IFRS 3- Revised 2008
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IFRS 3 Revised, Business combination, Goodwill, Merge and Acquisition
![IFRS 3 (Revised 2008)
Area
Transaction costs
Acquisition method
Steps in applying the acquisition method are: [IFRS 3.5]
1. Identification of the 'acquirer' The date on which the acquirer obtains control of the acquiree
2. Determination of the 'acquisition date' The entity that obtains control of the acquiree
4. Recognition and measurement of goodwill or a gain from a bargain purchase
Acquired assets and liabilities
IFRS 3 (Revised) affects the first accounting period beginning on or after 1 July 2009. It can be applied early but only to an accounting
period beginning on or after 30 June 2007
acquisition costs such as adviser’s fees, stamp duty and similar costs cannot be included in the
measurement of goodwill
option to measure non-controlling interests on the basis of fair value or net assets (transaction by
transaction)
fair value accounting at the acquisition date; contingent assets are not recognised, and contingent
liabilities are measured at fair value
new detailed guidance on the split between compensation and consideration for replacement share-
based payment awards
High-level overview of changes
pre-existing ownership interests are measured fair valued at acquisition date
subsequent changes do not impact goodwill (record to P&L) but are accounted for separately
The IASB has provided additional clarity that may well result in more intangible assets being recognised. Acquirers are required to recognise
brands, licences and customer relationships, and other intangible assets.
Calculation of goodwill
Contingent consideration (e.g. earn-
outs)
Transactions arising in conjunction
with business combinations
Recognition and measurement
Overview of differences between IFRS 3 (2008) and IFRS 3 (2004)
unrecognised deferred taxes no longer impact goodwill on subsequent measurement
'reliable measurement' exclusion for intangible assets removed
new guidance on indemnification assets and assets not expected to be used
buying or selling minority interests in a subsidiary only impacts equity
loss of control requires fair valuing of retained holding and recycling of reserves
settlement of pre-existing relationships (contracts, legal cases, etc.) can result in a gain/loss
Changes in ownership interests
(see IFRS 10)
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
Recognition principle. Identifiable assets acquired, liabilities assumed, and non-controlling interests in the acquiree, are recognised
separately from goodwill [IFRS 3.10]
Measurement principle. All assets acquired and liabilities assumed in a business combination are measured at acquisition-date fair value.
[IFRS 3.18]
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![IFRS 3 (Revised 2008)
Exceptions to the recognition and measurement principles
The following exceptions to the above principles apply:
Income taxes – the recognition and measurement of income taxes is in accordance withIAS 12 Income Taxes [IFRS 3.24-25]
Reacquired rights – the measurement of reacquired rights is by reference to the remaining contractual term without renewals [IFRS 3.29]
Share-based payment transactions - these are measured by reference to the method inIFRS 2 Share-based Payment
Goodwill
Goodwill = Consideration
transferred
+ Amount of
non-
controlling
interests
+ Fair value of previous
equity interests
- Net assets
recognised
(i) (ii)
(i) Include contingent consideration
Choice in the measurement of non-controlling interests (NCI)
fair value (sometimes called the full goodwill method), or
the NCI's proportionate share of net assets of the acquiree.
Example
Contingent liabilities – the requirements of IAS 37 Provisions, Contingent Liabilities and Contingent Assets do not apply to the recognition of
contingent liabilities arising in a business combination [IFRS 3.22-23]
(ii) If the value of the stake has increased, there will be a gain recognised in the statement of comprehensive income (income statement)
A loss would only occur if the existing interest has a book value in excess of the proportion of the fair value of the business obtained and no
impairment had been recorded previously. This loss situation is expected to occur infrequently.
Employee benefits – assets and liabilities arising from an acquiree's employee benefits arrangements are recognised and measured in
accordance with IAS 19 Employee Benefits (2011) [IFRS 2.26]
Assets held for sale – IFRS 5 Non-current Assets Held for Sale and Discontinued Operations is applied in measuring acquired non-current
assets and disposal groups classified as held for sale at the acquisition date.
Indemnification assets - an acquirer recognises indemnification assets at the same time and on the same basis as the indemnified item [IFRS 3.27-28]
IFRS 3 allows an accounting policy choice, available on a transaction by transaction basis, to measure non-controlling interests (NCI) either at: [IFRS 3.19]
The full goodwill method will increase reported net assets on the balance sheet which means that any future impairment of goodwill will be greater. Although
measuring non-controlling interest at fair value may prove difficult, goodwill impairment testing may be easier under full goodwill, as there is no need to
gross-up goodwill for partially owned subsidiaries.
P pays 800 to acquire an 80% 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, and the fair value of the non-controlling interest (the remaining 20% holding of ordinary shares) is 185.
