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    Business Combination Discussion and Questions PDF

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    Business Combination Discussion and Questions PDF

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    Chapter 4 ACCOUNTING FOR BUSINESS COMBINATION In November 2004, the Accounting Standard Council (ASC) has approved the adoption of International Financial Reporting Standard (IFRS) #3, Business Combination, issued by the International Accounting Standard Board (IASB), as a Philippine Financial Reporting Standard. IFRS # 3 was originally published in 2004 as the outcome of the IASB? first phase of its business combination project, which set out ‘that all business combinations should be recognizee using the purchase method of accounting. The second phase of the project was u:idertaken with the US standard setter, the Financial Accounting Standard Board (FASB), and addressed the application of the purchase method of accounting. The second edition of IFRS #3 was published in January 2008 replaces the term “purchase method” with “acquisition method”. The revised version of IFRS #3 should be applied for business combination that have an acquisition date on or after the beginning of the first annual reporting period beginning on or after July 1, 2009. However, an entity is permitted to adopt the standard in an annual reporting period that begins on or after June 30, 2007. In June 2008, the Financial Reporting Standards Council (FRSC) has approved the adoption of revised IFRS 3, Business Combination, and IAS 27, Consolidated and Separate Financial Statements, issued by the International Accounting Standards Board (IASB). The revised standards supersede the existing PFRS 3 and PAS 27, effective July 1, 2009. (Note: IMS 27, Consolidated and Separate Financial Statements was superseded by IFRS 10 in 2011.) Wentifying a Business Combination IFRS 10 defines business combination as a transaction or other event in which an a obtains control of one or more businesses. Stated differently, a business reubination occurs where several entities are brought together to form a single Porting entity. A business, on the other hand, is an integrated set of activities and Zn that is capable of being conducted and managed for the purpose of providing a var it the form of dividends, lower costs or other economic benefits directly to ing Ex “stors or other Owners, members or participants. ‘Scanne wih CamScanet 150 Chapter 4 - Accounting for Business ¢ tna, An acquirer might obtain control of an acquiree in a variety of ways, such as. 1. By transferring cash; cash equivalents or other assets, including 1 that constitute a business; tase 2. By incurring liabilities; 3. By issuing equity interests; 4. By providing more than one type of consideration; or 5. Without transferring consideration, including by contract alone. (se. 4 Business Combination Achieved Without the Transfer of Consideration in iy later part of this chapter) ‘A business combination may be structured in a number of different ways, ay therefore the facts of each transaction should be assessed carefully. Applica guidance -accompanying IFRS #3" provides a list of examples of buines combinations, including: © One or more businesses become subsidiaries of an acquirer; © One entity transfers its net asset to another entity; © Allentities that are partly to the business combination transfer their net asses {> anewly formed entity; or © A.group of former owners of one of the combining entities obtains contol the combined entity. [straightforward business combination, one entity will acquire anothe, rest i a parent-subsidiary relationship. However, if a business combination ines purchase of net assets, including goodwill of another entity, rather than the p ‘ii 6 of the equity of the other entity, this does not result in a parent-subsio#? relationship. Acquisition Method of Accounting ‘The second edition of IFRS #3 was published in January 2008 replaces ee “purchase method” with “acquisition method”. This method shall b * whereby: @ It is possible to identify the acquirer; © The acquisition date is determined; © The identifiable assets acquired, the liabilities ass! controlling (minority) interest are recognized and measured; and si gl © The resulting goodwill or gain from a bargain purchase is recos! measured. tamed and _—_- ‘Scanne wih CamScanet Chapter 4~ Accounting for Business Combination 151 Identifying the Acquirer The result of nearly all business combination is that one entity, the acquirer, obtains control of one or more other businesses, the acquiree. Ina business combination effected by transferring cash or other assets or by incurring liabilities, the acquirer is usually the entity that transfers the cash or other assets or incurs liabilities. However, in a business combination effected by exchanging equity interests, the acquirer is usually the entity that issues ils equity interest. However, in some business combinations, commonly called reverse acquisition, ihe issuing entity is the acquiree. This will be discussed in the later section of this chapter. In case identification of the acquirer is not clear, the following facts and circumstances may also be considered in identifying the acquirer in a business combination: * The combining entity whose owners as a group receive the largest portion of the voting rights in the combined entity is likely to be the acquirer, * Where there is a large minority interest in the combined entity and no other owner has a significant voting interest, the holder of the large minority interest is likely to be the acquirer; * Where one of the entities has the ability to elect or remove the majority of the members of the governing body of the combined entity, that party is likely to be the acquirer; * The combining entity whose management dominates the management of the combined entity; or * Where a premium has bec. paid over the fair value of one or more of the combining entities prior to the combination, the acquirer is likely to be the entity that has paid the premium. ‘Scanne wih CamScanet 152. Determining the Acquisition Date The acquirer should identify the acquisition date. The acquisition date jg the which the acquirer obtains control of the acquiree. It is normally the date a ty the acquirer legally transfers the consideration for the business, Hoy at possible for control to pass to the acquirer before or after this date. Where a i dates are keys to the business combination, it is the date on which control Passe hy determines the date on which the acquisition occurs. Consideration Transferred in a Business Combination The consideration transferred in a business combination is the total of the fair valuey at the acquisition date of the consideration given by the acquirer. The consideration transferred may take a number of forms, such as: © Cash or other assets given up e Liabilities assumed, such as taking on the liability for a bank loan of the acquiree. But future losses or other costs expected to be incurred in the futur do not form part of the consideration; or e Issuance of equity instruments, such as ordinary shares. _ carrying amounts of the assets or liabilities to be transferre:' differ from their fw’ values at the acquisition date, the acquirer shall remeasure the transterred st c: liabilities to their fair values and recognize any resulting gains or losses in profits! ‘oss. However, if the transferred assets or liabilities remain within the c “0 entity after the business combination (i.