the amount that would be recognised in accordance with IAS 37; the amount initially recognised less, if applicable, the cumulative amount of revenue recognised in accordance with IFRS 15. Note that non-controlling interests are all instruments classified as equity, not only shares. Scope of IFRS 3 acquired workforce, expected synergies or assets acquired that are not individually identified and separately recognised. The fair value of previously held equity interest in the target is then derecognised and included in calculation of goodwill. This software will be amortised over those 6 months as this is the period during which AC will obtain benefits from it. In such cases, the acquirer has an indemnification asset. Customer lists may include data such as name, age, geographical location or history of orders. IFRS 3 takes such limitations into account and introduces 12-month measurement period. Copyright © 2009-2020 Simlogic, s.r.o. IFRS 3 sets out the details for all of these steps. IFRS 3 (Revised 2008) — … The following milestones relate to the transaction: As said before, the key in determining the acquisition date is the notion of control. Additionally, paragraphs IFRS 3.B54-B55 provide detailed guidance on contingent payments to employees or former owners of the target that help to determine whether such payments are remuneration for future service or a contingent consideration for the target. IFRS 3 refers to the guidance in IFRS 10 to determine which of the combining entities obtains control. It is so because the acquirer paid so-called control premium (IFRS 3.B44-B45). Entities are required to identify the acquirer for each business combination (IFRS 3.6-7). All assets and liabilities acquired should be recognised irrespective of whether they were recognised by the target (IFRS 3.10-13) or whether the acquirer intends to use them. PwC: Practical guide to IFRS – Combined and carve out financial statements – 3 Step 1: Determine the purpose of the combined financial statements and understand the relevant regulatory requirements There is no definition of combined or carve out financial statements in IFRS… This approach is different from ‘regular’ requirements of IAS 37 where a liability is recognised only when the probability of outflow of resources exceeds 50%. It also provides … A Guide to Essential IFRS aims to simplify complex IFRS accounting standards into simple to understand concepts, enhanced with multiple case studies for participants to practice their knowledge to simulated ... – IFRS 1 First-time Adoption of International Financial Reporting Standards – IFRS 3 Business Combinations – IFRS … non-disclosure of a claim against the target). In July 2008, the Deloitte IFRS Global Office published B usiness Com­bi­na­tions and Changes in Ownership Interests: A Guide to the Revised IFRS 3 and IAS 27. IFRS 3 defines contingent consideration as: ‘Usually, an obligation of the acquirer to transfer additional assets or equity interests to the former owners of an acquiree as part of the exchange for control of the acquiree if specified future events occur or conditions are met. Recognizing and measuring goodwill or a gain from a bargain purchase. Transactions that are entered into primarily for the benefit of the acquirer or the combined entity, rather than primarily for the benefit of the target (or its former owners) before the combination, are likely to be separate transactions and should be accounted for separately from the business combination. Acquirer Company (AC) acquires 80% shareholding of Target Company (TC) for $100m. The application of the principles addressed … “when” IFRS for an asset classified as held for sale would be IFRS 5. In theory, overpayment will trigger an impairment loss during nearest impairment test (IFRS 3.BC382). IFRS 3 – Business Combinations A ‘business combination’ is a transaction or other event in which an acquirer obtains control of one or more businesses. First Time Adoption of International Financial Reporting Standards. AC has its own CRM software and therefore intends to migrate all TC customers within 6 months. TC has the following assets and liabilities as at the acquisition date: AC assesses that the fair value of assets and liabilities of TC equals their net book value as presented in the statement of financial position of TC. Acquiring Company (AC) acquired a competitor, the Target Company (TC), which had a TC brand with a fair value of $10 million. Legally protected trademarks (IFRS 3.IE18-IE21). More insights and guidance Long-term interests in associates and joint ventures. Example: Settlement of pre-existing contract. On acquisition, entities should recognise all liabilities if there is a present obligation and possibility of reliable measurement. It is possible that the acquirer obtains control without transferring consideration. An identifiable asset meets one of the two criteria: An asset is separable if it can be separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, identifiable asset or liability. Disclosure Requirements for Business Combinations. If there are any legal procedures to be fulfilled after the acquisition, they are usually virtually certain to be successfully processed and the control over TC is usually passed by TC’s former owners to AC before that date. After the initial recognition, the contingent liability is measured at the higher of the following amounts: