Project Business Combination – Phase II

1. Accounting for business combinations according to the

business combination project – Phase II
2.1 Definition of a „business combination“ and a
„business“
2.2 Steps of the acquisition method
2.3 Examples of consolidation

3. Particular problems of business combinations

3.1 Business combinations achieved in stages
3.2 Measurement Period

1. Accounting for business combinations according to the

Business Combination Project – Phase II
1.1 Definition of a „business combination“ and a „business“

• A business combination is a transaction or other event in which an

acquirer obtains control of one or more businesses (the acquiree);
IFRS 3.3

• A business is an integrated set of activities and assets that is capable

of being conducted or managed for the purpose of providing either
(1) a return in the form of dividends, or
(2) lower costs, or other economic benefits directly to investors or
other owners, members or participants

Ö no limitations on share deals (also asset deals)

Ö no limitations on specific types of enterprises (e.g. also mutual
entities)

2. Accounting for business combinations according to the

Business Combination Project – Phase II
2.2 Steps of the acquisition method

(1) identifying the acquirer

(2) determining the acquisition date

(3) recognising and measuring the identifiable assets acquired, the

liabilities assumed and any non-controlling interest in the acquiree

(4) measuring the fair value of the consideration (including contingent

consideration)

(5) recognising and measuring goodwill or a gain from bargain

purchase

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 2.2 Steps of the acquisition method
2.2.1 Identifying the acquirer

• the acquirer is the entity which obtains control of the acquiree

• in most cases quite easy to identify the acquirer (depending on the
form of consideration transferred for the acquiree)
- the entity that transfers the cash or other assets or incurs the
liabilities
- the entity that issues new shares
- in the case of combining entities by installing a new entity:
acquirer is the combining entity with the greater fair value
- entity whose management is able to dominate the management
of the other entity
- in a business combination involving more than two entities: the
acquirer is likely the entity that initiated the combination and its
assets, revenues, profit or loss exceed significantly those of the
other entities

2.2 Steps of the acquisition method

2.2.1 Identifying the acquirer
Reverse acquisitions (IFRS 3. Appendix B.19 – 27)
- the legal acquirer (public entity) acquires a bigger entity
(private entity) by issuance of shares of the smaller entity
- the former owners of the legal acquiree control after the
issuance of the shares the legal acquirer
- motivation for the private entity: „going public“

____> consolidated financial statements are issued by the public

entity
____> for accounting purposes: the public entity is the
„accounting acquiree“ and the private entity is the
„accounting acquirer“ (so reverse to the legal structure)

2.2 Steps of the acquisition method

2.2.2 Determining the acquisition date

• the acquisition date is the date the acquirer obtains control of the
acquiree (IFRS 3.8)

• in general: acquisition date is identical with the closing date (date

the acquirer transfers the consideration, acquires the assets and
assumes the liabilities of the acquiree); nevertheless deviating
agreements possible

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 2.2 Steps of the acquisition method
2.2.3 Recognising and measuring the identifiable assets acquired,
the liabilities assumed and any non-controlling interest in the
acquiree
(1) Recognition Principle (IFRS 3.10 - 3.12)

- Identifiable assets acquired and liabilities assumed must meet the

definition criteria of assets and liabilities in the IAS-Framework
(in general less requirements in comparison to the IAS/IFRS)
- The acquired assets and assumed liabilities must be part of the business
combination transaction rather than the result of separate transactions

(2) Measurement Principle (IFRS 3.18)

- Identifiable assets acquired and liabilities assumed are measured at their

acquisition-date fair values

2.2 Steps of the acquisition method

2.2.3 Recognising and measuring the identifiable assets acquired,
the liabilities assumed and any non-controlling interest in the
acquiree
Exceptions to the recognition and measurement principle (IFRS 3.21 –
3.31)

a) Exceptions to the recognition principle

- operating leases (IFRS 3.14); operating leases in which the acquiree is the
lessee to an operate lease (acquirer shall not recognise separately the asset
and the related liability embodied in the lease if the lease is at market terms
as of the acquisition date)
- identifiable intangible assets (IFRS 3.13); either separability criterion or
contractual-legal criterion
- contingent liabilities; not necessary that it is probable that an outflow of
resources embodying economic benefits will be required to settle the obligation
(IFRS 3.23)

b) Exceptions to the measurement principle

- reacquired rights (IFRS 3.29); valuation on the basis of the remaining
contractual term of the related contract
- share-based payment awards (IFRS 3.30)
- assets held for sale (IFRS 3.31; see IFRS 5.15)

