IFRS 3 (Revised 2008) — … Fair value of non-controlling interest need to be determined using valuation techniques under IFRS 13. IFRS 3 (Revised), Business Combinations, will result in significant changes in accounting for business combinations. Such a right is recognised as an asset on a business combination, but the fair value measurement should be based only on the remaining contractual term, i.e. Assets acquired in a business combination should be accounted for in a ‘fresh start’ mode, e.g. Recognizing and measuring goodwill or a gain from a bargain purchase. The fair value of previously held equity interest in the target is then derecognised and included in calculation of goodwill. 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. Acquiring Company (AC) acquired a competitor, the Target Company (TC), which had a TC brand with a fair value of $10 million. Accounting for Business Combinations Entities are required to identify the acquirer for each business combination (IFRS 3.6-7). Typical examples of assets that are recognised on business combination, but were not recognised before by the target, are internally generated intangible assets such as brands, patents or customer relationships. IFRS 3 . Other examples are IFRS 3, IFRS 6, IAS 19 and IAS 40. Investors may not wish to commit outright to a majority shareholding in an investee, but want to “test the waters” for … IFRS 3, Business combinations – A survival guide … If acquirer transfers other assets, they should be remeasured at fair value at acquisition date. So e.g. than other parties involved in the transaction. This software will be amortised over those 6 months as this is the period during which AC will obtain benefits from it. Customer lists may include data such as name, age, geographical location or history of orders. They also cannot be written-off immediately after the acquisition, as the impairment loss under IAS 36 can be recognised only when both value in use and fair value less costs of disposal are below the carrying value of the asset (IFRS 3.B43). under licence during the term and subject to the conditions contained therein. This should be done based on terms and conditions existing at the date of business combination (IFRS 3.15). 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 … It is possible that the acquirer obtains control without transferring consideration. Contracts and placed orders (even if cancellable) arise from contractual rights and therefore need not meet the separability criterion in order to be recognised. Note that non-controlling interests are all instruments classified as equity, not only shares. IFRS 3.B64e requires a qualitative description of the factors that make up the goodwill recognised. In theory, the equation used for calculating goodwill may give a negative number. Technology-based intangible assets (IFRS 3.IE39-IE44). However, pushdown accounting is not allowed under IFRS. More discussion on business combinations and income tax accounting can be found in IAS 12. 1.2. ifrs 3.2(b): ias 12 income taxes - recognition of deferred taxes when acquiring a single-asset entity that is not a business 10 1.3. ifrs 3.2(b): remeasurement of previously held interests 11 1.4. ifrs 3.2(c): ‘transitory’ common control 12 1.5. ifrs 3… IFRS 3 takes such limitations into account and introduces 12-month measurement period. Acquirer Company (AC) acquired Target Company (TC) for $100 m.  Before the acquisition, TC filed a lawsuit against AC for breaches of contractual terms. Combinations – Applying IFRS 3 in Practice (the Guide). Acquirer Company (AC) acquired Target Company (TC). EY Homepage. Insights Industries Services Client Stories Careers About us Please note that your account has not been verified … AC could terminate the contract, but then it would need to pay a penalty of $5 million to TC. So e.g. This approach is different from ‘regular’ requirements of IAS 37 where a liability is recognised only when the probability of outflow of resources exceeds 50%. Scope of IFRS 3 An identifiable asset meets one of the two criteria: An asset is separable if it can be separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, identifiable asset or liability. Instead, terms of the lease are taken into account when measuring the fair value of the asset subject to a lease (IFRS 3.B42). Goodwill is not amortised, but is subject to impairment testing at least annually as per IAS 36 requirements. It is so because the IASB believes such instances are rare are nearly impossible to detect. not at fair value (IFRS 3.26). More on leases in IFRS 16. Deferred tax is recognised for assets and liabilities recognised at business combination as well as for fair value adjustments (IAS 12.19). IFRScommunity.com is an independent website and it is not affiliated with, endorsed by, or in any other way associated with the IFRS Foundation. Examples of such assets are: IAS 38.34 specifically requires separate recognition of acquired in-process research and development project. … + free IFRS mini-course. Anyway, an acquirer cannot recognise any loss on acquisition due to overpayment, so any overpayment will increase the value of goodwill. Impact of this acquisition on consolidated financial statements of AC is as follows ($m): Method 1: Non-controlling interest measured at fair value: Method 2: Non-controlling interest measured at present ownership interest: The decision about the measurement basis can be made on a transaction-by-transaction basis. Share-based Payment. 