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The amount of TC’s identifiable net assets (CU200, calculated as CU250 – CU50) exceeds the fair value of the consideration transferred plus the fair value of the non-controlling interest in TC. Therefore, AC reviews the procedures it used to identify and measure the assets acquired and liabilities assumed and to measure the fair value of both the non-controlling interest in TC and the consideration transferred. After that review, AC decides that the procedures and resulting measures were appropriate.
Goodwill/bargain purchase gain
AC measures the gain on its purchase of the 80 per cent interest as follows:
If the acquirer chose to measure the non-controlling interest in TC on the basis of its proportionate interest in the identifiable net assets of the acquiree, the recognised amount of the non-controlling interest would be CU40 (CU200 x 0.20). The gain on the bargain purchase then would be CU10 (CU200 – (CU150 + CU40)).
11. Post-combination accounting
11.1 General guidance on subsequent measurement and accounting In general, assets acquired, liabilities assumed or incurred, and equity instruments issued in a business combination are subsequently measured and accounted for in accordance with other applicable IFRSs, according to their nature. [IFRS 3(2008).54] Examples of other IFRSs that provide guidance on subsequently measuring and accounting for assets
acquired and liabilities assumed or incurred in a business combination include:
• IAS 38 Intangible Assets prescribes the accounting for identifiable intangible assets acquired in a business combination. The acquirer measures goodwill at the amount recognised at the acquisition date less any accumulated impairment losses;
• IAS 36 Impairment of Assets prescribes the accounting for impairment losses;
• IFRS 4 Insurance Contracts provides guidance on the subsequent accounting for an insurance contract acquired in a business combination;
• IAS 12 Income Taxes prescribes the subsequent accounting for deferred tax assets (including unrecognised deferred tax assets) and liabilities acquired in a business combination;
• IFRS 2 Share-based Payment provides guidance on subsequent measurement and accounting for the portion of replacement share-based payment awards issued by an acquirer that is attributable to employees’ future services; and
• IAS 27 Consolidated and Separate Financial Statements (as amended in 2008) provides guidance on accounting for changes in a parent’s ownership interest in a subsidiary after control is obtained.
11.2 Specific guidance IFRS 3(2008) provides specific guidance in relation to the following assets acquired, liabilities
assumed or incurred, and equity instruments issued in a business combination:
• reacquired rights (see section 8.5.2);
• contingent liabilities (see section 8.5.1);
• indemnification assets (see section 8.5.7); and
• contingent consideration (see section 9.2).
11.3 Adjustments to provisional values IFRS 3(2008) permits adjustments to items recognised in the original accounting for a business combination, for a maximum of one year after the acquisition date, where new information about facts and circumstances existing at the acquisition date is obtained. Any such adjustments are made retrospectively as if those adjustments had been made at the acquisition date.
11.3.1 Use of provisional values
If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the financial statements should be prepared using provisional amounts for the items for which the accounting is incomplete. [IFRS 3(2008).45]
11.3.2 The measurement period
The measurement period is the period after the acquisition date during which the acquirer may adjust the provisional amounts recognised for a business combination. [IFRS 3(2008).46] The measurement period begins at the acquisition date and ends as soon as the acquirer receives the information it was seeking about facts and circumstances that existed as of the acquisition date or learns that more information is not obtainable. However, the measurement period cannot exceed one year from the acquisition date. [IFRS 3(2008).45] 11.3.3 What can be adjusted?
Adjustments may be made in the measurement period to the following components:
[IFRS 3(2008).46] (a) the identifiable assets acquired, liabilities assumed and any non-controlling interest in the acquiree;
(b) the consideration transferred for the acquiree (or the other amount used in measuring goodwill);
(c) in a business combination achieved in stages, the equity interest in the acquiree previously held by the acquirer; and (d) the resulting goodwill or gain on a bargain purchase.
11.3.4 Retrospective adjustments The adjustments to provisional amounts should be recognised as if the accounting for the business combination had been completed at the acquisition date. Therefore, comparative information for prior periods presented in the financial statements is revised as required, including making any change in depreciation, amortisation or other income effects recognised in completing the initial accounting. [IFRS 3(2008).49]
Adjustments to recognised items During the measurement period, the acquirer retrospectively adjusts the provisional amounts recognised at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognised as of that date. [IFRS 3(2008).45] Adjustments to unrecognised items During the measurement period, the acquirer also recognises additional assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets and liabilities as of that date. [IFRS 3(2008).45] Information to be considered The acquirer is required to consider all pertinent factors in determining whether information obtained after the acquisition date should result in an adjustment to the provisional amounts recognised or whether that information results from events that occurred after the acquisition date. Pertinent factors include the date when additional information is obtained and whether the acquirer can identify a reason for a change to provisional amounts. Information that is obtained shortly after the acquisition date is more likely to reflect circumstances that existed at the acquisition date than is information obtained several months later. For example, unless an intervening event that changed its fair value can be identified, the sale of an asset to a third party shortly after the acquisition date for an amount that differs significantly from its provisional fair value determined at that date is likely to indicate an error in the provisional amount. [IFRS 3(2008).47] Revising goodwill The acquirer recognises an increase (decrease) in the provisional amount recognised for an identifiable asset (liability) by means of a decrease (increase) in goodwill. However, new information obtained during the measurement period may sometimes result in an adjustment to the provisional amount of more than one asset or liability. For example, the acquirer might have assumed a liability to pay damages related to an accident in one of the acquiree’s facilities, part or all of which are covered by the acquiree’s liability insurance policy. If the acquirer obtains new information during the measurement period about the acquisition-date fair value of that liability, the adjustment to goodwill resulting from a change to the provisional amount recognised for the liability would be offset (in whole or in part) by a corresponding adjustment to goodwill resulting from a change to the provisional amount recognised for the claim receivable from the insurer. [IFRS 3(2008).48] Example 11.3.4 Measurement period [IFRS 3(2008).IE51-53] Suppose that AC acquires TC on 30 September 20X7. AC seeks an independent valuation for an item of property, plant and equipment acquired in the combination, and the valuation was not complete by the time AC authorised for issue its financial statements for the year ended 31 December 20X7. In its 20X7 annual financial statements, AC recognised a provisional fair value for the asset of CU30,000. At the acquisition date, the item of property, plant and equipment had a remaining useful life of five years. Five months after the acquisition date, AC received the independent valuation, which estimated the asset’s acquisition-date fair value as CU40,000.