2.2 Steps of the acquisition method

2.2.3 Recognising and measuring the identifiable assets acquired,
the liabilities assumed and any non-controlling interest in the
acquiree
Exceptions to the recognition and measurement principle (IFRS 3.21 –
3.31)

c) Exceptions to both the recognition and measurement principles

- Recognition and measurement of deferred tax assets or liabilities

according to IAS 12 (IFRS 3.34 f.)
- Recognition and measurement of employee benefits according to IAS 19
(IFRS 3.26)
- Recognition of indemnification assets at the same time as the recognition
of the indemnified item and measurement of indemnification assets on
the same basis as the valuation of the indemnified item (IFRS 3.27 f.)

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 2.2 Steps of the acquisition method
2.2.3 Recognising and measuring the identifiable assets acquired,
the liabilities assumed and any non-controlling interest in the
acquiree
Measuring the non-controlling interest in the acquiree

• Option between the following measurements (IFRS 3.19)

- fair value of the non-controlling interest´s (Full-Goodwill-Method)

- non-controlling interest´s proportionate share of the acquiree´s

identifiable net assets

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2.2 Steps of the acquisition method

2.2.4 Measuring the fair value of the acquiree

• Composition of the consideration transferred (IFRS 3.32):

- the acquisition-date fair values of the assets transferred by the
acquirer, liabilities assumed or incurred by the acquirer, and
equity interests issued by the acquirer (including also contingent
consideration); IFRS 3.37 ff.
- amount of any non-controlling interest in the acquiree (IFRS 3.19)
- the acquisition-date fair values of any non-controlling equity
investment in the acquiree that the acquirer owned immediately
before the acquisition date (IFRS 3.42)

Ö Remark: All acquisition-related costs in connection with a business

combination are not part of the consideration transferred in
exchange of the acquiree (accounting according to other IAS/IFRSs
apart from business combinations; in general: recognise expenses!)

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2.2 Steps of the acquisition method

2.2.5 Recognising and measuring goodwill or a gain
from bargain purchase

• Goodwill = Excess of the (fair value of the) consideration (including

any non-controlling interest in the acquiree and the acquisition-date
fair value of the acquirer´s previously held equity interest in the
acquiree) over the acquisition-date amounts of the identifiable net
assets

• In the case of an excess of the acquisition-date amounts of the

identifiable net assets over the (fair value of the) consideration
___> Re-Assessment of the fair values of the consideration and the

acquisition-date amounts of the identifiable net assets

according to IFRS 3.10 -3.31
___> After Re-Assessment: recognising gain on a bargain

purchase

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 2.3 Examples for consolidation

Example 1- Problem Balance sheet of S-GmbH as of Jan., 1, 01

The parent company P-AG acquired as
Non-current assets Equity
of Jan., 1, 01 100% of the shares of the
S-GmbH for a price of 1.450 T €. Since Land 50.000 Paid-in 300.000
Jan., 1, 01 P-AG has obtained control capital
over S-GmbH. The fair value of the land Machi- 400.000 Retained 400.000
is 450 T € and the fair value of the nery earnings
machinery is 750 T € as of the Equipm. 350.000 Liabilities
acquisition date. The carrying amounts Current assets Liabilities
of the other assets and liabilities are for
identical with their fair values. The Inven- 100.000 pension 300.000
applicable tax rate amounts to 40%. tories plans
Depart of the assets and liabilities trade rec. 350.000 Provision 100.000
shown in the financial statements of
Cash 250.000 trade liab 400.000
the S-GmbH the P-AG does not acquire
any other assets. Total 1.500.000 Equity 1.500.000
assets and total
liabilities
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2.3 Examples for consolidation

Example 1 – solution:
Fair value of assets 2.250.000 €
land 450.000 €
machinery 750.000 €
equipment 350.000 €
current assets 700.000 €
- Fair value of liabilities 1.100.000 €
liabilities for defined benefit pension plans 300.000 €
provisions 100.000 €
trade liabilities 400.000 €
deferred taxes (40% * (450.000 € + 750.000 €) –
(50.000 € - 400.000 €)) 300.000 €
Fair value of assets less liabilities 1.150.000 €

