Business Combinations 1

IFRS3 BUSINESS COMBINASTIONS

Groups accounts prepared where there has been a business combination (where an acquirer obtains
control of one or more businesses)

This raises 3 questions:

1) What is a business?
2) How do you identify an acquirer?
3) What is meant by control?

1. What is a business?
- Integrated set of activities which can be conducted and managed to provide a return.
- A business has 3 inputs

1. Inputs – an economic resource (assets etc)

2. Process – some kind of process which turns inputs into outputs. You need staff stock etc
3. Output – something coming out (sales etc)

2. How do you identify an acquirer?

- IFRS 3 says one will acquire and one will be acquired.
- Acquiree is taken over so for this we do good will, FV adjustments and consolidate post-AQ
profits etc
- Normally acquirer is parent.
- Sub may be the acquirer in less cases. REVERSE ACQUISITION

HOW TO IDENTIFY THE AQUIRER

- The one who its paying is normally the acquirer
- Issuing equity interest shares from the acquirer
- The largest is usually the size

CIRCUMSTANCES TO CONSIDER
- Voting rights amount after combination
- Senior management / BOD set up after combination
- Terms of equity exchanged

3. What is control?
- Control is normally a majority (of shares and hence voting rights)
- You will have control if you have control PEA!
- Power over investee
o Existing rights which let you direct them on what to do
o Rights can be straightforward or complex (embedded in contract)
- Exposure to variable returns
o Risks + rewards of ownership
 o Good = you do well
o Bad = you lose out
- Ability to use the power
o No ability to use power means you don’t really have it
- Consider other things which might impact it
o Options/Warrants
o Shareholder Agreements
o The size of other holdings

Q - read these ans

1) 45% but has option to buy 10 % anytime – has control

2) 40%. All other 12 have 5%. 40% has s/h agreement saying he has control. Needs 2/3s to
change this. Not possible as 60 is less than 66.6% - has control
3) 40%. Others have max 0.5% each more than 120 s/h
o ALL ABOVE MEANS STEWARDSHIP RESPONSIBILITY

Determine the AQ date - when we obtain control?

- The day we start bossing and directing. – TOMS PREFERENCE

- When public office becomes unconditional
- The date of acceptance of an unconditional offer.
- When you get the shares
IAS 28 – INVESTMENTS IN ASSOCIATES

Associates

- Sub = control = AQ accounting has to be used =

G/W consolidate line by line basis – NCI – PostAQ
- Principle not number to determined sub (>50%) USE PEA!!!!

- Ass = significant influence = equity accounting has to be used = no G/W - CONSOL - NCI = but
has online one line in BS and 1 in B&S = share of postAQ
- Principle (look at what’s going on rather than a number = logic)
- Principle not number to determined sub (>20% but <50%) USE PEA & Logic

- Ass = investor (parent) with significant influence.

- BoD rep in the company = 1/3 or 2/5 or 3/7 EDs etc.
- At 20% its an assumption you have significant influence.
- In SBR possible to have 15% as an ASS if:
o you have a BoD member etc (PEA).
o Participate in decisions before they are made
o Material transactions between Parent & Ass
o management personal interchange or sharing tech info
o Equity accounting (1 line 1 number that’s all – in P&L & BS)

[9:40] 2nd video

- Investment in ASS recognised at cost – then increased by share of postAQ – P&L

- No assets or liabilities of the associate are in the CONSOL - OCI
- 1 line in P&L, BS & OCI – as above

Q June & William [12:45]

 30% purchased £200,000
 Profit £60,000
 £10,000 dividend paid mid-year
 £5,000 impairment loss

SOFP NCA INVESTMENT IN ASSOSIATE = 210,000

- Cost of Investment £200,000

- Plus % postAQ RE
30% x (60k-10k div = 50k) £15,000 – Both in Group RE W5
- Less Impairment loss (£5,000) – Both in Group RE W5
 £210,000

Group P&L - Income from Ass 13,000

- % Ass PAT
- 30% x 60,000 18,000
- Less imp loss (5,000)
13,000

Discontinuing the equity method

- This stops when significant influence cease;
o When you buy more shares and it becomes a sub rather than ASS
 ---- 40% + 20% = 60%
o When shares are sold, becomes investment not ASS or SUB
 ----- 40% - 30% = 10%
 This now has to be valued at FV IFRS 9

Losses in excess of investment

- If an investor share of losses of an ASS equals zero or less then stop recognising its share of
further losses.
- UNLESS its legally for you to claim and deal with the losses
- Or if the investor has put money into it.
- ONLY RESTART recognising profits once your previous loss has been covered.

IFRS 11 – Joint Arrangements

- Agreement where 2 of more parties have joint control

- 50/50 relationship
o Taxi £20k
o 10k each
o 12hours each
o = Joint arrangement

- Buy company for £20k

o Company buys taxi
o They split profits

- Joint control will only apply if unanimous decisions are needed.

- Proportional CONSOL
o 50% of everything
o Asset & Liability
o Profit & Loss
2 types of joint agreements
- Joint Operations
o Right to assets
o Obligation for any liability
o Unincorporated (like a partnership)
o Proportional CONSOL
 50% of everything
 Asset & Liability
 Profit & Loss

- Join Ventures
o Right to net assets
o (taxi business) incorporate as a company
o Split share of 50/50 & profits too
o Incorporated
 Right to net assets
 Equity Accounting
 Same as ASS ^ accounting treatment.

Q Zoo – [32:10]

- 3 companies already trading

- Agree to merge and go 33.3% each in new co.
- Need 2/3 vote to go ahead with something

- Can be overruled (2/3) therefore not Joint Arrangement

- Significant influence therefore ASS not sub or JA
- TO BE JA THERE HAS TO BE UNANIMOUS CONSENT.

Q Alpha – [37:10]

For JO we have direct exposure to all Ass & Lia so we have to split it out

In JV we can do it equity accounting on one line

REWATCH Q ALPHA AT 37mins again