BUSINESS COMBINATIONS

& CONSOLIDATION

Advanced Accounting
IFRS 3: Business Combinations

 A Business Combination is “the bringing together of

separate businesses or entities into one reporting
entity” (IASB)
 IFRS 3 require that all business combinations be
accounted for using the “purchase method”
 Purchase method recognizes all intangible assets
acquired in a business combination
 The purchase method is part of the convergence
project with FASB
IFRS 3: Business Combinations

 An acquirer must be identified for every business

combination
 Acquirer is defined as, “the combining entity that obtains
control of the other combining entities or businesses” (IASB)
 The acquirer must measure the cost of the business
combination including the following:
 “the fair values, at the date of exchange, of assets given, liabilities
incurred or assumed, and equity investments issued by the
acquirer, in exchange for control of the acquiree; plus any costs
directly attributable to the combination” (IASB)
 IFRS 3: Business Combinations

 The acquirer must separately recognize the acquiree’s identifiable assets, liabilities,
and contingent liabilities at the acquisition date

 These must satisfy certain recognition criteria even if they have been previously
recognized in the acquiree’s financial statements:
 Any assets (other than intangible assets) where it is probable that associated future
economic benefits will flow to the acquirer and fair value of the asset can be measured
reliably (IASB)
 Liabilities (other than contingent liabilities) where it is probable that an outflow of
resources embodying economic benefits will be required to settle the obligation and fair
value of the liability can be measure reliably (IASB)
 For intangible assets and contingent liabilities, the fair value must be able to be measured
reliably (IASB)

 These must be measured at the acquisition date, at their fair values, by the acquirer
IFRS 3: Business Combinations

 Goodwill: If acquired in a business combination:

 Must be recognized as an asset from the acquisition date
 Initially, goodwill is a measure of the excess of the cost of the business
combination over the acquirer’s interest in the net fair value of the
acquiree’s identifiable assets, liabilities, and contingent liabilities (IASB)
 These were previously recognized above
 It is prohibited to amortize goodwill
 Goodwill must be tested for impairment annually

 Must be tested more frequently if events or circumstances

indicate that the asset may be impaired (IASB)

 This is in accordance with IAS 36 Impairment of Assets
IFRS 3: Business Combinations

 In addition, goodwill can include:

 The fair value of the going concern element of the
acquiree
 The fair value of the expected synergies
 Overpayments by the acquirer
 Errors in measuring and recognizing fair value of
either the cost of the business combination or the
acquiree’s identifiable assets, liabilities, and contingent
liabilities (IASB)
IFRS 3: Business Combinations

 If the net fair value of the acquiree’s identifiable

assets, liabilities, and contingent liabilities exceeds
the cost of the business combination:
 Acquirer must reassess the identification and
measurement of those identifiable assets, liabilities,
and contingent liabilities
 Any excess that remains after the reassessment must be
recognized by the acquirer as profit or loss (IASB)
IFRS 3: Business Combinations

 Business combinations may involve more than one

exchange transaction
 This may happen when “stages” of share purchases occur
 Each of these “stage” transactions must be treated
separately
 Important to assess the cost of the transaction and fair
value information at the date of each of these subsequent
transactions
 Goodwill determined for each separate transaction
IFRS 3: Business Combinations

 If the acquirer does not obtain full consideration of

the acquire, goodwill can be recorded in 2 ways:
1. The difference between the consideration paid and
the purchaser’s share of identifiable net assets
acquired (Partial Goodwill)
2. Full Goodwill: recognized for the non controlling
interest in a subsidiary as well as the controlling
interest
Goodwill Example

 Partial Goodwill
 Identifiable net assets (fair value) = 1000
 Non controlling interest (20% * 1000) = 200
 Net assets required (1000 – 200) = 800
 Purchase Consideration = 900
 Goodwill (900 – 800) = 100
 Full Goodwill
 Identifiable net assets (fair value) = 1000
 Non controlling interest (measured at fair value) = 210
 Net assets required (1000 – 210) = 790
 Purchase consideration = 900
 Goodwill = 110

 Under full goodwill, non controlling interest is measured at fair value

 Under partial goodwill, non controlling interest is the percentage not acquired (20%)
multiplied by the identifiable net assets
IFRS 3: Business Combinations
IFRS 3: Business Combinations

 In many jurisdictions, the pooling of interest method is

permitted under US GAAP, also known as united interest or
merger accounting.
 Pooling of interest method is permitted by IAS 22 in instances
were an acquirer could not be identified
 Under the purchase method of accounting, the acquirer's
identifiable assets and liabilities should be measured at fair
value at acquisition date
 It requires more effort than pooling of interest method and
usually results in the recognition of goodwill or negative
goodwill on acquisition
 IFRS 3: Business Combinations

Cost of Business Combinations:

