Accounting FOR Business FOR Business Combination PDF

Preview

Summary

ACCOUNTING FOR BUSINESS FOR BUSINESS COMBINATIONDefinition of a Business Combination A business combination is “a transaction or other event in which an acquirer obtains control of one or more businesses.” (PFRS 3)Control - An investor controls an investee when the investor is exposed, or has rights...

Description

ACCOUNTING FOR BUSINESS FOR BUSINESS COMBINATION Definition of a Business Combination A business combination is “a transaction or other event in which an acquirer obtains control of one or more businesses.” (PFRS 3) Control • An investor controls an investee when the investor is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. • Control is normally presumed to exist when the ownership interest acquired in the voting rights of the acquiree is more than 50% (or 51% or more). Control may exist even if the acquirer holds less than 50% interest in the voting rights of acquiree, such as in the following cases: 1. The acquirer has the power to appoint or remove the majority of the board of directors of the acquiree; or 2. The acquirer has the power to cast the majority of votes at board meetings or equivalent bodies within the acquiree; or 3. The acquirer has power over more than half of the voting rights of the acquiree because of an agreement with other investors; or 4. The acquirer has power to control the financial and operating policies of the acquiree because of a law or an agreement. *substance over form Accounting for business combinations Business combinations are accounted for using the acquisition method. This method requires the following: 1. Identifying the acquirer; 2. Determining the acquisition date; and 3. Recognizing and measuring goodwill(unidentifiable asset).This requires recognizing and measuring the following: a. Consideration transferred/binayad mo b. Non-controlling interest in the acquiree c. Previously held equity interest in the acquiree d. Identifiable assets acquired and liabilities assumed on the business combination.

Identifying the acquirer • The acquirer is the entity that obtains control of the acquiree. The acquiree is the business that the acquirer obtains control of in a business combination. • The acquirer is normally the entity that: a. Transfers cash or other assets and incurs liabilities; b. Issues its equity interests (except in reverse acquisitions); c. Receives the largest portion of the voting rights; d. Has the ability to elect or appoint or to remove a majority ; e. Dominates the management of the combined entity; f. Significantly larger of the combining entities; g. Initiated the combination/acquirer initiates acquisition Determining the acquisition date • The acquisition date is the date on which the acquirer obtains control of the acquiree. Recognizing and measuring goodwill Consideration transferred

xx

Non-controlling interest in the acquiree (NCI) Previously held equity interest in the acquire Total Less: Fair value of net identifiable assets acquired

xx xx xx (xx)

Goodwill / (Gain on a bargain purchase)

xx

On acquisition date, the acquirer recognizes a resulting: a. Goodwill as an asset. b. Gain on a bargain purchase as gain in profit or loss. The consideration transferred in a business combination is measured at fair value. Examples of potential forms of consideration include: 1. Cash, 2. Other assets, 3. A business or a subsidiary of the acquirer, 4. Contingent consideration, 5. Ordinary or preference equity instruments, options, warrants and member interests of mutual entities. Acquisition-related costs • Acquisition-related costs are costs the acquirer incurs to effect a business combination. • Acquisition-related costs are recognized as expenses in the periods in which they are incurred, except for the following: a. Costs to issue debt securities measured at amortized cost – included in the initial measurement of the resulting financial liability. b. Costs to issue equity securities – are accounted for as deduction from share premium. If share premium is insufficient, the issue costs are deducted from retained earnings. Non-controlling interest (NCI) • Non-controlling interest (NCI) is the equity in a subsidiary not attributable, directly or indirectly, to a parent. • NCI is measured either at: a. Fair value, or b. The NCI’s proportionate share of the acquiree’s identifiable net assets. Previously held equity interest in the acquiree Previously held equity interest in the acquiree pertains to any interest held by the acquirer before the business combination. Net identifiable assets acquired • On acquisition date, the acquirer shall recognize, separately from goodwill, the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree. • Any unidentifiable asset of the acquiree (e.g., any recorded goodwill by the acquiree) shall not be recognized. • The identifiable assets acquired and the liabilities assumed are measured at their acquisition-date fair values. • Pfrs 10 is the preparation of financial statements for business combination. • Consolidated financial statement. Reverse acquisitions • In a business combination accomplished through exchange of equity interests, the acquirer is usually the entity that issues its equity interests. However, the opposite is true for reverse acquisitions. • In a reverse acquisition, the entity that issues securities (the legal acquirer) is identified as the acquiree for accounting purposes while the entity whose equity interests are acquired (the legal acquiree) is the acquirer for accounting purposes PFRS 10 Consolidated Financial Statements Definition of terms • Parent – an entity that controls one or more entities. • Subsidiary – an entity that is controlled by another entity. • Group – a parent and its subsidiaries. • Consolidated financial statements – the financial statements of a group in which the assets, liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries are presented as those of a single economic entity. Preparation of Consolidated FS • A parent entity is required to present consolidated financial statements, except when all of the following conditions are met:

a. The parent is a subsidiary of another entity and all its other owners do not object to the parent not presenting consolidated financial statements; b. The parent’s debt or equity instruments are not traded in a public market (or being processed for such purpose); and c. The parent’s ultimate or any intermediate parent produces consolidated financial statements Accounting requirements • Consolidated financial statements shall be prepared using uniform accounting policies. • The financial statements of the parent and its subsidiaries used in preparing consolidated financial statements shall have the same reporting dates. (The maximum difference in reporting dates is 3 months.) • Consolidation begins from the date the investor obtains control of the investee and ceases when the investor loses control of the investee. Reciprocal account- account used by parent and subsidiary Upstream downstream Measurement • Income and expenses of the subsidiary are based on the amounts of the assets and liabilities recognized in the consolidated financial statements at the acquisition date. • Investments in subsidiaries are accounted for in the parent’s separate financial statements either: a. at cost; b. in accordance with PFRS 9 Financial Instruments; or c. using the equity method. NCI in net assets of the subsidiary Non-controlling interests shall be presented in the consolidated statement of financial position within equity, separately from the equity of the owners of the parent. • Non-controlling interest in the net assets consists of: 1. The amount determined at the acquisition date using PFRS 3; and The NCI’s share of changes in equity since the acquisition date. •

NCI in profit or loss and comprehensive income • The profit or loss and each component of other comprehensive income in the consolidated statement of profit or loss and other comprehensive income shall be attributed to the following: 1. Owners of the parent 2. Non-controlling interests Preparing the Consolidated financial statements • Consolidated financial statements are prepared by combining the financial statements of the parent and its subsidiaries line by line by adding together similar items of assets, liabilities, equity, income and expenses. Consolidation at date of acquisition 1. Eliminate the “Investment in subsidiary” account. This requires: a. Measuring the identifiable assets acquired and liabilities assumed in the business combination at their acquisition-date fair values. b. Recognizing the goodwill from the business combination. c. Eliminating the subsidiary’s pre-combination equity accounts and replacing them with the noncontrolling interest. 2. Add, line by line, similar items of assets and liabilities of the combining constituents....