acquirer).

Why is this date important?

Four main areas where the selection of the date (acquisition date) affects the
accounting for a business combination:
 The fair values of net assets acquired

 Consideration given, where the consideration takes a non-cash form

 Measurement of the non-controlling interest (Equity in a subsidiary not attributable, directly or indirectly, to a parent)

 Measurement of the FV of any equity holding acquired prior to gaining contro l (e.g., an initial 20%
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ACCOUNTING IN THE RECORDS OF THE ACQUIRER: STEP 3 & 4

Where the acquirer purchases assets and assumes liabilities of another entity, it has to
consider:

1. The recognition and measurement of the identifiable assets acquired, and the liabilities
assumed (step 3 of the acquisition method).

2. The recognition and measurement of Goodwill (step 4 of the acquisition method).

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 RECOGNITION:
As at the acquisition date, the acquirer shall
recognise:

STEP 3:  All the identifiable assets acquired, MEASUREMENT:

RECOGNITION AND  All the liabilities assumed,
 Any Non-controlling interest in the acquiree
AT
FAIR VALUE
MEASUREMENT OF
ASSETS, LIABILITIES
AND NCI IF ANY Recognition criteria:
Recognition occurs if:

• It is probable that any future economic benefit associated with

the item will flow to or from the entity,

• The item has a cost or value that can be measured with

reliability. 14
STEP 3: RECOGNITION AND MEASUREMENT OF ASSETS, LIABILITIES
AND NCI IF ANY….CONTD.
Accounting for Contingent Liabilities:

1. 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

2. A present obligation that arises from past events, but it is not recognized because:

(i) It is not probable that an outflow of resources embodying economic benefits will be required
to settle the obligation

(ii) the amount of the obligation cannot be measured with sufficient reliability.
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 Contingent Liabilities: Real Liabilities (Present Obligations)

Only the real liabilities (possible obligations) are recognized

by the acquirer in a business combinations and measured at
fair value.

STEP 3 – Definitions of Assets & Liabilities in the conceptual

framework.
CONTD.,
“A present obligation of the entity to transfer an
economic resource as a result of past events”

 Possible obligations are not recognized in business

combinations.
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Step 3 – Contd., (Intangible Assets)

 Internally generated intangibles that were not recognized by the

acquiree but would be recognised by the acquirer.
Examples
Examplesinclude
includetrademarks;
trademarks;trade
tradenames;
names; customer
customerlists;
lists;
royalty
royaltyagreements;
agreements; patented
patentedtechnology
technologyetc.
etc.
 Recognize where the asset can be measured reliably

• The acquirer would measure those at FV: FV of an intangible reflects

market expectations about the probability of future economic benefits
flowing to the entity
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  FV is an exist price and is determined after the
specific asset or liability has been identified, the
principal market has been determined, the
assumption that market participants would make in
pricing an asset or liability have been identified.


STEP 3 – Valuation Techniques (measurement methods):
Market Approach
CONTD., Income Approach
(DETERMINATI Cost approach

ON OF FV) Acquirer has 12 months from acquisition date to
determine fair values
 At first reporting date after acquisition the fair
values may only be provisionally determined – a best
estimate
 Finalization of fair values will result in adjustments
to goodwill
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 ABC PLC acquired B PLC totally on 01.04.2021 and B PLC’s statement of
financial position on that date was as follows;
CA FV
Non-current assets 6 000 7 500
Current assets 2 500 2 400
Total Assets 8 500 9 900

Stated capital 2 500 4 000

Retained earnings 1 900 1 900
ACTIVI Noncurrent Liabilities
Current Liabilities
3 300
800
3 300
700
TY 1 Total equity and liabilities 8 500 9 900

B PLC had disclosed following in notes.

A contingent liability from a present obligation Rs 740 (FV)
A contingent liability from a possible obligation Rs 880
An internally generated Brand Name with expected benefits of Rs1,800
(reliably estimated) and the 75% probability of receiving the benefits.

What is the fair value of identifiable net assets (FVINA) as at 01.04.2021?

