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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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• an equity interest previously held in the acquiree which qualified as an associate under IAS 28 or a jointly controlled entity under IAS 31 is similarly treated as if it were disposed of and reacquired at fair value on the acquisition date. Accordingly, it is remeasured to its acquisitiondate fair value, and any resulting gain or loss compared to its carrying amount under IAS 28 or IAS 31 is recognised in profit or loss. Any amount that has previously been recognised in other comprehensive income, and that would be reclassified to profit or loss following a disposal, is similarly reclassified to profit or loss [IFRS 3(2008).42]; and • goodwill (or a gain from a bargain purchase) is measured as: [IFRS 3(2008).32]

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Example 12.1A Financial asset under IAS 39 becomes a subsidiary A acquired a 75% controlling interest in B in two stages.

• In 20X1, A acquired a 15% equity interest for cash consideration of CU10,000. A classified the interest as available-for-sale under IAS 39. From 20X1 to the end of 20X5, A reported fair value increases of CU2,000 in other comprehensive income (OCI).

• In 20X6, A acquired a further 60% equity interest for cash consideration of CU60,000.

A identified net assets of B with a fair value of CU80,000. A elected to measure non-controlling interests at their share of net assets. On the date of acquisition, the previously-held 15% interest had a fair value of CU12,500.

The revaluation gain of CU3,000 previously recognised in OCI is not reclassified to profit or loss because it would not be reclassified if the interest in D were disposed of.

In 20X6, C will measure goodwill as follows:

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12.2 Financial asset becomes an associate or a jointly controlled entity While consequential amendments were made to IAS 28 and IAS 31 to require remeasurement of a residual interest to fair value following a disposal, no amendment was made to deal with the situation of an equity investment which is classified as a financial asset under IAS 39 being increased to become either an associate under IAS 28 or a jointly controlled entity under IAS 31.

Financial asset becomes an associate or a jointly controlled entity

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35% 15% 0% 20% 50% 100%

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When control is lost and an investment in an associate/jointly controlled entity is retained, IAS 27(2008) requires measurement of the investment retained at fair value and for that fair value to be used as deemed cost for subsequent accounting. IAS 27(2008).37 states that ‘the fair value of any investment retained in the former subsidiary at the date when control is lost shall be regarded as … the cost on initial recognition of an investment in an associate or jointly controlled entity’.

Step acquisitions and partial disposals The question arises as to whether the principles applied to partial disposals and control achieved in stages should also be applied to an equity-accounted or proportionatelyconsolidated interest achieved in stages. IAS 28.20 states that: ‘Many of the procedures appropriate for the application of the equity method are similar to the consolidation procedures described in IAS 27. Furthermore, the concepts underlying the procedures used in accounting for the acquisition of a subsidiary are also adopted in accounting for the acquisition of an investment in an associate.’ Against this, it is noted that IAS 28.11 has not been amended and states ‘Under the equity method, the investment in an associate is initially recognised at cost…’, which may be read as requiring any remeasurement under IAS 39 to be reversed in the initial equity accounting.

In developing IFRS 3(2008), the IASB considered this issue, but did not provide any answer.

12.3 Transactions between parent and non-controlling interests Once control has been achieved, further transactions whereby the parent entity acquires further equity interests from non-controlling interests, or disposes of equity interests but without losing control, are accounted for as equity transactions (i.e. transactions with owners in their capacity as

owners). [IAS 27(2008).30] It follows that:

[IAS 27(2008).31]

• the carrying amounts of the controlling and non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiary;

• any difference between the amount by which the non-controlling interests is adjusted and the fair value of the consideration paid or received is recognised directly in equity and attributed to the owners of the parent; and

• there is no consequential adjustment to the carrying amount of goodwill, and no gain or loss is recognised in profit or loss.

The option available to measure non-controlling interests either at fair value or at a proportionate share of the acquiree’s identifiable net assets in IFRS 3(2008).19 is described as being available ‘in a business combination’.

For a transaction between the parent and non-controlling interests, IAS 27(2008) does not give detailed guidance as to how to measure the amount to be allocated to the parent and noncontrolling interest to reflect a change in their relative interests in the subsidiary. More than one approach may be possible. In most cases, however, the best approach may be to recognise any difference between the fair value of the consideration paid and the non-controlling interest, in terms of existing carrying amount, directly in equity attributable to the parent.

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IAS 32.35 requires that the transaction costs of any equity transaction be recognised in equity.

Therefore, the costs associated with a transaction between a parent and non-controlling interests are recognised in equity.

A schedule is required to be disclosed that shows the effects on the equity attributable to owners of the parent of any changes in a parent’s ownership interest in a subsidiary that do not result in a loss of control. [IAS 27(2008).41(e)] 12.3.1 Implications of the measurement basis of non-controlling interests The adjustment to the carrying amount of non-controlling interests and the consequential adjustment to equity following a transaction with the parent will be affected by the choice of measurement basis for the non-controlling interest at acquisition date. The Board explains the

difference as follows:

‘The third difference [due to the choice of measurement basis for non-controlling interests] arises if the acquirer subsequently purchases some (or all) of the shares held by the non-controlling shareholders. If the non-controlling interests are acquired, presumably at fair value, the equity of the group is reduced by the non-controlling interests’ share of any unrecognised changes in the fair value of the net assets of the business, including goodwill. If the non-controlling interest is measured initially as a proportionate share of the acquiree’s identifiable net assets, rather than at fair value, that reduction in the reported equity attributable to the acquirer is likely to be larger. This matter was considered further in the IASB’s deliberations on the proposed amendments to IAS 27.’ [IFRS 3(2008).BC218] The difference is highlighted in the following examples.