Purchase price (consideration) 1.450.000 €

- Fair value of assets less liabilities 1.150.000 €
Goodwill 300.000 €

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2.3 Examples for consolidation

Example 2 – Problem

Example 1 with the following deviation:

The parent company P-AG acquired as of Jan., 1, 01 only 60 per cent
of the outstanding shares of the S-GmbH for a price of 870.000 €. The P-
AG pays no premium for acquiring the 60% share. The fair value of the S-
GmbH, as a whole, is 1.450.000 €.

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 2.3 Examples for consolidation
Example 2 – Solution

• Option according to IFRS 3.19

(1) Measurement of the non-controlling interest at their fair value

(Full-Goodwill-Method)

• Calculation of the goodwill as in the solution of example 1

• Computation of minority interest: 40% * 1.450.000 € = 580.000 €
• Consolidation entry:

Goodwill 300.000 € to Investment in subsidiaries 870.000 €

Land 450.000 € Minority interest 580.000 €
Machinery 750.000 € Liabilities for pension plans 300.000 €
Equipment 350.000 € Provisions 100.000 €
Inventories 100.000 € Trade liabilities 400.000 €
Trade receivables 350.000 € Deferred taxes 300.000 €
Cash 250.000 €

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2.3 Examples for consolidation

Example 2 – Solution

• Option according to IFRS 3.19

(2) Measurement of the non-controlling interest at the non-

controlling interest´s proportionate share of the acquiree´s
identifiable net assets

• Computation of minority interest: 40% * 1.150.000 € = 460.000 €

• Computation of Goodwill:

Purchase price 870.000 €

+ non-controlling interest 460.000 €
= Consideration 1.330.000 €
- Fair value of identifiable assets less liabilities 1.150.000 €
= Goodwill 180.000 €

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2.3 Examples for consolidation

Example 2 – Solution

• Option according to IFRS 3.19

(2) Measurement of the non-controlling interest at the non-controlling

interest´s proportionate share of the acquiree´s identifiable net assets

• Consolidation entry:

Goodwill 180.000 € to Investment in subsidiaries 870.000 €

Land 450.000 € Minority interest 460.000 €
Machinery 750.000 € Liabilities for pension plans 300.000 €
Equipment 350.000 € Provisions 100.000 €
Inventories 100.000 € Trade liabilities 400.000 €
Trade receivables 350.000 € Deferred taxes 300.000 €
Cash 250.000 €

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 2.3 Examples for consolidation

Example 3 – Problem

Example 2 with the following deviation:

The parent company P-AG acquired as of Jan., 01, 01 only 60 per cent
of the outstanding shares of the S-GmbH for a price of 900.000 €. The P-
AG pays a premium for acquiring a controlling interest of 30.000 €.

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2.3 Examples for consolidation

Example 3 – Solution

• Option according to IFRS 3.19

(1) Measurement of the non-controlling interest at their fair value

(Full-Goodwill-Method)

• Computation of minority interest: 40%/60% *(900.000 € - 30.000 €) = 580.000 €

• Computation of Goodwill

Purchase price 900.000 €

+ non-controlling interest 580.000 €
= Consideration 1.480.000 €
- Fair value of identifiable assets less liabilities 1.150.000 €
= Goodwill 330.000 €

• Goodwill amounts to 330.000 €

Ö distribution to P-AG: 900.000 € - 60% * 1.150.000 € = 210.000 €
Ö distribution to minorities: 580.000 € - 40% * 1.150.000 € = 120.000 €
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2.3 Examples for consolidation

Example 3 – Solution

• Consolidation entry:

Goodwill 330.000 € to Investment in subsidiaries 900.000 €

Land 450.000 € Minority interest 580.000 €
Machinery 750.000 € Liabilities for pension plans 300.000 €
Equipment 350.000 € Provisions 100.000 €
Inventories 100.000 € Trade liabilities 400.000 €
Trade receivables 350.000 € Deferred taxes 300.000 €
Cash 250.000 €

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 2.3 Examples for consolidation

