Chapter 3: Business Combination: Based On IFRS 3
Chapter 3: Business Combination: Based On IFRS 3
Combination
Based on IFRS 3
ABC…….Parent
XYZ…….Subsidiary
Reasons of Business
combination
1. Growth
2. Economies of scale
3. Better management
4. Monopolistic ambition
5. Diversification
6. Tax advantage
Acquisition Method
This standard requires to use the acquisition method
to account for a business combination transaction.
It involves four steps:
Step 1: Identify the acquirer
The guidance in IFRS 10 shall be used to identify the
acquirer—the entity that obtains control of another
entity, i.e. the acquiree.
Cont….
In the absence of evidence to the contrary:
Example 1: Companies A and B combine businesses by
forming C. C issues 30 million and 20 million shares to A’s
& B’s shareholders in exchange for A’s and B’s businesses.
Example 2: same as Example 1, except: 20 million shares
are issued to each of A’s & B’s shareholders. C had 9 board
members, 5 appointed by A’s shareholders and 4 by B’s.
Example 3: on 31 December 2014 A has 100 million
shares in issue. On 1 January 2015 A issued 200 million
new A shares to the owners of B in exchange for all of B’s
shares.
Cont…..
Entity A intends to acquire the voting shares
(and therefore obtain control) of Target Entity.
Entity A incorporates Newco and uses this
entity to effect the business combination.
Entity A provides a loan at commercial interest
rates to Newco. The loan funds are used by
Newco to acquire 100% of the voting shares of
Target Entity in an arm’s length transaction.
Step 2: Determine the acquisition
date: date on which the acquirer
obtains control.
The date on which the acquirer obtains
control of the acquiree is generally the
date on which the acquirer legally
transfers the consideration, acquires the
assets and assumes the liabilities of the
acquiree—the closing date
Step 3: Recognize and measure the
identifiable assets acquired, the
liabilities assumed and any non
controlling interest in the acquiree;
The acquirer shall measure the identifiable assets acquired and the
liabilities assumed at their acquisition-date fair values. All other
components of non-controlling interests shall be measured at their
acquisition-date fair values.
1. Marketable Securities: Recorded at Fair value.
2. Receivables: Recorded at Discounted present value Amount.
3.Inventory:
I. Raw materials: Current Replacement cost
II. Work in Process: Net realizable cost-cost to complete-cost to
sale
III. Finished Goods: Net realizable cost-cost to sale
Cont…
4. Intangible Assets: Recorded at Fair value.
5. Fixed Assets: Recorded at Fair value.
6. Liabilities: Recorded at Fair value.
Non controlling interest
NCI is arise when one company controls
another company less than 100%. It is also
referred as Minority Interest.
IFRS 3: allows an accounting policy choice for
measuring non-controlling interest (NCI) at
the acquisition date:
1) fair value; or
2) NCI’s proportion of the group values of the
subsidiary’s net assets.
IFRS for SMEs: NCI = NCI’s proportion of the
group values of the subsidiary’s net assets.
Cont…
Sometimes NCI is calculated through Implied value.
Implied value = Acquisition cost / % of controlling
interest
NCI = Implied value-Acquisition cost
For example, If Com. A acquired 80% of Com. B at Br.
a. Cash paid,
b. The Current fair value of other assets distributed,
c. The present value of debt securities issued &
d. The Current fair value (Market) value of equity security issued by the combiner.
Investment in Subsidiary………………….xx
Cash/other assets………………………………………………………………
xx
Bond
Payable………………………………………………………………………..xx
Common
stock……………………………………………………………………...xx
Additional paid in capital in excess of par value…………………xx
Cont…
b. Contingent Consideration: Relates to an additional
amount paid by the parent to the shareholders of
subsidiary if certain conditions are met. It recorded at
fair value.
Investment in subsidiary……………xx
Contingent
Consideration………………xx
Cash…………………………………………………………
……………xx
Cont…
2. Fair value of Net Identifiable Asset (FVNIA):
2. Goodwill = 78,000-(0.75*100,000)
=78,000-75,000 = 3,000
Example 2
P com acquired S com on Dec. 31/2017 with the
following balances:
The carrying amount of Assets are Br 440,000.
25,000, respectively.
Cont…
Journal Entries:
1. Investment in S…..(8*50,000)…...........….400,000
Common Stock…(5*50,000)…………………….
……………250,000
Additional Paid in capital in excess of par…..
………..150,000
2. Merger Expense……………………………………………………
25,000
Additional Paid in capital in excess of par…...…….40,000
Cash…………………………………………………………….65,00
0
Cont…
Goodwill Calculation
Acquisition Cost = Br 400,000
70,000.
Example 3
Cont…
Journal Entries:
1. Investment in Set…((100,000*13) + 50,000)
…….1,350,000
Common Stock…(100,000*10)
………………………………1,000,000
Additional Paid in Capital in Excess of
Par…………… 300,000
Cash…………………………………………………
…………..…………….50,000
2. Merger
Expense………………………………………………
Cont…
Goodwill calculation
Acquisition cost = Br 1,350,000