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«Business combinations and changes in ownership interests A guide to the revised IFRS 3 and IAS 27 Audit.Tax.Consulting.Financial Advisory. Contacts ...»

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Step 1: B measures the fair value of both A’s original share options and the replacement share options at the acquisition date in accordance with IFRS 2.

Identifying and measuring consideration

Step 2 Identify three periods of time:

• the vesting period completed at the date of acquisition;

–  –  –

Step 2: B identifies the vesting period completed (X), the total vesting period (Y), and the original vesting period (Z).

Step 3 The portion of the replacement award attributable to pre-combination service (which is the portion that is accounted for as part of the consideration in the business combination) is the ‘market-based measure’ of the acquiree award multiplied by the ratio of the portion of the vesting period completed to the greater of the total vesting period or the original vesting period of the acquiree award. [IFRS 3(2008).B58]

Step 3: Amount allocated to consideration is:

–  –  –

Step 4 The amount attributable to post-combination service, and so recognised as remuneration cost in the post-combination financial statements, is determined as the difference between the market-based measure of the acquirer’s replacement award and the amount allocated to purchase consideration in Step 3. Therefore, the acquirer attributes any excess of the market-based measure of the replacement award over the market-based measure of the acquiree award to postcombination service and recognises that excess as remuneration cost in the post-combination financial statements. This expense is recognised immediately if there is no further service period.

[IFRS 3(2008).B59]

Step 4: Amount allocated to post-combination service is:

–  –  –

Further requirements:

• the amount allocated to consideration at Step 3 is added to the purchase consideration;

• the amount allocated to post-combination service at Step 4 is recognised as a postcombination expense in accordance with IFRS 2;

• the acquirer attributes a portion of a replacement award to post-combination service if it requires post-combination service, regardless of whether employees had rendered all of the service required for their acquiree awards to vest before the acquisition date [IFRS 3(2008).B59];

• the allocation between purchase consideration and post-combination service should reflect the best estimate of the number of replacement awards that are expected to vest. For example, if the market-based measure of the portion of a replacement award attributed to precombination service is CU100 and the acquirer expects that only 95 per cent of the award will vest, the amount included in consideration transferred in the business combination is CU95 [IFRS 3(2008).B60];

• subsequent changes in the estimated number of replacement awards expected to vest are reflected in remuneration cost for the period in which the changes or forfeitures occur and are not adjusted against the initial accounting for the acquisition [IFRS 3(2008).B60];

• the effects of other events, such as modifications or the ultimate outcome of awards with performance conditions, that occur after the acquisition date are accounted for in accordance with IFRS 2 in determining remuneration cost for the period in which an event occurs [IFRS 3(2008).B60];

• the same requirements for determining the portions of a replacement award attributable to pre- and post-combination service apply regardless of whether a replacement award is classified as a liability or as an equity instrument in accordance with IFRS 2. All changes in the market-based measure of awards classified as liabilities after the acquisition date and the related income tax effects are recognised in the acquirer’s post-combination financial statements in the period(s) in which the changes occur [IFRS 3(2008).B61]; and Identifying and measuring consideration • the income tax effects of replacement awards of share-based payments are recognised in accordance with the requirements of IAS 12 Income Taxes [IFRS 3(2008).B62].

The following examples (which assume that all awards are classified as equity) illustrate

replacement awards that the acquirer (AC) was obliged to issue in the following circumstances:

–  –  –

AC issues replacement awards of CU110 (market-based measure) at the acquisition date for TC awards of CU100 (market-based measure) at the acquisition date. No post-combination services are required for the replacement awards and TC’s employees had rendered all of the required service for the acquiree awards as of the acquisition date.

The amount attributable to pre-combination service is the market-based measure of TC’s awards (CU100) at the acquisition date; that amount is included in the consideration transferred in the business combination. The amount attributable to post-combination service is CU10, which is the difference between the total value of the replacement awards (CU110) and the portion attributable to pre-combination service (CU100). Because no post-combination service is required for the replacement awards, AC immediately recognises CU10 as remuneration cost in its post-combination financial statements.





Applying the steps outlined earlier:

–  –  –

Step 4: Amount allocated to post-combination service = 110-100 = 10 Example 9.3.

4.4B [IFRS 3(2008).IE65-IE67] Acquiree awards Vesting period completed before the business combination

–  –  –

AC exchanges replacement awards that require one year of post-combination service for sharebased payment awards of TC, for which employees had completed the vesting period before the business combination. The market-based measure of both awards is CU100 at the acquisition date. When originally granted, TC’s awards had a vesting period of four years. As of the acquisition date, the TC employees holding unexercised awards had rendered a total of seven years of service since the grant date.

Even though TC employees had already rendered all of the service, AC attributes a portion of the replacement award to post-combination remuneration cost in accordance with paragraph B59 of IFRS 3, because the replacement awards require one year of post-combination service.

The total vesting period is five years – the vesting period for the original acquiree award completed before the acquisition date (four years) plus the vesting period for the replacement award (one year).