The method of subsequent measurement specified above forbids to derecognise a liability assumed in a business combination until it is settled or expires. If goodwill relates to an acquisition of a foreign subsidiary, it is expressed in functional currency of this subsidiary and then subsequently translated as per IAS 21 requirements. But before that, IFRS 3 requires reassessment and reexamination of all the steps performed in business acquisition accounting (IFRS 3.34-36). Athens, February 2018 Chris Ragkavas, BA, MA, FCCA, CGMA IFRS technical expert, financial consultant. There are exceptions to the recognition and measurement principles of IFRS 3 applicable to certain specified assets and liabilities. It can happen e.g. For official information concerning IFRS Standards, visit IFRS.org. Insights into IFRS provides a practical guide to IFRS standards. Where relevant, the Guide also discusses subsequent amendments to these Standards. The fair value of the contract from the supplier’s (TC) perspective is determined at $7 million,  of which $3 million relates to above-market fixed pricing, and the remaining $4 million relates to at-market prices. Accounting for Business Combinations The public company is usually a legal acquirer as it issues shares to owners of the private company in exchange for shares in the private company. IFRS 3 . Non-controlling interest measured at fair value will usually be higher than when measured at proportionate share of identifiable net assets – the corresponding impact affects goodwill, making it also higher (see the illustrative example above). Fair value of ‘TC’ brand is estimated at $20m. Any difference between fair value and net book value is recognised immediately in P/L. Finally, both entities are merged into one entity or operations of the private company are transferred to the public company. The information provided on this website is for general information and educational purposes only and should not be used as a substitute for professional advice. Is such cases, a one-off gain on bargain purchase is recognised in P/L. The accounting for share-based payment arrangements in the context of business combinations is covered in IFRS 2. If all contingent consideration is paid in full, but the acquirer has a right to partial return, such a right is recognised as an asset at fair value and it decreases total consideration (IFRS 3.39-40). Operating leases in which the target is the lessor are not recognised separately if the terms of an operating lease are either favourable or unfavourable when compared with market terms. allowance for credit losses or accumulated depreciation of fixed assets should not be continued in financial statements of the acquirer (IFRS 3.B41). So e.g. However, contingent consideration also may give the acquirer the right to the return of previously transferred consideration if specified conditions are met’ (this would be an asset). When it comes to contingent assets, the acquirer should not recognise them unless the target has an unconditional right at the acquisition date. Use at your own risk. So e.g. The costs to issue debt or equity securities shall be recognised in accordance with IAS 32 and IFRS 9 (IFRS 3.53). The acquirer measures the identifiable assets acquired and the liabilities assumed at their acquisition-date fair values (IFRS 3.18-19), with certain exceptions as specified below. It is often difficult to assess whether a right is unconditional, especially for non-contractual assets. IFRS 3 (2008) seeks to enhance the relevance, re­li­a­bil­ity and com­pa­ra­bil­ity of in­for­ma­tion provided about business com­bi­na­tions (e.g. All Rights Reserved. All IFRS 3 requirements apply also to this kind of business combinations (IFRS 3.43-44). Goodwill is not amortised, but is subject to impairment testing at least annually as per IAS 36 requirements. More discussion on business combinations and income tax accounting can be found in IAS 12. Technology-based intangible assets (IFRS 3.IE39-IE44). Consideration transferred is the sum of fair values of (IFRS 3.37): Usually, consideration is paid in cash. Conversely, entities cannot recognise liabilities for future expenditures for which there is no present obligation as at the acquisition date. However, IFRS 3 takes into account instances when the control is obtained before or after the closing date (IFRS 3.8-9). The acquirer sometimes has a right to withhold part of the consideration for a specific period in case of e.g. Contingent consideration classified as equity as per IAS 32 is not subsequently remeasured and its settlement is accounted for within equity (IFRS 3.58). Other examples are IFRS 3, IFRS 6, IAS 19 and IAS 40. IFRS 3 Intelligence: Business Combinations : IFRS 4 . Goodwill is the difference between (IFRS 3.32): Example: illustration of calculation of goodwill. If shares of the target are quoted, their fair value will be determined as ‘price x quantity’. ‘Control‘ is used here in the meaning introduced by IFRS 10. This criterion is to be assessed irrespective of what the acquirer plans to do with the asset. It most often concerns a right to use an asset (recognised or unrecognised by the acquirer) by the target (such as brand). The useful life can be estimated as the period over which a significant competitor will fill the void after TC was withdrawn from the market, which will depend on many variables, such as