IFRS 3 (МСФО 3): Business Combinations (Объединение бизнеса) Phase I and Phase II

IFRS 3 Объединения бизнесов
Источник: Moscow, 23 November 2004 Galina Ryltsova, IASB Project Manager
Опубликовано: 16 Сентября 2005

Phase I IFRS 3:Reasons for Issuing, Scope, Method, Identifying the Acquirer, Measuring Cost, Allocating Cost, Amortisation vs. Non-amortisation, Negative Goodwill ,Completing the Accounting, IAS 38, IAS 36 Phase II

Business Combinations Phase I

  • IFRS 3 Business Combinations
  • Amendments to IAS 38 Intangible Assets
  • Amendments to IAS 36 Impairment of Assets

Reasons for Issuing

IAS 22 permitted 2 methods of accounting for business combinations

  • impaired comparability
  • created incentives for structuring
  • pooling of interests method prohibited in Australia, Canada and United States

Reasons for Issuing

Also differences across jurisdictions in accounting for

  • goodwill
  • negative goodwill
  • intangible assets acquired in business combinations
  • provisions for terminating or reducing acquiree's activities (restructuring provisions)

Reasons for Issuing

IAS 22 contained benchmark and allowed alternative treatment for measuring acquiree's identifiable assets and liabilities

IFRS 3: Scope

All business combinations except:

  • Formations of joint ventures
  • Combinations involving entities or businesses under common control
  • Combinations involving two or more mutuals or by contract alone without obtaining ownership interest (eg DLCs)

IFRS 3: Scope

Business combination broader than «acquisitions»

-Bringing together of separate entities or businesses into one reporting entity

-Acquiree must be a «business»

  • «Integrated set of activities and assets conducted and managed to provide (a) return to investors, or (b) lower costs/other economic benefits to policyholders/participants.
  • Generally consists of inputs, processes applied to inputs, outputs that are/will be used to generate revenues.
  • «Presumed a business if goodwill present

IFRS 3: Method

All business combinations accounted for using purchase method

  • Pooling of interests method prohibited

IFRS 3: Identifying the Acquirer

Identify an acquirer for all combinations

  • Entity that obtains control of other combining entities or businesses
  • Must be pre-existing combining entity
  • Possible for acquirer to be entity whose equity interests have been acquired (ie legal subsidiary)

IFRS 3: Identifying the Acquirer

Reverse acquisitions:

  • Eg – private entity arranges to have itself «acquired» by smaller public entity to obtain stock exchange listing
  • Issuing public entity is legal parent and private entity is legal subsidiary
  • BUT legal sub is acquirer if it has power to govern financial and operating policies of legal parent so as to obtain benefits from its activities

Control is the determinant

IFRS 3: Measuring Cost

  • Fair value at date of exchange of assets given, liabilities incurred, equity instruments issued in exchange for control

PLUS

  • Directly attributable costs
  • Include contingent consideration if/when probable and reliably measurable

IFRS 3: Allocating Cost

Recognise acquiree's identifiable assets, liabilities and contingent liabilities at fair values at acquisition date (provided reliably measurable)

  • Fair value less costs to sell for non-current assets or disposal groups classified as held for sale under IFRS 5.

State any minority interest in the acquiree at the minority's proportion of the net fair value of those items

IFRS 3: Allocating Cost

lASB's objective is to ensure business combination accounting reflects condition of acquiree immediately before combination

IFRS 3: Allocating Cost

Contingent liabilities

  • Recognition driven by negative goodwill analysis
  • Form part of condition of acquiree immediately before combination
  • After initial recognition, measure at higher of
  • Amount that would be recognised under IAS 37 (= zero until «provision» definition and recognition criteria satisfied); and
  • Amount initially recognized

IFRS 3: Allocating Cost

Restructuring provisions

-Only recognise as part of allocating cost if acquiree has existing liability at acquisition date under IAS 37

  • «Otherwise, recognition would increase goodwill, inappropriately reflecting condition of acquiree as if restructuring done
  • *IAS 22 restructuring provisions are NOT contingent liabilities: no present obligation nor possible obligation from past event whose existence will be confirmed by occurrence/non-occurrence of uncertain future event not wholly within entity's control

IFRS 3: Allocating Cost

Intangible Assets

  • Recognise intangible item, including IPR&D project, separately from goodwill if it:

* Meets «intangible asset» definition; and *Can be measured reliably

  • See IAS 38 slides

IFRS 3: Allocating Cost

Goodwill

  • Recognise as an asset
  • Initially measure at excess of cost over acquirer's interest in net fair value of identifiable assets, liabilities and contingent liabilities satisfying recognition criteria
  • Subsequently measure at cost less accumulated impairment losses – DON'T AMORTISE

Amortisation vs. Non-amortisation

Arguments for amortising acquired goodwill

  • Is a method of allocating cost over periods consumed and is consistent with approach taken to other assets with finite useful lives
  • Consistent with general prohibition on recognising internally generated goodwill – ensures acquired goodwill is written off and no internally generated goodwill is recognised in its place

Amortisation vs. Non-amortisation

• Arguments against amortising acquired goodwill

  • Useful life and pattern in which it diminishes generally not possible to predict, yet amortisation depends on such predictions

«Therefore, amount amortised in any period can at best be described as an arbitrary estimate of consumption during that period

  • Anecdotal and research evidence supports view that amortisation charge has little, if any, information value and that impairment-only model will provide more useful information.