The portion attributable to pre-combination services equals the market-based measure of the acquiree award (CU100) multiplied by the ratio of the pre-combination vesting period (four years) to the total vesting period (five years). Thus, CU80 (CU100 x 4/5 years) is attributed to the pre-combination vesting period and therefore included in the consideration transferred in the business combination. The remaining CU20 is attributed to the post-combination vesting period and is therefore recognised as remuneration cost in AC’s post-combination financial statements in accordance with IFRS 2.

Identifying and measuring consideration

Applying the steps outlined earlier:

–  –  –

AC exchanges replacement awards that require one year of post-combination service for sharebased payment awards of TC, for which employees had not yet rendered all of the service as of the acquisition date. The market-based measure of both awards is CU100 at the acquisition date. When originally granted, the awards of TC had a vesting period of four years. As of the acquisition date, the TC employees had rendered two years’ service, and they would have been required to render two additional years of service after the acquisition date for their awards to vest. Accordingly, only a portion of the TC awards is attributable to pre-combination service.

The replacement awards require only one year of post-combination service. Because employees have already rendered two years of service, the total vesting period is three years. The portion attributable to pre-combination services equals the market-based measure of the acquiree award (CU100) multiplied by the ratio of the pre-combination vesting period (two years) to the greater of the total vesting period (three years) or the original vesting period of TC’s award (four years). Thus, CU50 (CU100 x 2/4 years) is attributable to pre-combination service and therefore included in the consideration transferred for the acquiree. The remaining CU50 is attributable to post-combination service and therefore recognised as remuneration cost in AC’s postcombination financial statements.

–  –  –

Applying the steps outlined earlier:

Step 1: Acquiree acquisition date fair value = CU100 Acquirer acquisition date fair value = CU100

–  –  –

Step 4: Amount allocated to post-combination service = 100-50 = 50 Example 9.3.

4.4D [IFRS 3(2008).IE70-IE71] Acquiree awards Vesting period not completed before the business combination

–  –  –

Assume the same facts as in example 9.3.4.4C above, except that AC exchanges replacement awards that require no post-combination service for share-based payment awards of TC for which employees had not yet rendered all of the service as of the acquisition date. The terms of the replaced TC awards did not eliminate any remaining vesting period upon a change in control. (If the TC awards had included a provision that eliminated any remaining vesting period upon a change in control, the guidance in example 9.3.4.4A would apply.) The market-based measure of both awards is CU100. Because employees have already rendered two years of service and the replacement awards do not require any post-combination service, the total vesting period is two years.

The portion of the market-based measure of the replacement awards attributable to precombination services equals the market-based measure of the acquiree award (CU100) multiplied by the ratio of the pre-combination vesting period (two years) to the greater of the total vesting period (two years) or the original vesting period of TC’s award (four years). Thus, CU50 (CU100 x 2/4 years) is attributable to pre-combination service and therefore included in the consideration transferred for the acquiree. The remaining CU50 is attributable to postcombination service. Because no post-combination service is required to vest in the replacement award, AC recognises the entire CU50 immediately as remuneration cost in the postcombination financial statements.

Identifying and measuring consideration

Applying the steps outlined earlier:

–  –  –

Step 4: Amount allocated to post-combination service = 100-50 = 50 9.3.5 A transaction that reimburses the acquiree or its former owners for paying the acquirer’s acquisition-related costs.

Section 9.4 below deals with the treatment of acquisition-related costs as expenses, which represents a significant change from the previous version of IFRS 3.

The Basis for Conclusions for IFRS 3(2008) recognises that this change creates the potential for abuse. ‘Some constituents, including some respondents to the 2005 Exposure Draft, said that if acquirers could no longer capitalise acquisition-related costs as part of the cost of the business acquired, they might modify transactions to avoid recognising those costs as expenses. For example, some said that a buyer might ask a seller to make payments to the buyer’s vendors on its behalf. To facilitate the negotiations and sale of the business, the seller might agree to make those payments if the total amount to be paid to it upon closing of the business combination is sufficient to reimburse the seller for payments it made on the buyer’s behalf. If the disguised reimbursements were treated as part of the consideration transferred for the business, the acquirer might not recognise those expenses. Rather, the measure of the fair value of the business and the amount of goodwill recognised for that business might be overstated.’ [IFRS 3(2008).BC370] To mitigate such concerns, IFRS 3(2008) includes in its list of examples of transactions that should be separated from the business combination ‘.. a transaction that reimburses the acquiree or its former owners for paying the acquirer’s acquisition-related costs’. [IFRS 3(2008).52(c)] It follows that where such a transaction is identified, that element is deducted from the consideration used to calculate goodwill, and is expensed by the acquirer.

–  –  –

9.4 Acquisition-related costs Acquisition-related costs are costs the acquirer incurs to effect a business combination. Those costs include finder’s fees; advisory, legal, accounting, valuation and other professional or consulting fees;

general administrative costs, including the costs of maintaining an internal acquisitions department;



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