Example 12.3.1A

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As indicated in BC218, the reduction in equity is greater where the option was taken to measure non-controlling interests at acquisition date as a proportionate share of the acquiree’s identifiable net assets. The treatment has the effect of including the non-controlling interest’s share of goodwill directly in equity. This outcome will always occur where the fair value basis is greater than the net asset basis at acquisition date.

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* It is assumed that non-controlling interests are reduced proportionately. Under the fair value option, the closing balance represents 10/25th of the acquisition date fair value (11,200) plus 10% of the change in net assets since acquisition (2,000).

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12.4 Disposal of a controlling interest but retaining a non-controlling residual interest 12.4.1 Adjustments on loss of control IAS 27 details the adjustments made when a parent loses control of a subsidiary, based on the date

when control is lost:

[IAS 27(2008).34]

• derecognise the carrying amount of assets (including goodwill), liabilities and non-controlling interests;

• recognise the fair value of consideration received;

• recognise any distribution of shares to owners;

• recognise the fair value of any residual interest;

• reclassify to profit or loss any amounts (i.e. the entire amount, not a proportion) relating to the subsidiary’s assets and liabilities previously recognised in other comprehensive income as if the assets and liabilities had been disposed of directly; and

• recognise any resulting difference as a gain or loss in profit or loss attributable to the parent.

Example 12.4.1 Parent disposes of its controlling interest but retains an associate interest In 20X1, A acquired a 100% equity interest in B for cash consideration of CU125,000.

B’s identifiable net assets at fair value were CU100,000. Goodwill of CU25,000 was identified and recognised.

In the subsequent years, B increased net assets by CU20,000 to CU120,000. Of this, CU15,000 was reported in profit or loss and CU5,000, relating to fair value movements on an available-for-sale financial asset, was reported within other comprehensive income.

A then disposed of 75% of its equity interest for cash consideration of CU115,000.

The resulting 25% equity interest is classified as an associate under IAS 28 and has a fair value of CU38,000.

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Subsequent accounting under IAS 28 on an equity-accounting basis will require an exercise to assess the fair value of B’s identifiable net assets on the date that control is lost. Goodwill will be identified by comparing the initial fair value of the interest of CU38,000 with the residual share (25%) of identifiable net assets at fair value.

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12.4.2 Subsequent accounting for a residual interest The fair value of any residual interest on the date that control is lost becomes the fair value on initial recognition of the resulting financial asset under IAS 39, associate under IAS 28, or jointly controlled entity under IAS 31. [IAS 27(2008).36 – 37] 12.4.3 Interaction with IFRS 5 Where a parent is committed to a plan to dispose of a controlling interest in a subsidiary, and meets the other requirements of IFRS 5, all the assets and liabilities of that subsidiary are classified as held for sale, regardless of whether the entity will retain a non-controlling interest in its former subsidiary after the sale. [IFRS 5.8A] Step acquisitions and partial disposals

12.5 Disposal of an associate or a jointly controlled entity but retaining a financial asset The principle adopted in IAS 27 that a change in accounting basis is recognised as a disposal and re-acquisition at fair value is extended by consequential amendments in IAS 27 to two other


• IAS 28 is amended such that on the loss of significant influence, the investor measures at fair value any investment the investor retains in the former associate [IAS 27(2008).A7]; and

• IAS 31 is amended such that when an investor ceases to have joint control, the investor measures at fair value any investment the investor retains in the former jointly controlled entity [IAS 27(2008).A8].

This reflects the Board’s view that the loss of control, loss of significant influence and loss of joint control are economically similar events which should be accounted for similarly.

[IAS 27(2008).BCA2 – BCA30] In each case, the fair value of any retained interest becomes the initial carrying amount for the retained asset as a financial asset, associate or jointly controlled entity under the appropriate Standard.

12.6 Accounting in the investing entity (where separate financial statements are prepared) Because the Board introduced the requirement to remeasure pre-existing and residual equity interests within IFRS 3(2008) (which is a Standard dealing only with accounting for business combinations), it appears that the requirement only applies to financial statements in which a business combination is accounted for under IFRS 3(2008). It follows that this requirement would not extend to the individual financial statements of the investing or parent entity.

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13. Business combinations with no transfer of consideration 13.1 Accounting requirement and examples An acquirer may obtain control of an acquiree without transferring consideration. In such cases, IFRS 3 requires an acquirer to be identified, and the acquisition method to be applied. Examples of such

circumstances include:

[IFRS 3(2008).43] (a) the acquiree repurchases a sufficient number of its own shares for an existing investor (the acquirer) to obtain control;

(b) minority veto rights lapse that previously kept the acquirer from controlling an acquiree in which the acquirer held the majority voting rights; and (c) a combination by contract alone (see section 13.2).

13.2 Combinations by contract alone In a business combination achieved by contract alone, two entities enter into a contractual arrangement which covers, for example, operation under a single management and equalisation of voting power and earnings attributable to both entities’ equity investors. Such structures may involve a ‘stapling’ or formation of a dual listed corporation.

13.2.1 Example of a dual listed structure BHP Billiton Annual Report 2007

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On 29 June 2001, BHP Billiton Plc (previously known as Billiton Plc), a UK listed company, and BHP Billiton Limited (previously known as BHP Limited), an Australian listed company, entered into a Dual Listed Companies’ (DLC) merger. This was effected by contractual arrangements between the Companies and amendments to their constitutional documents.

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