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 Goodwill or Gain from a bargain Purchase:
Non- FV of
FV of FV of
Controlling Previous
STEP 4: consideration
+transferred + Interest in + Equity -
acquiree’s
+
net assets
RECOGNITION AND Acquiree Interests
MEASUREMENT OF
GOODWILL OR A
GAIN FROM A
BARGAIN PURCHASE Acquisition in stages

Excess of consideration paid over FV of net assets acquired

(ACCOUNTING IN – Goodwill (Capitalize as an intangible asset)
THE RECORDS OF
THE ACQUIRER)
Excess of FV of net Assets over consideration paid – Gain
from a Bargain Purchase (Negative Goodwill in fact)---
Reassess for any errors---any excess to P/L immediately
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 BUSINESS
COMBINATION
AS A RESULT Will be covered in chapters 18 to 22. (In this lesson, for
OF such business combinations, only the recognition and
ACQUIRING measurement of the investment by the acquirer is
covered)
SHARES OF
OTHER
COMPANIES

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Settlement of Consideration

Consideration paid by the acquirer may consist of one or a

number of the following forms
• Cash

• Non-monetary assets

• Equity instruments

• Liabilities undertaken

• Contingent consideration
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 •Consideration paid immediately by cash
•Consideration paid partially by cash (Partially
differed payment)
CONSIDERA Where the settlement is deferred, the cash
must be discounted to present value as at
TION - CASH the date of acquisition
The discount rate used is the entity’s
incremental borrowing rate; interest
expense is recognised on payment

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 CONSIDERA •Assets such as PPE, Investments, licenses and
TION – NON- patents
MONETARY •The acquirer is effectively selling the non-
monetary assets to the acquiree
ASSETS

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 Where an acquirer issues their own shares
CONSIDERA as consideration, they need to determine
TION – the fair value of the shares as at the date of
exchange
EQUITY If listed, the fair value is the quoted market
INSTRUME price of the shares (with a few limited
exceptions)
NTS

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CONSIDERATI
ON-  In issuing equity instruments such as shares, as part
of consideration paid, transaction costs such as stamp
duties, professional advisers’ fees and brokerage fees
COSTS OF may be incurred.

ISSUING  Such costs are considered to be an integral part of

the equity transaction and should be recognized
DEBT AND directly in equity

EQUITY Costs associated with the issue of debt instruments are

included in the measurement of the liability
INSTRUMENT
S
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 In some cases, the agreement will provide for
additional (or repayment of) consideration ,
CONTINGE contingent on a future event
Example
NT  Where an acquirer issues shares as part of their
consideration, the agreement may require an additional
CONSIDERA payment IF the value of the shares falls below a certain
amount within a specified period of time
TION If the adjustment is probable and can be measured
reliably, then the amount should be included in the
calculation of the cost of acquisition

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Acquisition related costs

Acquisition related costs that are Do not form part of the

directly attributable to a business consideration transferred
combination (expense as incurred)

Finder’s fees
Advisory, legal accounting, valuation and other
Examples include: professional or consulting fees
General administrative costs, including the costs of
maintaining an internal acquisitions department.

* *Compare
Comparethis
thisto
tothe
therequirements
requirementsof
ofLKAS
LKAS16
16PPE
PPEand
andLKAS
LKAS38
38IA,
IA,where
wheresuch
suchcosts
costsare
arecapitalised
capitalisedinto
intothe
thecost
costof
of
acquisition
acquisition

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SUMMARY
IFRS 3 Business Combinations - summary 2021 - YouTube

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 ACTIVITY 2
What is the value of consideration to be settled based on the following
information?
A Limited is going to acquire all assets and liabilities of Q Limited on 31.03.2021
and settlement will be made as follows.
Immediate cash payment of Rs. 330 million on 1.4.2021 and another cash
payment of Rs. 233.28 million on 31.03.2023 to shareholders of Q Limited who
opted have cash instead of shares of A Limited.
The cost of capital of A Limited would be 8%.
5 Shares of A Limited for every 2 shares held by shareholders of Q Limited. Total
shares of Q Limited outstanding as of 31.3.2021 were 4 million.
The book value and the fair value of a share of Q limited as of 31.3.2021 were Rs.
18 and Rs. 20 respectively.
Share issuance cost was estimated to be Rs. 2.8 million.
Legal fees and other costs for this arrangement would amount to Rs. 7.5 million

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END OF THE
SESSION

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