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IFRS 3- Revised 2008
- 1. IFRS 3 (Revised 2008) Area Transaction costs Acquisition method Steps in applying the acquisition method are: [IFRS 3.5] 1. Identification of the 'acquirer' The date on which the acquirer obtains control of the acquiree 2. Determination of the 'acquisition date' The entity that obtains control of the acquiree 4. Recognition and measurement of goodwill or a gain from a bargain purchase Acquired assets and liabilities IFRS 3 (Revised) affects the first accounting period beginning on or after 1 July 2009. It can be applied early but only to an accounting period beginning on or after 30 June 2007 acquisition costs such as adviser’s fees, stamp duty and similar costs cannot be included in the measurement of goodwill option to measure non-controlling interests on the basis of fair value or net assets (transaction by transaction) fair value accounting at the acquisition date; contingent assets are not recognised, and contingent liabilities are measured at fair value new detailed guidance on the split between compensation and consideration for replacement share- based payment awards High-level overview of changes pre-existing ownership interests are measured fair valued at acquisition date subsequent changes do not impact goodwill (record to P&L) but are accounted for separately The IASB has provided additional clarity that may well result in more intangible assets being recognised. Acquirers are required to recognise brands, licences and customer relationships, and other intangible assets. Calculation of goodwill Contingent consideration (e.g. earn- outs) Transactions arising in conjunction with business combinations Recognition and measurement Overview of differences between IFRS 3 (2008) and IFRS 3 (2004) unrecognised deferred taxes no longer impact goodwill on subsequent measurement 'reliable measurement' exclusion for intangible assets removed new guidance on indemnification assets and assets not expected to be used buying or selling minority interests in a subsidiary only impacts equity loss of control requires fair valuing of retained holding and recycling of reserves settlement of pre-existing relationships (contracts, legal cases, etc.) can result in a gain/loss Changes in ownership interests (see IFRS 10) 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 Recognition principle. Identifiable assets acquired, liabilities assumed, and non-controlling interests in the acquiree, are recognised separately from goodwill [IFRS 3.10] Measurement principle. All assets acquired and liabilities assumed in a business combination are measured at acquisition-date fair value. [IFRS 3.18] http://financialstreet.blogspot.com/
- 2. IFRS 3 (Revised 2008) Exceptions to the recognition and measurement principles The following exceptions to the above principles apply: Income taxes – the recognition and measurement of income taxes is in accordance withIAS 12 Income Taxes [IFRS 3.24-25] Reacquired rights – the measurement of reacquired rights is by reference to the remaining contractual term without renewals [IFRS 3.29] Share-based payment transactions - these are measured by reference to the method inIFRS 2 Share-based Payment Goodwill Goodwill = Consideration transferred + Amount of non- controlling interests + Fair value of previous equity interests - Net assets recognised (i) (ii) (i) Include contingent consideration Choice in the measurement of non-controlling interests (NCI) fair value (sometimes called the full goodwill method), or the NCI's proportionate share of net assets of the acquiree. Example Contingent liabilities – the requirements of IAS 37 Provisions, Contingent Liabilities and Contingent Assets do not apply to the recognition of contingent liabilities arising in a business combination [IFRS 3.22-23] (ii) If the value of the stake has increased, there will be a gain recognised in the statement of comprehensive income (income statement) A loss would only occur if the existing interest has a book value in excess of the proportion of the fair value of the business obtained and no impairment had been recorded previously. This loss situation is expected to occur infrequently. Employee benefits – assets and liabilities arising from an acquiree's employee benefits arrangements are recognised and measured in accordance with IAS 19 Employee Benefits (2011) [IFRS 2.26] Assets held for sale – IFRS 5 Non-current Assets Held for Sale and Discontinued Operations is applied in measuring acquired non-current assets and disposal groups classified as held for sale at the acquisition date. Indemnification assets - an acquirer recognises indemnification assets at the same time and on the same basis as the indemnified item [IFRS 3.27-28] IFRS 3 allows an accounting policy choice, available on a transaction by transaction basis, to measure non-controlling interests (NCI) either at: [IFRS 3.19] The full goodwill method will increase reported net assets on the balance sheet which means that any future impairment of goodwill will be greater. Although measuring non-controlling interest at fair value may prove difficult, goodwill impairment testing may be easier under full goodwill, as there is no need to gross-up goodwill for partially owned subsidiaries. P pays 800 to acquire an 80% 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, and the fair value of the non-controlling interest (the remaining 20% holding of ordinary shares) is 185. http://financialstreet.blogspot.com/
- 3. IFRS 3 (Revised 2008) Method 1 Full Fair value Method 2 Proportion of identifiable assets Method 1 Method 2 Wrong calculation Method 2 Consideration transfer 80% 800 800 800 Identifiable net assets (FV) 600 NCI 20% 185 120 160 NCI -120 Total 985 920 960 Net assets acquired 480 Identifiable net assets (FV) 600 600 600 Consideration transfer 800 GW 385 320 360 GW 320 Reference IAS plus (Deloitte) ACCA technical articles Guidance from IFRS.org Link http://financialstreet.blogspot.com/2014/03/ifrs-3-business-combination.html http://www.slideshare.net/pbtuyen http://financialstreet.blogspot.com/