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Business Combinations IFRS 3 - Coggle Diagram
Business Combinations IFRS 3
Business combinations achieved through:
Taking over the
board of directors
Taking over
business assets and liabilities
Taking over
shares
Types of business combinations:
Take-over.
Amalgamation
Business combination (external growth of a business).
Absorption
Reconstruction (not covered in REK3AB):
Essentially the same business conducted by the new company with the same shareholders.
Shareholders transfer entire enterprise to a new company in exchange for shares.
Merger
Unbundling:
Shareholders of the holding company obtain shares in subsidiary companies directly
.
NB!!
Treatment for
accounting purposes
depends on the
substance of the transaction
.
Identifying a business combination
Business combinations can happen in two ways:
Business Combination through:
Purchase of Shares:
Obtaining control through purchasing equity of another entity means
acquiring ownership interest through control of voting rights
.
This type of control leads to the
preparation of consolidated financial statements
.
The equity investment in shares will be recorded in the
acquirer's separate financial statements
(see Annexure A) and later covered in consolidated financial statements (to be addressed in future units).
Business Combination through:
Purchase of Assets and Takeover of Liabilities
:
Focus on identifying assets and liabilities that
were not part of the acquirer's financial statements before the business combination
.
A
ssets and liabilities treated as separate transactions
should not be recognized as part of the business combination.
I
dentifiable assets acquired and liabilities assumed
will be recognized in the acquirer's separate financial statements according to IFRS 3 principles.
All business combinations are accounted for using the
Acquisition Method
, which involves 4 steps:
1.) Identifying the acquirer:
Considerations include
fair value differences
, cash exchange, or management selection ability.
Acquirer is the
entity obtaining control
of other entities.
2.) Identify the acquisition date:
The
date
when the acquirer gains control over the acquiree.
3.) Recognise and measure assets, liabilities, and non-controlling interests:
Recognition is subject to conditions specified in para. 11 and 12.
Acquirer must
separately recognise identifiable assets, liabilities, and non-controlling interests apart from goodwill
.
4.) Recognise and measure goodwill or gain on bargain purchase.
Identification
1.) Control
An investor
has control
over an investee
when
:
The investor has
power over the investee
.
The investor is
exposed to variable returns
from its involvement with the investee.
The investor has the
ability to use its power to affect the investee's returns.
2.) Acquisitions
The
acquirer transfers assets, incurs liabilities, or issues equity (shares)
in exchange for control.
A
n acquisition is a business combinatio
n where the
acquirer gains control over
the net assets and operations of the acquiree.
Business combination definition:
A
transaction or event
where the
acquirer gains control of one or more businesses
.
3.) Acquisition date:
The
date when the acquirer obtains control
of the acquiree.
Recognition for acquisition method:
Accounting treatment for acquisition includes:
Recognition and measurement of goodwill or gain on bargain purchase at acquisition and subsequently.
Recognition and measurement of identifiable assets acquired, liabilities assumed, and non-controlling interests.
At the acquisition date, the acquirer must classify or designate identifiable assets and liabilities for subsequent application of other IFRSs.
About
Assets and liabilities must be part of the exchange in the business combination, not separate transactions.
Acquirer's application of recognition principles may lead to recognizing previously unrecorded assets or liabilities for the acquiree.
Identifiable assets acquired and liabilities assumed must meet Framework definitions of assets and liabilities.
The following assets and liabilities must be classified according to IFRS 3:
Finance and operating leases
Insurance contracts
Certain intangible assets
Income Taxes
Employee benefits
Indemnification assets
Measurement:
Subsequent Measurement
After the initial measurement, the acquirer will subsequently measure and account for assets acquired, liabilities assumed, or incurred, and equity instruments issued in a business combination according to the applicable IFRS for those items.
Initial Measurement
Goodwill is recognized as of the acquisition date and is calculated as the excess of:
The amount of any non-controlling interest in the acquiree (measured in accordance with IFRS 3).
In a business combination achieved in stages, the acquisition-date fair value of the acquirer's previously held equity interest in the acquiree.
The aggregate of consideration transferred (measured at acquisition-date fair value as per IFRS 3).
Over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed (measured in accordance with IFRS 3).
In the case of a bargain purchase, where b) exceeds a), goodwill is not recognized.
The acquirer measures identifiable assets acquired and liabilities assumed at fair values on the acquisition date.
Disclosure
Financial Effects Disclosure:
These adjustments should pertain to business combinations that took place either in the current reporting period or in previous reporting periods.
The acquirer must disclose information that allows users of the financial statements to assess the nature and financial impact of adjustments recognized in the current reporting period.
Disclosure Requirements for Business Combinations:
An acquirer must provide information about all business combinations that occurred:
b) after the end of the reporting period but before the financial statements are authorized for issue.
a) during the current reporting period, or