¢., the assets or liabilities were transierred ° the acquiree rather than to its former owners) and the acquirer retains control one the acquirer shall measure those assets and liabilities at their carrying ancl" immediately before the acquisition date and shall not recognize a gain o Ios © profit or loss on assets or liabilities it controls both before and after the busi combination. i ‘ ; ; a leg! Any costs incurred by the acquirer to achieve the business combination, such * 7 and professional fees, should not form part of the consideration transferred should be recognized in profit or loss in the period in which they are incu’. exception to this general requirement is that where cost have been incurred In '8 cai debt or equity securities should be deducted from the carrying amount of the ° or liability. ‘Scanne wih CamScanet Chapter 4~ Accounting for Business Combination 153 Contingent Consideration ‘The consideration transferred in a business combination may include any assets or liabilities resulting from a contingent consideration arrangement. In which case, the acquirer shall recognize the acquisition-date fair value of contingent consideration as part of the consideration transferred in exchange for the acquiree. The acquirer shall classify an obligation to pay contingent consideration that meets the definition of a financial instrument as a financial liability or as equity in accordance to IAS 32, ‘Financial Instruments: Presentation. The acquirer shall classify as an asset a right to the return of previously transferred consideration if specified conditions are met. Some subsequent changes to the amount recognized at the acquisition date for contingent consideration, may be the results of additional information that the acquirer obtained after that date about facts and circumstances that existed at the acquisition date. Such changes are measurement period adjustment, which is discussed in the later section of this chapter. However in case the measurement period adjustment cannot be applied where the change results from events after the acquisition date, such as when it becomes clear that the acquiree has met an earnings target, reaching a specified share price or reaching a milestone on research and development project, the following may be considered: Where the contingent consideration is classified as equity, this amount should not be remeasured and instead the final settlement of the consideration should be recognized as part of equity. © Where the contingent consideration is within the scope of IFRS 9, Financial Instruments, this shall be measured at fair value at each reporting date and changes in fair value shall be recognized in profit or loss in accordance with IFRS 9. © Where the contingent consideration is NOT within the scope of IFRS 9, Financial Instruments, this shal! be measured at fair value at each reporting date and changes in fair value shall be recognized in profit or loss. Classifying and Measuring the Identifiable Net Assets Acc ‘sired The acquirer must recognize separately at the date of acquisition the acquiree’s identifiable assets, liabilities, and contingent liabilities that satisfy the recognition criteria at that date set out in the IFRS. These net assets must be recognized imrespective of whether they have been previously recognized in the acquiree’s financial statements. a ‘Scanne wih CamScanet i a a ae vr: 154 Chapter 4— Accounting for Business Cie, To qualify for recognition as part of applying the acquisition method, an item © Meet the definition of an asset or liability in the Framewoy, Preparation and Presentation of Financial Statements atthe acquis’ (IRS 3.11). & + Be part of the business acquired (the acquiree) rather than the rsa separate transaction (IFRS 3.12) B At the acquisition date, the acquirer shall measure the acquiree’s identifiable yp assets at their fair value. In addition to the identifiable net assets acquired, 4, acquirer should recognize any non-controlling interest in the acquire either © At fair value, or © At the non-controlling interest’s proportionate share of the acquires identifiable net assets. This choice is available for each business combination, so an entity may use far value approach for one business combination and the proportionate share of tz acquiree's identifiable net assets for another. For the purpose of measuring a2: controlling interests at fair value, it may be possible to determine the acquisitiondez fair value on the basis of active market prices for the equity shares not held by acquirer. In case of non-publicly traded shares, the acquirer should measure the value of the non-controlling interests using other valuation techniques. The acquirer may recognize some assets and liabilities that the acquiree had previously recognized in its financial statements. For example, intangible #5 acquired must be recognized as assets separately from goodwill. These intangid* assets must meet the definition of an asset in accordance with IFRS 3. The identifiable net assets acquired in a business combination should be classified * designated according to their nature at the date of acquisition. to ensure that ol international standards can be applied subsequent to the acquisition; except Contracts as either an operating lease or finance lease which is in accordance 8" IAS 17, Lease; and ‘Insurance Contracts which is in accordance with IFR> Insurance Contracts. The acquirer shall classify those contracts on the basis of * contractual terms and other factors at the inception of the contract (or, if the tem", the contract have been modified in a manner that would change its classificatio™ the date of that modification, which might be the acquisition date). Furthermore, the acquirer shall recognize and measure a deferred tax asset of liabil? arising from the assets acquired and liabilities assumed in a business combinatio’ accordance with IAS 12, Income Taxes. It should be noted that when identifiable _—

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