Post-combination accounting In its financial statements for the year ended 31 December 20X8, AC retrospectively adjusts the 20X7 prior year information as follows:
(a) the carrying amount of property, plant and equipment as of 31 December 20X7 is increased by CU9,500. That adjustment is measured as the fair value adjustment at the acquisition date of CU10,000 less the additional depreciation that would have been recognised if the asset’s fair value at the acquisition date had been recognised from that date (CU500 for three months’ depreciation);
(b) the carrying amount of goodwill as of 31 December 20X7 is decreased by CU10,000; and (c) depreciation expense for 20X7 is increased by CU500.
In accordance with paragraph B67 of IFRS 3, AC discloses:
(a) in its 20X7 financial statements, that the initial accounting for the business combination has not been completed because the valuation of property, plant and equipment has not yet been received;
(b) in its 20X8 financial statements, the amounts and explanations of the adjustments to the provisional values recognised during the current reporting period. Therefore, AC discloses that the 20X7 comparative information is adjusted retrospectively to increase the fair value of the item of property, plant and equipment at the acquisition date by CU9,500, offset by a decrease to goodwill of CU10,000 and an increase in depreciation expense of CU500.
11.3.5 Adjustments after the measurement period.
After the measurement period ends, the accounting for a business combination can be amended only to correct an error in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. [IFRS 3(2008).50] 11.3.6 Deferred tax arising from a business combination The requirements of IFRS 3(2008) have resulted in amendments to IAS 12 Income Taxes. In addition
to consequential changes in terminology, a more significant change is made in respect of the postcombination recognition of deferred tax assets acquired in a business combination as follows:
[IAS 12.68 (as amended by IFRS 3(2008).C4)] • acquired deferred tax benefits recognised within the measurement period that result from new information about facts and circumstances that existed at the acquisition date reduce the carrying amount of any goodwill related to that acquisition. If the carrying amount of that goodwill is zero, any remaining deferred tax benefits are recognised in profit or loss; and • all other acquired deferred tax benefits realised are recognised in profit or loss (or outside profit or loss if otherwise required by IAS 12).
Prior to this amendment, under IAS 12, the subsequent realisation of all deferred tax assets acquired in a business combination reduced the carrying amount of goodwill to the amount that would have been recognised if the deferred tax asset had been recognised as an identifiable asset from the acquisition date, regardless of the date of realisation.
See section 15.3.3 for specific transitional provisions regarding this change.
Step acquisitions and partial disposals
12. Step acquisitions and partial disposals This chapter deals not only with business combinations where control is achieved through two or more separate transactions (referred to as ‘business combinations achieved in stages’ or ‘step acquisitions’), but also with other partial acquisition and disposal situations.
These types of transactions are significantly affected by the 2008 revisions to IFRS 3 and IAS 27.
The underlying principles are explained in chapter 2 of this guide.
12.1 Control achieved in two or more transactions This section applies where an equity investment in one of the following categories is increased to become a controlling interest: a financial asset under IAS 39, an associate under IAS 28 or a jointly controlled entity under IAS 31.
Transactions where control is achieved through two transactions
75% 15% 35% 75% 0% 20% 50% 100%
The principles to be applied are:
• a business combination occurs only in respect of the transaction that gives one entity control of another [IFRS 3(2008)(Appendix A)];
• the identifiable net assets of the acquiree are remeasured to their fair value on the date of acquisition (i.e. the date that control passes) [IFRS 3(2008).18];
• an equity interest previously held in the acquiree which qualified as a financial asset under IAS 39 is treated as if it were disposed of and reacquired at fair value on the acquisition date.
Accordingly, it is remeasured to its acquisition-date fair value and any resulting gain or loss is recognised in profit or loss. Consistent with the treatment as if it were a direct disposal, any changes in value of the equity interest that were previously recognised in other comprehensive income (e.g. because the investment was classified as available-for-sale) are reclassified from equity to profit or loss [IFRS 3(2008).42];