the significance of entry barriers. When the non-controlling interest is subsequently reduced through purchase of additional shares by the parent company, such a transaction is accounted for as an equity transaction under IFRS 10. By far the most significant … If, after applying the guidance in IFRS 10, it is still not clear which of the combining entities is the acquirer, IFRS 3 provides some additional application guidance … IFRS 3 allows two measurement bases for non-controlling interest (IFRS 3.19): 1. fair value or 2. the present ownership instruments’ proportionate share of target’s identifiable net assets. Customer list is recognised as an intangible asset if the terms of confidentiality or other agreements or simply the law do not prohibit the entity from selling, leasing or otherwise exchanging the list. The acquirer is an entity that obtains control over the target. Share with your friends. liabilities to former owners incurred by the acquirer, and. AC intends to keep legal rights to brand TC forever in order to prevent other companies from using it. This approach is specifically allowed by IFRS 3.BC110 provided that there are no material events between the month closing date and actual acquisition date. Such consideration is referred to as contingent consideration and it should also be recognised at fair value as a part of business combination. IFRS 3 does not say how to measure fair value, as this is covered in IFRS 13. This should be done based on terms and conditions existing at the date of business combination (IFRS 3.15). In all other cases, the acquisition is … IFRS 3, Business combinations – A survival guide … Despite the legal classification, if the guidance in IFRS 3.B14-B18 indicates that the private company is de facto the acquirer, the business combination should be accounted for with the private company as the acquirer. Note that the part of contingent consideration that depends on continuous employment of the selling shareholder (so-called ‘earn-outs’) needs to be excluded from acquisition accounting and treated as an expense in future periods (IFRS 16.B55(a) and January 2013 IFRIC update). How do equity accounting losses and IFRS … Note that variant 2. is available only for equity instruments that are present ownership instruments and entitle their holders to a proportionate share of the target’s net assets in the event of liquidation. More on leases in IFRS 16. These are set out in paragraphs IFRS 3.22-31,54-57 and include items discussed below. Sometimes takeovers occur in stages. When an impairment loss is charged against goodwill, its amount will be higher when non-controlling interest is measured at fair value (see point 1. above). AC did not recognise any provision as it believed that the probability of cash outflow relating to this case is only 20%. How to calculate impairment on intercompany loans? A guide to IFRS 3 Business combinations 2 Acknowledgements This document is the result of the dedication and quality of several members of the Deloitte team. … Welcome to the IFRS 3 Business Combinations (2019) e-learning module. EY Homepage. The economic benefits for AC to be obtained from TC brand is that competitors cannot use it, which in turn increases profits of AC. In particular, entities should recognise assumed contingent liabilities for which a present obligation exists, even if the probability of outflow of resources is lower than 50% (IFRS 3.22-23). General criteria of IFRS 13 for determination of fair value of liabilities apply also to contingent consideration. The standard now applies to more transactions, as combinations by contract alone and combinations of mutual entities are brought into … Fair value of the liability is estimated at $2 m. This claim becomes an intragroup claim after the business combination, so it should be considered effectively settled in the consolidated financial statements of AC and AC should account for this settlement separately from business combination. Contract-based intangible assets. even if not separable from the related assets or legal entity. It may be challenging to determine the useful life of such asset, especially if the acquirer does not intend to use it at all, but some estimate needs to be made. IFRS 3 ‘Business Combinations’ (IFRS 3) requires an extensive analysis to be performed in order to accurately detect, recognise and measure at fair value the tangible and intangible assets and liabilities … Sometimes the amount (level) of consideration depends on future events. IFRS 3 amendments – Clarifying what is a business. If acquirer transfers other assets, they should be remeasured at fair value at acquisition date. How to treat different useful lives of PPE used by the parent and subsidiary? ifrs 3 business combinations OLD VS NEW he IASB revised IFRS3, Business Combinations and amended IAS27, Consolidated and Separate Financial Statements in January 2008 as part of the second phase … If such a project is never completed, it must be impaired. Combinations – Applying IFRS 3 in Practice (the Guide). It is usually straightforward to determine which entity is the acquirer – it is the entity that transfers cash or issues equity instruments and is clearly larger (in terms of assets, revenue etc.) AC recognises TC brand at its fair value of $10 million despite intent to withdraw the brand from the market. 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