Download - Business Combinations (1)
Business combinations.
A-IFRS Workshop
Objectives
•This module is designed to:– develop an understanding of:
– AASB 3 Business Combinations– AASB 127 Consolidated and Separate Financial Statements– AASB 128 Investments in Associates– AASB 131 Interests in Joint Ventures
– communicate major changes from current practice
– outline transitional adjustments
2 ©2004 Deloitte Touche TohmatsuBusiness combinations
1. OverviewObjectives• key pronouncements• major impact areas
Overview•AASB 3 Business Combinations
– Supersedes AASB 1013 Accounting for Goodwill AASB 1015 Acquisitions of Assets
•AASB 127 Consolidated and Separate Financial Statements
– Supersedes AASB 1024 Consolidated Accounts
•AASB 128 Investments in Associates– Supersedes AASB 1016 Accounting for Investments in Associates
•AASB 131 Interests in Joint Ventures– Supersedes AASB 1006 Interests in Joint Ventures
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2. Business Combinations- Scope
Objectives• scope of AASB 3• concept of a ‘business’• identifying an acquirer
What is a ‘business combination’?
“the bringing together of separate entities or businesses into one reporting entity”
•AASB 3 - business combinations only– look to other A-IFRSs for acquisitions of assets
•AASB 1015 covered acquisitions of all assets (and businesses)
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AASB 3/IFRS 3 scope differences
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Business combinations… AASB 3 IFRS 3
…forming a joint venture excluded excluded
…involving entities under common control
included excluded
…involving two or more mutual entities
excluded excluded
(ED - include)
…in which separate entities or businesses are brought together by contract alone
excluded excluded
(ED - include)
Business combinations - scope
AASB 3/IFRS 3 scope differences
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Business combinations… AASB 3 IFRS 3
…involving entities under common control
included excluded
Business combinations - scope
– must apply requirements of AASB 3
– exemption for non-Corps Act entities, can elect to use existing book values in some limited circumstances
Non-Corps Act scope exclusion
Is the transaction a reconstruction
within an economic entity?
Apply the purchase method
of accounting
Yes
No
Measure net assets at their carrying amounts
immediately prior to the reconstruction
Yes
Yes No
Is the entity reporting under the
Corporations Act 2001?
Has the entity elected to account for the combination
at book values?
No
Reconstruction within a reporting entity
• Business transferred from one entity to another entity in the same reporting entity
OR
• Ownership interest in the ultimate parent entity of a reporting entity transferred to a newly formed reporting entity
AND
• Acquirer only issues its own equity instruments as purchase consideration and relative ownership interests remain unchanged.
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Reconstruction within a reporting entity
Following the June 2005 revision of AASB 3, DTF and HoTARAC will review its
policy on reconstruction/transfers within the reporting entity.
Preliminary View:Account for reconstructions within a
reporting entity at book value
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Concept of a ‘business’
• Key concepts:– integrated set of activities and assets– managed for a return or other economic
benefits– generally consists of inputs, processes and
resulting outputs– goodwill present → presumed to be a business– an entity is not always a business
Exercise 2.1– identifying businesses, implications– Page 14
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Concept of a ‘business’
Answers
1. B’s service operation
2. D’s net assets, excluding
systems and management
3. Computers & telephone systems 4. M, single investment property 5. Q, gas pipeline Depends
13 ©2004 Deloitte Touche TohmatsuBusiness combinations - scope
Concept of a ‘business’
Exercise 2.2– Do your recent acquisitions represent
‘businesses’?– Page 15
Exercise 2.3– What are the consequences of an acquisition
representing a ‘businesses’?– Page 15
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Identifying an acquirer
• Key concepts:– acquirer must be identified for all acquisitions
– the combining entity that obtains control of the other combining entities or businesses
– if difficult, consider:– relative fair values of combining entities– entity giving up cash might be the acquirer– domination of management team
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Identifying an acquirer
The acquirer under AASB 3can be different to the legal acquirer
Exercise 2.4– identifying the acquirer– Page 17
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Identifying an acquirer
Answers
1. CD acquires AB Entity AB
2. Group restructureNO ACQUIRER
17 ©2004 Deloitte Touche TohmatsuBusiness combinations - scope
Identifying an acquirer
Exercise 2.5– Could any of you recent acquisitions be
regarded as a ‘reverse acquisition’?– Page 18
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3. Business Combinations- Accounting requirementsObjectives• understand the key requirements
Accounting for business combinations
• Key concepts:– must use ‘purchase method’– acquirer must be identified for all acquisitions– measure the cost of the combination– allocate cost to net assets and contingent
liabilities– cost > fair values → goodwill– cost < fair values → income*
* contribution by owners if involving entities under common control and conditions met
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Cost of a business combination
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Cost of combination
= Fair values +Costs
attributable
At ‘date of exchange’
Assets given
Liabilities incurred or assumed
Equity instruments issued by acquirer
Must be directly attributable
Excludes general admin costs
Excludes costs of issuing equity instruments,
