Reviewer PFRS 3 Business Combinations PDF

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PFRS 3 BUSINESS COMBINATIONSDefinition of a Business CombinationA business combination is “a transaction or other event in which an acquirer obtains control of one or more businesses.” (PFRS 3)Control...

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PFRS 3 BUSINESS COMBINATIONS 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: • The acquirer has the power to appoint or remove the majority of the board of directors of the acquiree; or • The acquirer has the power to cast the majority of votes at board meetings or equivalent bodies within the acquiree; or • The acquirer has power over more than half of the voting rights of the acquiree because of an agreement with other investors; or • The acquirer has power to control the financial and operating policies of the acquiree because of a law or an agreement. Accounting for business combinations • Business combinations are accounted for using the acquisition method. This method requires the following: • Identifying the acquirer; • Determining the acquisition date; and • Recognizing and measuring goodwill. This requires recognizing and measuring the following: • Consideration transferred • Non-controlling interest in the acquiree • Previously held equity interest in the acquiree • 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: • Transfers cash or other assets and incurs liabilities; • Issues its equity interests (except in reverse acquisitions); • Receives the largest portion of the voting rights; • Has the ability to elect or appoint or to remove a majority ; • Dominates the management of the combined entity;

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Significantly larger of the combining entities; Initiated the combination

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 Non-controlling interest in the acquiree (NCI) Previously held equity interest in the acquiree Total Less: Fair value of net identifiable assets acquired Goodwill / (Gain on a bargain purchase)

xx xx xx xx (xx) 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. Consideration transferred • The consideration transferred in a business combination is measured at fair value. • Examples of potential forms of consideration include: • Cash, • Other assets, • A business or a subsidiary of the acquirer, • Contingent consideration, • 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: • Costs to issue debt securities measured at amortized cost – included in the initial measurement of the resulting financial liability. • 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. THE “EXCESS OF THE ACQUIRER’S INTEREST IN THE NET FAIR VALUE OF ACQUIREE’S IDENTIFIABLE ASSETS, LIABILITIES, AND CONTINGENT LIABILITIES OVER COST” (FORMERLY KNOWN AS NEGATIVE GOODWILL) SHOULD BE REASSESSED AS TO THE ACCURACY OF ITS MEASUREMENT AND THEN RECOGNIZED IMMEDIATELY IN PROFIT OR LOSS.

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.  ON ACQUISITION DATE, THE DATE ON WHICH THE ACQUIRER OBTAINS CONTROL OF 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....