Please enable JavaScript.
Coggle requires JavaScript to display documents.
Business Combinations – IFRS 3 - Coggle Diagram
Business Combinations – IFRS 3
Purchase consideration
Piecemeal acquisition
existing stake to be re-measured to fair value at the date of acquisition
taking into account any movement to the statement of profit or loss together with any gains previously recorded in equity that relate to the existing holding
If the value of the stake has increased
a gain recognised in the statement of comprehensive income
A loss would only occur if
existing interest has a carrying amount in excess of the proportion of the fair value
no impairment had been recorded previously
Any previous stake is seen as being ‘given up’ to acquire the entity
a gain or loss is recorded on its disposal
Contingent consideration
also recognised at fair value
even if payment is not deemed to be probable at the date of the acquisition.
All subsequent changes
recognised in the statement of profit or loss
rather than against goodwill
as they are deemed to be a liability recognised in accordance with IFRS 9, Financial Instruments
increase or reduction in liability
previously, they were recorded against goodwill
under-performance
decrease in liability
results in reduction of expense in the statement of profit or loss
good performance
An increase in the liability
results in an expense in the statement of profit or loss
Nature of contingent consideration is important
as it may meet the definition of a liability or equity
equity
no remeasurement
liability
new requirement
at acquisition date
the contingent consideration is measured to fair value
subsequently
re-measured through earnings
rather than the historic practice of re-measuring through goodwill
This change is likely to increase the focus and attention on the opening fair value calculation and subsequent re-measurements
negative goodwill
recorded in the statement of profit or loss, as in the previous standard
Transaction costs
no longer form a part of the acquisition price
instead, they are expensed as incurred
not deemed
to be part of what is paid to the seller of a business
to be assets of the purchased business that should be recognised on acquisition
The standard requires entities to disclose the amount of transaction costs that have been incurred
employee share-based payments
additional guidance on valuation
how to decide whether share awards
part of the consideration for the business combination or
compensation for future services
Goodwill and NCI
Goodwill
def
an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognised
simple terms goodwill is measured as the difference between
the consideration paid plus any NCI, and
the acquisition–date fair value of identifiable net assets acquired
NCI
entity has the option to measure either at
fair value of their proportion of identifiable assets and liabilities (partial method), or
full fair value (full method)
increase reported net assets on the statement of financial position
which means that any future impairment of goodwill will be greater
Although measuring NCI at fair value may prove difficult
goodwill impairment testing is likely to be easier under full goodwill
as there is no need to gross-up goodwill for partially owned subsidiaries
Fair valuing assets and liabilities
Most assets are recognised at fair value
with exceptions for certain items such as deferred tax and pension obligations
intangible assets
Acquirers are required to recognise brands, licences and customer relationships, and other intangible assets.
Contingent assets
not recognised
contingent liabilities
measured at fair value
After the date of the business combination
re-measured at the higher of
original amount
amount in accordance with the relevant standard
Restructuring provision
The ability of an acquirer to recognise a liability for terminating or reducing the activities of the acquiree is severely restricted
can be recognised in a business combination only when the acquiree has
an existing liability for which there are detailed conditions in IAS 37
but these conditions are unlikely to exist at the acquisition date in most business combinations
maximum period of 12 months from the date of acquisition
to finalise the acquisition accounting
adjustment period ends when the acquirer has gathered all the necessary information, subject to the 12-month maximum
no exemption from the 12-month rule for
deferred tax assets or
changes in the amount of contingent consideration
The revised standard will only allow adjustments against goodwill within this one-year period.
NCI is measured at fair value
valuation methods used for determining that value require to be disclosed
step acquisition
disclosure is required of
fair value of any previously held equity interest in the acquiree, and
the amount of gain or loss recognised in the statement of profit or loss resulting from re-measurement
IFRS 10, Consolidated financial statements
economic entity approach
treats all providers of equity capital as shareholders of the entity
even when they are not shareholders in the parent company.
for example
disposal of a partial interest in a subsidiary
does not result in a gain or loss
but in an increase or decrease in equity
treasury transaction
Purchase of some or all of the NCI
accounted for in equity
from subs to associate
recognition of gain or loss on the entire interest
A gain or loss is recognised on the part that has been disposed of
a further holding gain is recognised on the interest retained
difference between
fair value of the interest
carrying amount of the interest
The gains are recognised in the statement of comprehensive income
Amendments to IAS 28, Investments in Associates, extend this treatment to associates and joint ventures
Disposal of controlling interest while retaining associate holding
adjustments to be made when a parent loses control of a subsidiary
Derecognise the carrying amount of assets (including goodwill), liabilities and NCIs
Recognise the fair value of consideration received
Recognise any distribution of shares to owners
Recognise the fair value of any residual interest
Reclassify to profit or loss any amounts (the entire amount, not a proportion) relating to the subsidiary’s assets and liabilities previously recognised in other comprehensive income, as if the assets and liabilities had been disposed of directly