financial instruments
Business combinations – accounting requirements
Cost of a business combination
Supplementary Case study 3.1– cost of a business combination
– Page 22
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Cost of a business combination
Answersa) 3,000,000 shares x $10.75 = $32,250,000
b) as follows:
1. Finders’ fee of $20,000 NO
2. Lawyers fees of $80,000 YES
3. Costs incurred by DEF NO
4. Accountants fees YES
5. Valuers fees YES
6. Costs of issuing shares NO
7. Costs of arranging finance NO
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Cost of a business combination
Answers, continuedd) total cost:
Cost of shares issued $32,250,000
Cash consideration paid 3,000,000
Other costs 145,000
TOTAL $35,395,000
e) journal entry:
DR Investment 35,395,000 CR Equity 32,225,000 CR Borrowings 2,990,000 CR Cash/payables 200,000DR Expense 20,000
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Determining fair values
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Item Measurement Recognition criteria
Assets other than intangibles
Fair value Probable, reliably measurable
Intangibles Fair value Identifiable, reliably measurable
Non-current assets held for sale
Fair value less costs to sell
As above
Liabilities Fair value Probable, reliably measurable
Restructuring liabilities
Fair value Acquiree has existing liability under AASB 137
Contingent liabilities Fair value Reliably measurable
Goodwill Cost None
Determining fair values
• AASB 3, Appendix B has guidance on fair values for various items
– see table on page 26
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Determining fair values
• Provisionally determined fair values – 12 month window to restate acquisition entry– subsequent changes to estimates impact profit– recalculate everything from acquisition date– restate comparative information, if applicable
• 12 month limit does not apply to:– errors, can always be corrected (as above)– contingent consideration, adjust cost of combination– deferred tax assets, special requirements
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Accounting after initial recognition
• Key requirements after initial recognition:
– no goodwill amortisation, impairment test
– contingent liabilities measured higher of:– amount that would be recognised under AASB 137– original amount, less any amortisation under AASB 118
– adjust provisional items, within 12 months
– errors, contingent consideration adjusted
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4. Impairment of goodwill
Objectives• understand approach to impairment testing of goodwill
Goodwill – basic principles
• Must test annually
• Allocate goodwill to individual CGUs or groups of CGUs
• Take allocated goodwill into account when measuring disposals
• Impairment losses cannot be reversed
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Goodwill – allocation to CGUs
• Goodwill allocated:– lowest level of CGUs at which goodwill is
monitored → look to management structure– cannot be larger than a segment– completed before end of reporting period when
acquired, extend to next period with disclosure– cannot change allocation, unless restructured– goodwill is ‘grossed up’ for minorities
Exercise 4.1– allocating goodwill to CGUs– page 35
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Goodwill – impairment test
• Annual impairment test– same time each year for each CGU– where acquired during the year, test by the end
of the year– first test any assets or CGUs, then test CGUs
with goodwill– can use prior year calculation in some cases
Discussion 4.1 and 4.2– testing other assets first
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5. Business Combinations - First-time adoption
Objectives• initial adjustments under AASB 1
Transitional adjustments under AASB 1• Transitional requirements in AASB 3
overridden by AASB 1– comparative information restated– retrospectively apply standard at date of
transition, subject to voluntary exceptions
First-time adoption ©2004 Deloitte Touche Tohmatsu34
Business combination options under AASB 1
• AASB 1 allows– full restatement of past business combinations– no restatement before date of transition– restatement from a particular date
FRD 113 “Investments in Subsidiaries, Jointly Controlled Entities and Associates:Do not restate business combinations
First-time adoption ©2004 Deloitte Touche Tohmatsu36
6. Business Combinations - Disclosure
Objectives• be aware of disclosure requirements
Disclosure
• Checklist on page 45
Disclosure ©2004 Deloitte Touche Tohmatsu40
7. Consolidations, Joint Ventures and AssociatesObjectives• Understand the key differences
Consolidations
•AASB 127 “Consolidated and Separate Financial Statements” – Parent entity must present consolidated financial
statements (consolidating all subsidiaries)
– Subsidiaries based on ‘control’– consistent with AASB 1024 concepts
– Public sector:– control may be established by legislation or executive
authority or by administrative arrangements– ministerial approval is required for budgets– power of the minister to appoint remove members of the board– ministerial power of direction
Consolidation ©2004 Deloitte Touche Tohmatsu42
Consolidations
•Key differences:– Subsidiaries’ financial statements used for
consolidation purposes:– should be the same date as parent entity– may differ by up to 3 months (but must adjust for
significant transactions and events)
– Losses attributable to minority interests– only if minority has a binding obligation to make good
– Parent entity’s increase or decrease in ownership (without impacting control)– treated as an equity transaction
Consolidation ©2004 Deloitte Touche Tohmatsu43
Consolidations
•Separate financial statements of the parent entity
– measure investment in subsidiaries, jointly controlled entities and associates:– cost; or– in accordance with AASB 139
FRD 113 “Investments in Subsidiaries, Jointly Controlled Entities and Associates:
- Measure at cost.
