«Business combinations and changes in ownership interests A guide to the revised IFRS 3 and IAS 27 Audit.Tax.Consulting.Financial Advisory. Contacts ...»
Earnings per share would be based on the consolidated earnings (pre-combination earnings of Company B, and post-combination earnings of Company A + Company B). The weighted average number of shares would be based on 500 shares pre-combination (being the number of shares in Company A issued to shareholders of Company B) and 600 shares postcombination.
14.2.4 Worked example of a reverse acquisition Example 14.2.4 Reverse acquisition [IFRS 3(2008).IE1-IE15] This example illustrates the accounting for a reverse acquisition in which Entity B, the legal subsidiary, acquires Entity A, the entity issuing equity instruments and therefore the legal parent, in a reverse acquisition on 30 September 20X6. This example ignores the accounting for any income tax effects.
This example also uses the following information:
(a) On 30 September 20X6 Entity A issues 2.5 shares in exchange for each ordinary share of Entity B. All of Entity B’s shareholders exchange their shares in Entity B. Therefore, Entity A issues 150 ordinary shares in exchange for all 60 ordinary shares of Entity B.
(b) The fair value of each ordinary share of Entity B at 30 September 20X6 is CU40. The quoted market price of Entity A’s ordinary shares at that date is CU16.
(c) The fair values of Entity A’s identifiable assets and liabilities at 30 September 20X6 are the same as their carrying amounts, except that the fair value of Entity A’s non-current assets at 30 September 20X6 is CU1,500.
Calculating the fair value of the consideration transferred As a result of Entity A (legal parent, accounting acquiree) issuing 150 ordinary shares, Entity B’s shareholders own 60 per cent of the issued shares of the combined entity (i.e. 150 of 250 issued shares). The remaining 40 per cent are owned by Entity A’s shareholders. If the business combination had taken the form of Entity B issuing additional ordinary shares to Entity A’s shareholders in exchange for their ordinary shares in Entity A, Entity B would have had to issue 40 shares for the ratio of ownership interest in the combined entity to be the same. Entity B’s shareholders would then own 60 of the 100 issued shares of Entity B – 60 per cent of the combined entity. As a result, the fair value of the consideration effectively transferred by Entity B and the group’s interest in Entity A is CU1,600 (40 shares with a fair value per share of CU40).
The fair value of the consideration effectively transferred should be based on the most reliable measure. In this example, the quoted market price of Entity A’s shares provides a more reliable basis for measuring the consideration effectively transferred than the estimated fair value of the shares in Entity B, and the consideration is measured using the market price of Entity A’s shares – 100 shares with a fair value per share of CU16.
The amount recognised as issued equity interests in the consolidated financial statements (CU2,200) is determined by adding the issued equity of the legal subsidiary immediately before the business combination (CU600) and the fair value of the consideration effectively transferred (CU1,600). However, the equity structure appearing in the consolidated financial statements (i.e. the number and type of equity interests issued) must reflect the equity structure of the legal parent, including the equity interests issued by the legal parent to effect the combination.
Earnings per share
Assume that Entity B’s earnings for the annual period ended 31 December 20X5 were CU600 and that the consolidated earnings for the annual period ended 31 December 20X6 were CU800. Assume also that there was no change in the number of ordinary shares issued by Entity B during the annual period ended 31 December 20X5 and during the period from 1 January 20X6 to the date of the reverse acquisition on 30 September 20X6. Earnings per
share for the annual period ended 31 December 20X6 is calculated as follows:
Restated earnings per share for the annual period ended 31 December 20X5 is CU4.00 (calculated as the earnings of Entity B of 600 divided by the number of ordinary shares Entity A issued in the reverse acquisition (150)).
Effective date and transition
15. Effective date and transition
15.1 IFRS 3(2008) - effective date 15.1.1 Mandatory application IFRS 3(2008) is applicable to business combinations for which the acquisition date is in annual reporting periods beginning on or after 1 July 2009. [IFRS 3(2008).64]. With certain exceptions, the requirements of IFRS 3(2008) apply prospectively, meaning that there is no amendment to the accounting for earlier business combinations.
Specific transitional provisions override the requirements of IFRS 3(2008) in relation to deferred taxes, meaning that no goodwill adjustments can be recognised where deferred taxes arising in a pre-transition business combination are recognised for the first time after the beginning of the annual reporting period in which the IFRS 3(2008) is applied (see 15.3.3). [IFRS 3(2008)(67)] There are also specific transitional provisions in relation to entities (such as mutual entities) that have not yet applied IFRS 3(2004) and had one or more business combinations that were accounted for using the purchase method (see 15.3.2). [IFRS 3(2008)(67)] 15.1.2 Early adoption The Standard may be adopted early, but only for annual reporting periods beginning on or after 30 June 2007.
If an entity chooses to adopt IFRS 3(2008) before 1 July 2009:
• it must disclose that fact; and
• it must apply the 2008 amendments to IAS 27 at the same time.
15.1.3 Effect on a calendar-year entity
For an entity with a calendar-year accounting period:
• application for IFRS 3(2008) is mandatory for the year ended 31 December 2010; and
• early adoption is allowed from the year ended 31 December 2008. (i.e. applied in accounting for business combinations occurring after 1 January 2008).
15.1.4 Summary table for various reporting periods The table below shows the mandatory application date of IFRS 3(2008) and the earliest business combination that could be accounted for under IFRS 3(2008) if the Standard is adopted early.
Note: Different dates will apply where an entity changes its annual reporting date during the transitional period.