 Acquirer measures cost of business combinations as the total
FV at date of exchange of assets given, liabilities incurred
and equity instruments issued by the acquirer in exchange of
control of the acquirer and any costs directly attributable to
the business combination inquired by acquirer.
 If equity instruments are issued as consideration for the

acquisition, the market price of those instruments would be

the FV at the date of the transaction.
IFRS 3: Business Combinations

Allocating Costs of Business Combinations:

 At the acquisition date the acquirer must allocate the cost of business
combination by recognizing at FV the identifiable assets, liabilities, and
contingent liabilities of the acquirer
 Any difference between total of net assets and acquired and cost of

acquisition is treated as goodwill or negative goodwill

 IFRS 3: Business Combinations

Intangible Assets:
 When a company acquires intangible assets as part of a business combination, the
intangible asset is recognized separately if it meets the following criteria
1. Separately identifiable
2. Controlled by the acquirer
3. Source of future economic benefit
4. FV can be measured reliably
 On initial recognition of an intangible assets at the date of the transaction,
the cost of the intangible is measured at FV. The fair value of the intangible
asset is the amount the entity would have paid for the asset in an arm’s
length transaction between knowledgeable and willing parties, on the basis
of best information available
 Advice from an independent specialist with experience in the market can also be
sought
 IFRS 3: Business Combinations

Goodwill:
 Has to be tested for impairment at least annually(According to
IAS 36)
 In determining of goodwill being impaired as a result of

business combination, goodwill is allocated to a cash-generating

unit.
 To determine if a write-down is required, the recoverable

amount of the cash-generating unit is compared to is carrying

amount.
 Recoverable amount= higher of FV-costs to sell, or value in use.
 IFRS 3: Business Combinations

Goodwill (Cont.):
 Best estimable of FV-costs to sell is the agreed price in a binding sales
agreement for that cash generating unit.
 If there is no binding sales agreement, it would be the bid price for the
same asset in an active market
 If there is no active market, the FV (less costs to sell) would be based
upon the best available information the entity would get for the asset in
disposal.
 If a write-down is required, it would be first allocated to the recognized
goodwill of the cash-generating unit. Any additional write-down is
done in a pro rata basis to the other assets in the cash generating unit.
 IFRS 3: Business Combinations

Effective Date of IFRS 3:

 Effective for business combinations for which the agreement date is on or after
mach 31,2004
 Entities may choose to apply to transactions prior to March 31 2004 if they have

sufficient information to apply the standard.

 If goodwill has been recognized prior to March 31, 2004 resulting from

business combinations, the entity is required to:

1. Discontinue amortization of goodwill
2. Eliminate carrying amount of goodwill of accumulated amortization
3. Test goodwill for impairment
 For first time adopters of IFRS, IFRS 3 must be applied at transition date.
Business combinations made prior are not required to be restated. If companies
choose to do so, they must also restate any other business combinations occurred
from the date of the first one to the date of adopting IFRS.
Implementation of IFRS

 Reevaluation of Louis Vuitton brand at historical cost

(Equal to the value retained by Christian Dior)
 Accounting for goodwill against deferred taxes on
brands
 Eliminating the accumulated goodwill amortization
 Reclassification of the goodwill to trademarks or other
intangible assets
 Accounting against goodwill “Other non-current
liability” in relation to minority interest purchase
commitments
http://uk.reuters.com/business/quotes/incomeStatement?stmtTyp
e=BAL&perType=INT&symbol=LVMH.PA

http://www.lvmh.com/comfi/pdf/LVMH_RA_2009_U
K.pdf
Questions

The article from the NYSSCPA states that this particular topic has raised a
lot of concerns and tension in terms of convergence. The article also states
that while US GAAP and IFRS standards regarding business combinations
are very similar, they are not exact copies. What do you think the major
differences are between the GAAP and IFRS standards that is causing such
controversy in the global accounting community?

The key differences between consolidation when using GAAP or IFRS

involves the process of asserting control over the new combined company.
IFRS has clearer rules on who takes control after a merger than GAAP does.
There are also differences in rules for voting rights as well as for booking
investments belonging to the combining companies.
Questions

What are some of the advantages/disadvantages of the fresh-start

accounting method, and when should this method be used, as
mentioned in The CPA Journal article?

The advantages of the fresh-start method are that it gives companies

the opportunity to restructure and revalue their assets and liabilities
using a fair value option. It is frequently used after a company
declares bankruptcy. The disadvantages are that the company is likely
not in a strong financial position (especially if they are coming off
bankruptcy) and revaluing their assets using fair value could lead to
even bigger losses if the market is down.
Questions

The ifrsaccounting.com article identifies many differences between GAAP

and IFRS for business combinations and consolidated financial statements.
The majority of these differences seem to be minimal. Do you believe a
combination of these small differences could together create a material
difference between IFRS and GAAP? What does this mean for convergence?

While the two systems are very similar, the small differences still create an
issue that is keeping the two sides from coming to an agreement. A few of
these differences can also still create a problem down the road- especially
concerning convergence. There needs to be a clear ruling on things such as
the rules governing control, goodwill, and a booking assets belonging to the
converging companies.