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). Intro to consolidation and group accounts – which method for your investment? not at fair value (IFRS 3.24-25). The Guide shows continuing progress towards further enhancing the quality of IFRS … Acquirer Company (AC) acquires 70% shareholding in Target Company (TC) for $50m. 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. It happens so, because one-off gains are usually excluded from KPIs observed by management and investors. IE32-IE33). Consent of competition authorities received: September 20, Payment by AC to former owners of TC: September 25, AC ownership of shares registered by the court registry: November 3. Customer contracts and orders, together with related customer relationships (IFRS 3.IE25-IE30). It is a period during which the acquirer can make retrospective adjustments to acquisition accounting if it obtains new information about facts and circumstances that existed at the acquisition date. Net identifiable assets acquired and the liabilities assumed. It is usually straightforward to determine the acquisition date, which is usually the so-called ‘closing date’. 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. This entity is the accounting acquirer. allowance for credit losses or accumulated depreciation of fixed assets should not be continued in financial statements of the acquirer (IFRS 3.B41). The application of the principles addressed … Disclosure Requirements for Business Combinations. without taking into account possible contract renewals (IFRS 3.29). Legally protected trademarks (IFRS 3.IE18-IE21). Acquirer Company (AC) acquired Target Company (TC) for $100 m.  Before the acquisition, TC was a supplier of AC. Please check your inbox to confirm your subscription. AC recognises TC’s CRM software at fair value of $2 million even though it will use it only for 6 months. The ‘additional’ impairment loss will be allocated to non-controlling interest. 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. Changes in fair value of contingent consideration resulting from events after the acquisition date (e.g. TC demanded a payment of $10m from AC. Examples of such transactions given in IFRS 3.52 are: IFRS 3.B50 lists factors to consider when assessing whether a transaction should be accounted for separately from a business combination. Applying the acquisition method comprises. 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. 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. IFRS 3 refers to the guidance in IFRS 10 to determine which of the combining entities obtains control. Acquired assets held for sale should be initially measured at fair value less costs to sell in accordance with IFRS 5 (IFRS 3.31). 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). This rule does not apply to assets transferred to the target as acquirer controls them also after the acquisition (IFRS 3.38). 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. Customer lists and non-contractual customer relationships. Acquisition-related costs, such as professional fees, should be expensed in the periods in which the costs are incurred and the services are received. An asset must be identifiable in order to be recognised by the acquirer. Share with your friends. AC intends to keep legal rights to brand TC forever in order to prevent other companies from using it. ‘Control‘ is used here in the meaning introduced by IFRS 10. even if not separable from the related assets or legal entity. Volume A - A guide to IFRS reporting Volume B - Financial Instruments - IFRS 9 and related Standards Volume C ... International Financial Reporting Standards (linked to Deloitte accounting guidance) International Financial Reporting Standards . Sometimes the amount (level) of consideration depends on future events. IFRS 9 (IFRS 3.BC276). Right-of-use assets and lease liabilities for leases where the target is the lessee are recognised at the present value of the remaining lease payments as if the acquired lease were a new lease at the acquisition date. 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. Copyright materials such as films, books etc. For example, fair value adjustments recognised in consolidated financial statements are ‘pushed down’ to separate financial statements of the acquiree. How to calculate impairment on intercompany loans? IFRS 3 sets out the details for all of these steps. This criterion is to be assessed irrespective of what the acquirer plans to do with the asset. 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