Effective date and transition
15.2 IAS 27(2008) – effective date The effective date for the 2008 amendments to IAS 27 is for annual accounting periods beginning on or after 1 July 2009. [IAS 27(2008).45] This is the same date as IFRS 3(2008). The amendments can also be applied early, but only if IFRS 3(2008) is adopted early, and disclosure of early adoption is made. Because the early adoption of IAS 27(2008) is linked to the adoption of IFRS 3(2008), this effectively limits early adoption of IAS 27(2008) to the beginning of an annual reporting period that begins on or after 30 June 2007.
The requirements of IAS 27(2008) are required to be applied retrospectively with the following
exceptions (which are to be applied prospectively):
• attribution of total comprehensive income to the parent and non-controlling interests even if this results in the non-controlling interests having a deficit balance (the amendment to paragraph 28 of the Standard). Therefore, entities are not permitted to restate the allocation of profit or loss between the parent and the non-controlling interests for reporting periods before the amendment is applied;
• accounting for changes in ownership interests in a subsidiary after control is obtained (requirements of paragraphs 30 and 31 of the Standard – see section 12.3). Therefore, these requirements should not be applied to changes in ownership interests that occurred before the amendments are applied; and
• accounting for loss of control (requirements of paragraphs 34 – 37 of the Standard – see section 12.4). Entities are not permitted to restate the carrying amount of an investment in a former subsidiary, nor to recalculate any gain or loss on the loss of control of a subsidiary, if control was lost before the amendments are applied.
15.3 Transition 15.3.1 General principles Assets and liabilities that arose from business combinations whose acquisition dates preceded the application of the Standard are not adjusted upon application of IFRS 3(2008). [IFRS 3(2008).65] Similarly, many of the changes introduced in IAS 27(2008) only apply on a prospective basis, and the accounting adopted for transactions that occurred prior to the beginning of the first annual reporting period in which IAS 27(2008) is applied is not adjusted. [IAS 27(2008).45] The acquisition date in a business combination, combined with the relevant annual reporting period to which IFRS 3(2008) is first applied, determines which version of IFRS 3 to apply when accounting for a particular business combination.
Acquisition date after IFRS 3(2008) is applied Where the acquisition date is on or after the beginning of the annual reporting period during which the IFRS 3(2008) is first applied, then IFRS 3(2008) must be applied in full to the transaction.
Acquisition date before IFRS 3(2008) is applied Where the acquisition date is before the beginning of the annual reporting period during which the IFRS 3(2008) is first applied, IFRS 3(2004)
is applied when accounting for the business combination. Therefore:
• the initial accounting for the business combinations is in accordance with IFRS 3(2004);
• the initial accounting for the business combination (e.g. capitalised acquisition costs, initial measurement of non-controlling interests, adjustments to goodwill for the different method of accounting for step acquisitions, and so on) is not restated to reflect the new or revised requirements in IFRS 3(2008) when the revised Standard is adopted;
• contingent consideration adjustments that arise in respect of the business combination are adjusted against the initial accounting for the business combination in accordance with IFRS 3(2004), resulting in an adjustment to goodwill; and
• comparative information is not adjusted.
However, the new requirements in IFRS 3(2008) and IAS 27(2008) are applied to:
• changes in ownership interests in a subsidiary occurring after the beginning of the annual reporting period in which IFRS 3(2008) and IAS 27(2008) are first applied, regardless of whether or not the subsidiary was acquired in a business combination that occurred prior to initial application of IFRS 3(2008) and IAS 27(2008); and
• deferred tax adjustments occurring after the beginning of the annual reporting period in which IFRS 3(2008) and IAS 27(2008) are first applied – see section 15.3.3 below.
Contingent consideration The intent of the Board appears to be that contingent consideration arising on business combinations occurring before IFRS 3(2008) is applied continues to be accounted for under IFRS 3(2004). Consequently, any adjustments continue to be made against goodwill. However, the interaction of this requirement in IFRS 3(2008) and the consequential amendment to IAS 39 is currently the subject of debate. As a consequence of IFRS 3(2008), paragraph 2(f) of IAS 39 is deleted with the effect that contracts for contingent consideration in a business combination are no longer excluded from the scope of IAS 39. The amendment to IAS 39 does not provide any transitional relief for contingent consideration relating to business combinations occurring before the implementation of IFRS 3(2008) with the effect that IAS 39 would apply to such ‘brought forward’ contingent consideration. On the basis that the US version of this requirement provides such transitional relief, it is suggested that the Board’s drafting does not reflect their intent.
Effective date and transition 15.3.2 Entities previously outside the scope of IFRS 3 Mutual entities and combinations by contract alone were previously outside the scope of IFRS 3.
IFRS 3(2008) will apply to those entities prospectively, as described above. For business combinations
occurring in earlier periods:
[IFRS 3(2008).B68 – B69]
• classification – earlier business combinations continue to be classified in accordance with the entity’s previous accounting policy;
• previously-recognised goodwill – elimination of any amortisation accumulated under the entity’s previous accounting policy, but no change to net carrying amount;
• goodwill previously recognised as a deduction from equity – not recognised as an asset. Nor is the goodwill recognised in profit or loss when the business to which it relates is disposed of or when the relevant cash-generating unit is determined to be impaired;
• subsequent accounting for goodwill – discontinue amortisation (if any) and test for impairment; and
• previously-recognised negative goodwill – derecognise any amount carried as a deferred credit and adjust retained earnings.
15.3.3 Deferred tax assets arising in a business combination Paragraph 68 of IAS 12 Income Taxes, which deals with changes in the measurement of deferred tax assets arising in business combinations, has been amended by IFRS 3(2008) (see section 11.3.6).