Consolidation ©2004 Deloitte Touche Tohmatsu44
Investments in associates
•AASB 128 “Investments in Associates” – Associates based on ‘significant influence’
– consistent with AASB 1016 concepts
– Investments in associates must be measured using the equity method in the consolidated financial statements
– Scope exclusions:– venture capital organisations– mutual funds, unit trusts, etc– investments designated as ‘fair value through profit and
loss’ under AASB 139
Associates ©2004 Deloitte Touche Tohmatsu45
Investments in associates
•Other Exemptions: – Investment held for sale under AASB 5
– If the following conditions are satisfied:– all owners agree that equity accounting not be applied– investor’s debt/equity securities not traded– accounts not filed for purpose of issuing securities– parent entity prepares consolidated accounts, which adopt
equity accounting, and accounts are publicly available
Associates ©2004 Deloitte Touche Tohmatsu46
Investments in associates
•Reporting date of investee:– Investor uses the most recent available financial
statements of associate (in order to apply equity accounting)
– If associate has a different reporting date:– associate prepares “investor” financial statements using
the investor’s reporting date (unless impracticable)
– if associate prepares financial statements at a different reporting date, the investor must adjust for any significant transactions or events that occur between the two dates
– in any case, the reporting dates cannot differ by more than 3 months
Associates ©2004 Deloitte Touche Tohmatsu47
Investments in associates
•Key differences:– No amortisation of notional goodwill
– consistent with AASB 3 Business Combinations
– If entity ceases to be an associate, investment is treated as a financial asset under AASB 139– AASB 1016 required investment to be measured at cost
– Investor’s net investment includes long-term loans and receivables– therefore, equity accounted losses may be applied against
long-term loans and receivables if the investment is reduced to zero
Associates ©2004 Deloitte Touche Tohmatsu48
Investments in associates
•First time adoption: – Same rules as business combinations
– full restatement of past business combinations– no restatement before date of transition– restatement from a particular date
FRD 113 “Investments in Subsidiaries, Jointly Controlled Entities and Associates:
Do not restate prior acquisitions of associates
Associates ©2004 Deloitte Touche Tohmatsu49
Joint ventures
• AASB 131 “Interests in Joint Ventures”
• JV entities - equity method of accounting under AASB 128 “Investments in Associates”– same scope exclusions, first time adoption, etc,
AASB 131
Jointly
controlled
operations
Jointly
controlled
assets
Jointly
controlled
entities
AASB 1006 Joint venture operationsJoint venture
entities
Joint ventures ©2004 Deloitte Touche Tohmatsu50
Workshop summary
Summary
Points to note – business combinations:– goodwill not amortised (impairment test)– separate identification of intangible assets– restructuring provisions more difficult– contingent liabilities recognised– IPR&D recognised based on probability– discount on acquisition recognised as revenue– limited timeframe to adjust acquisition entries– Implementation
– Refer implementation guidance typical tasks
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Summary
Points to note – Associates:– some scope exclusions– no amortisation of notional goodwill– rules for difference reporting dates– definition of net investment in associate
Points to note – Joint Ventures:– jointly controlled operations, jointly controlled
assets, and jointly controlled entities– JV entities – equity accounting under AASB 128
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