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Indian Chartered Accountant

IFRS 3 BUSINESS COMBINATIONS

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OBJECTIVE Specify the Financial Reporting by an Entity when it undertakes a Business Combination.
CORE PRINCIPLE All Business Combinations should be accounted by applying the PURCHASE METHOD.
SCOPE Accounting for Business CombinationsExclusions :

  • Formation of Joint Ventures – IAS 31
  • Entities under Common Control
  • Business Combinations involving Mutual Entities
  • Business Combination involving formation of Reporting Entity by Contract alone without – Ownership Interest. Eg. Dual Listed Corporation
Definition – Business Integrated Set of Activities and Assets conducted & managed for the purpose of providing :

  • a return to investors; or
  • lower costs or other economic benefits directly and proportionately to policyholders or participants.

If GOODWILL is present – Presumption as to Business.
Recognition – Acquirer’s Perspective The Acquirer Recognises the Acquiree’s IdentifiableAssetsLiabilities (including Contingent Liabilities)At         Fair ValueAt         Acquisition Date.

Goodwill on Acquisition is recognised and Subsequently tested for Impairment at reporting date annually rather than amortised.
Identify The Acquirer
  • Acquirer obtains CONTROL of the Acquiree.
  • CONTROL – POWER to govern the FINANCIAL or OPERATING POLICIES of an Entity or Business – to obtain benefits from its activities.
  • Presumption that Acquirer can be identified in a Business Combination.
How To Identify The Acquirer? The Entity

  1. Acquires more than half of the other entity’s voting rights
  2. Acquires less than half of the other entity’s voting rights but Exercises–
    1. Power over half of the other Entity’s voting rights by virtue of
      1. an Agreement with other Investors; or
      2. a Statue or an Agreement
    2. Power to appoint or remove Board of Directors
    3. Power to cast majority votes at meetings of Board of Directors.

Indicators – The Entity

q  whose Fair Value is Higher

q  making payment of Cash or Other Assets

q  whose Management Dominates in the Combined Entity

q  initiated the process of Business Combination

Note:          New Entity is formed – Identify one of the    existing entities as the Acquirer on the previously mentioned criteria.
Measure the Cost of Business Combination The Cost of Business Combination is++   Fair Value of Assets given++   Fair Value of Liabilities assumed++   Fair Value of Equity instruments issued by the Acquirer++   Directly Attributable Costs of Business Combination

++   Present Value of Deferred Consideration

++   FV of Contingent Consideration – if Adjustment is Probable and can be measured Reliably.

N.B.     Fair Value (FV) is measured at Date of Exchange.
Definitions – Cost of Business  Combination Acquisition Date Date on which Acquirer Effectively obtains ‘Control’ of the Acquiree.
Directly Attributable Costs Includes – Professional fees paid to Accountants, Legal Advisors, Valuers and other Consultants to effect Business Combination.Excludes – General Administration Costs, etc. not specifically linked to a Business Combination
Fair Value The amount for which an asset could be exchanged or a liability settled, between knowledgeable, willing parties in an arm length’s transaction.
Allocate the Cost to Assets, Liabilities on Acquisition Date Recognises the Acquiree’s IdentifiableAssetsLiabilities (including Contingent Liabilities)At         Fair ValueAt         Acquisition Date.

Exception :: Non-current Assets (or Disposal Groups) that are classified as Held for Sale as per IFRS 5 shall be recognised At Fair Value Less Costs to Sell.
RECOGNITION CRITERIA – ASSETS AND LIABILITIES OF ACQUIREE
  • Assets other than Intangible Assets
    • Probable flow of F.E.B. to Acquirer
    • Fair Value can be measured Reliably
    • Liability
      • Probable outflow of F.E.B. to settle the obligation
      • Fair Value can be measured Reliably
    • Contingent Liability and Intangible Assets
      • Fair Value can be measured reliably.
Recognition Of Income Of Acquiree Profits / Losses of Acquiree shall be Incorporated after the Date of Acquisition.Profits / Losses shall be Based on the Cost of Business Combination to the Acquirer.
Recognition Of Goodwill q  Cost of Business Combination > Fair Value of Assets, Liabilities & Contingent Liabilities acquiredq  Recognise Difference as GOODWILL as Assetq  Initial Measurement At Cost.q  Subsequent Measurement – Cost less Accumulated Impairment loss (if any)q  Goodwill – payment for F.E.B. from assets not capable of being individually identified and separately recognised.

q  No Amortisation – Test for impairment annually or more frequently – if events indicate Impairment (IAS 36).
Bargain Purchase q  Cost of Business Combination < Fair Value of Assets, Liabilities & Contingent Liabilities acquired.q  Reassess the identification & measurement of Acquiree’s identifiable Assets, Liabilities, and Contingent Liabilities and the measurement of Cost of Business Combination.q  Recognise in P & L – any excess remaining after that reassessment.
Disclosure – By Acquirer Information that enable the users of Financial Statements evaluate:-q  The Nature and Financial Effect of Business Combination effectedq  during the period; andq  after the Balance sheet date but before the Financial Statements are authorised for issue.q  The Financial Effect of Gains, Losses, Error Corrections and other adjustments recognised in current period that relate to Business Combination effected in Current or Prior periods.

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Nirmal Ghorawat
The author is a fellow member of the Institute of Chartered Accountants of India.
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