Example 3 – Solution

• Option according to IFRS 3.19

(2) Measurement of the non-controlling interest at the non-controlling

interest´s proportionate share of the acquiree´s identifiable net assets

• Computation of minority interest: 40%/60% * 1.150.000 € = 460.000 €

• Computation of Goodwill

Purchase price 900.000 €

+ non-controlling interest 460.000 €
= Consideration 1.360.000 €
- Fair value of identifiable assets less liabilities 1.150.000 €
= Goodwill 210.000 €

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2.3 Examples for consolidation

Example 3 – Solution

• Consolidation entry:

Goodwill 210.000 € to Investment in subsidiaries 900.000 €

Land 450.000 € Minority interest 460.000 €
Machinery 750.000 € Liabilities for pension plans 300.000 €
Equipment 350.000 € Provisions 100.000 €
Inventories 100.000 € Trade liabilities 400.000 €
Trade receivables 350.000 € Deferred taxes 300.000 €
Cash 250.000 €

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2.3 Examples for consolidation

Example 4 – Problem

Example 3 with the following deviation:

The parent company P-AG acquired some years ago a 30% non-
controlling equity interest in the S-GmbH for historical cost of 300.000 €.
Immediately before the acquisition of another 30% share of the S-GmbH
(purchase price: 465.000 €, including 45.000 € as a premium for acquiring
a controlling interest in the S-GmbH) the P-AG classified its 30% share
previously acquired in the S-GmbH as an available-for-sale financial asset
(carrying amount: 400.000 €). No deferred taxes for the differences
between carrying amount and tax book values are recognised (IAS
12.39).

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 2.3 Examples for consolidation

Example 4 – Solution

Accounting for the non-controlling interest:

Fair value of the 30% non-controlling interest = 465.000 € - 45.000 € = 420.000 €

Investment (non-controlling) 20.000 € to other income 20.000 €

Equity, fair-value adjustments
for available-for-sale finan-
cial assets 100.000 € to other income 100.000 €

• Option according to IFRS 3.19

(1) Measurement of the non-controlling interest at their fair value

(Full-Goodwill-Method)

Purchase price (including control Premium) 465.000 €

+ fair value of the previously held equity interest in the acquiree 420.000 €
+ fair value of the minority interest in the acquiree 560.000 €
= Consideration 1.445.000 €
- Fair value of identifiable assets less liabilities - 1.150.000 €
= Goodwill 295.000 €

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2.3 Examples for consolidation

Example 4 – Solution

(1) Measurement of the non-controlling interest at their fair value

(Full-Goodwill-Method)

• Goodwill amounts to 295.000 €

Ö distribution to P-AG: 885.000 € - 60% * 1.150.000 € = 195.000 €
Ö distribution to minorities: 560.000 € - 40% * 1.150.000 € = 100.000 €

• consolidation entry:

Goodwill 295.000 € to Investm. in non-controll. int. 420.000 €

Land 450.000 € Investment in subsid./banks 465.000 €
Machinery 750.000 € minority interest 560.000 €
Equipment 350.000 € Liabilities for pension plans 300.000 €
Inventories 100.000 € Provisions 100.000 €
Trade receivables 350.000 € Trade liabilities 400.000 €
Cash 250.000 € Deferred taxes 300.000 €

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2.3 Examples for consolidation

Example 4 – Solution

(2) Measurement of the non-controlling at the non-controlling interest´s proportionate share

of the acquiree´s identifiable net assets

Purchase price (including control Premium) 465.000 €

+ fair value of the previously held equity interest in the acquiree 420.000 €
+ non-controlling interest 460.000 €
= Consideration 1.345.000 €
- Fair value of identifiable assets less liabilities - 1.150.000 €
= Goodwill 195.000 €

• consolidation entry:

Goodwill 195.000 € to Investm. in non-controll. int. 420.000 €

Land 450.000 € Investment in subsid./banks 465.000 €
Machinery 750.000 € Minority interest 460.000 €
Equipment 350.000 € Liabilities for pension plans 300.000 €
Inventories 100.000 € Provisions 100.000 €
Trade receivables 350.000 € Trade liabilities 400.000 €
Cash 250.000 € Deferred taxes 300.000 €

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 2.3 Examples for consolidation

Example 5 – Problem

Example 1 with the following deviation:

The purchase price of the S-GmbH is only 1.100.000 €.