IFRS 3: Negative Goodwill

Recognise acquiree's contingent liabilities at fair values as part of allocating cost (provided fair value can be measured reliably)

Remaining excess =

  • errors in recognising or measuring cost or identifiable assets, liabilities or contingent liabilities
  • requirement in accounting standards to measure identifiables at amount that is not fair value
  • bargain purchase

IFRS 3: Negative Goodwill

Reassess identification and measurement of:

  • cost
  • acquiree's identifiable assets, liabilities and contingent liabilities

Recognise remaining excess as income

IFRS 3: Completing the Accounting

Acquirer has 12 months from acquisition date to complete business combination accounting

  • Use provisional values in intervening periods, but additional disclosures needed

Adjustments to provisional values to complete accounting must be recognised from acquisition date

IFRS 3: Completing the Accounting

Adjustments after accounting complete can only be recognised to correct an error

  • Triggers error disclosures in IAS 8

Some limited exceptions

  • Contingent consideration

Deferred tax assets

IAS 38: Intangible Assets

Definition

  • Identifiable non-monetary asset without physical substance
  • Asset should be treated as meeting «identifiability» criterion if it

* is separable (capable of being separated or divided from entity and sold, transferred, licensed, rented or exchanged either individually or with a related contract, asset or liability); or

*arises from contractual or other legal rights, even if not separable

IAS 38: Initial Recognition and Measurement

Recognise initially at cost, but only if:

  • Expected future benefits are probable; and
  • Cost can be measured reliably

IAS 38: Applying the Recognition Criteria

In a business combination

  • Cost = fair value at acquisition date
  • Fair value usually measurable with sufficient reliability to qualify for recognition separate from goodwill

*Rebuttable presumption if useful life is finite

*lf separable but only together with related tangible or intangible asset, recognise group as single asset if individual fair values not reliably measurable

IAS 38: Applying the Recognition Criteria

In a business combination (cont)

  • Only circumstance in which fair value might not be reliably measurable: asset arises from legal or other contractual rights and either:

*ls not separable; or

*ls separable, but no history or evidence of exchange transactions for same or similar assets, and otherwise estimating fair value dependent on immeasurable variables

IAS 36: Goodwill impairments

1. Allocate goodwill to CGUs

  • Allocate to each of the acquirer's CGUs (or groups of CGUs) expected to benefit from synergies, irrespective of whether other acquired assets are allocated to those CGUs (or groups)
  • Each CGU (or group) should be consistent with lowest level at which information about goodwill is available and monitored for internal reporting purposes
  • BUT – must not be larger than a segment

2. Measure recoverable amount of CGU and compare with carrying amount (CA)

  • RA = higher of VIU and NSP
  • If RA > CA, CGU and goodwill considered not impaired
  • If RA < CA, allocate loss first to goodwill, then to other assets based on relative carrying values
  • Reversing goodwill impairment losses prohibited

IAS 36: Goodwill impairments – US approach

Two step approach:

  • Compare the fair value (FV) of reporting unit with carrying amount (CA)

If FV > CA, reporting unit and goodwill considered not impaired

  • If FV < CA, estimate implied FV of goodwill

implied FV of goodwill is measured as in a business combination

f implied FV of goodwill < CA of goodwill, recognise an impairment loss for that excess

IAS 36: Goodwill impairments -differences in US and IFRS approaches

Potential reconciling item for IFRS preparers that are also US registrants

But, differences in approaches arise from historical (inherited) differences between IFRS and US GAAP:

  • Differences in the measure of recoverable amount
  • Differences in the level at which goodwill is tested for impairment
  • Differences in impairment test for other assets

IAS 36: Additional disclosures

  • For evaluating reliability of impairment tests for goodwill and indefinite lived intangibles
  • Disclosures to be made for each CGU containing significant amount of goodwill or intangible assets with indefinite useful lives

IAS 36: Additional disclosures

Disclose:

  • carrying amount of goodwill / indefinite lived intangibles in CGU
  • description of each key assumption on which recoverable amount is based
  • management's approach to determining value(s) assigned to each key assumption, whether value(s) reflect past experience and/or, if appropriate, are consistent with external information, and, if not, how and why they differ.

IAS 36: Additional disclosures

If a reasonably possible change in a key assumption would cause CGU's carrying amount to exceed recoverable amount, also disclose:

  • amount by which CGU's recoverable amount exceeds carrying amount
  • value assigned to key assumption
  • Sensitivity analysis for key assumption

IAS 36: Additional disclosures

Also make disclosures for any key assumption relevant to recoverable amount of multiple CGUs that individually contain insignificant amounts of goodwill or indefinite life intangibles, but which contain, in aggregate, significant amounts of goodwill or indefinite life intangibles.

IFRS 3: Transitional Provisions

Previously recognised:

  • goodwill – discontinue amortising; eliminate accumulated amortisation against goodwill; test for impairment
  • negative goodwill – derecognise against the opening balance of retained earnings
  • intangible assets – reclassify as goodwill if not meeting the identifiably criterion in IAS 38

Business Combinations – II

4 parts

1. Purchase method procedures

  • Joint project with FASB – ED expected 01 2005

2. Applying purchase method to combinations involving 2 or more mutuals, and combinations solely by contract (eg DLCs)

  • Now forms part of joint Purchase Method Procedures project

3. Formation of joint ventures and possible applications for «fresh start» method

4. Combinations of entities under common control