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2.3 Examples for consolidation

Example 5 – Solution

Fair value of the consideration transferred 1.100.000 €

- Net amount of fair values of the separately recognised
identifiable assets acquired and liabilities assumed 1.150.000 €
= gain on „bargain purchase“ 50.000 €

• consolidation entry:

Land 450.000 € to Investment in subsid./banks 1.100.000 €

Machinery 750.000 € gain on bargain purchase 50.000 €
Equipment 350.000 € Liabilities for pension plans 300.000 €
Inventories 100.000 € Provisions 100.000 €
Trade receivables 350.000 € Trade liabilities 400.000 €
Cash 250.000 € Deferred taxes 300.000 €

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2.3 Examples for consolidation

Example 6 – Problem

Example 2 with the following deviation:

The parent company P-AG acquired as of Jan., 1, 01 only 60 per cent of

the outstanding shares of the S-GmbH for a price of 660.000 €.

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 2.3 Examples for consolidation
Example 6 – Solution

• Computation of minority interest: 40% * 1.150.000 € = 460.000 €

Purchase price 660.000 €

+ non-controlling interest 460.000 €
= Consideration 1.120.000 €
- Fair value of identifiable assets less liabilities - 1.150.000 €
= gain on „bargain purchase“ 30.000 €

• Consolidation entry:

Land 450.000 € to Investment in subsidiaries 660.000 €

Machinery 750.000 € Gain on bargain purchase 30.000 €
Equipment 350.000 € Minority interest 460.000 €
Inventories 100.000 € Liabilities for pension plans 300.000 €
Trade receivables 350.000 € Provisions 100.000 €
Cash 250.000 € Trade Liabilities 400.000 €
Deferred taxes 300.000 €
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3. Particular problems of business combinations

3.1 Business combinations achieved in stages

• The acquirer shall remeasure its non-controlling equity investment in

the acquiree at fair value as of the acquisition date and recognise any
gain or loss in profit or loss (example 4).

• Once an acquirer has obtained control of an acquiree, subsequent

acquisitions (or dispositions) of any non-controlling interests in the
acquiree shall be accounted for as equity transactions

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3.1 Business combinations achieved in stages

Example 7 – Problem

Example 2 with the following deviation:

As of Jan., 1, 02 the P-AG acquires additionally 20% of the outstanding

shares of the S-GmbH for a price of 300.000 €. The fair value of the S-
GmbH as of Jan., 1, 02, as a whole is, 1.500.000 €.

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 3.1 Business combinations achieved in stages

Example 7 – Solution

As the acquirer has already obtained the control since the acquisition of the 60 per cent of the
shares of the S-GmbH took place the acquisition of the additional 20 per cent of the shares of
the S-GmbH is accounted as an equity transaction. The minority interest is reduced by the
reduction of the non-controlling interest.

(1) Measurement of the non-controlling interest at fair value (Full-Goodwill-Method)

Minority interest 290.000 € to Bank 300.000 €

Equity, shareholders‘ 10.000 €

Any excess the P-AG pays for the acquisition is due to an increase of the fair value of the
subsidiary (esp. Increase in goodwill and increase in the fair values of the assets of the
subsidiary).

(2) Measurement of the non-controlling interest at the non-controlling interest´s proportionate

share of the acquiree´s identifiable net assets

Minority interest 230.000 € to Bank 300.000 €

Equity, shareholders‘ 70.000 €

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3.2 Measurement Period

Definition: Period during the acquirer shall retrospectively

adjust the provisional amounts recognised at the
acquisition date

- Maximum length of the measurement periode: one year from the acquisition
date
- in the case that measurements can be determined only provisionally as of the
acquisition date: recognising and measuring the identifiable net assets and the
fair value of the consideration
- retrospective adjustments during the measurement period to reflect any new
information obtained about facts and circumstances that existed as of the
acquisition date
- Adjustments during the measurement period as if these adjustments to the
provisional values had been completed at the acquisition date (consequences
for following adjustments; e.g. depreciation) with effect on the goodwill
- after the end of the measurement period: only a restatement of the business
combination in the case of errors (according to IAS 8) is possible.

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