«Business combinations and changes in ownership interests A guide to the revised IFRS 3 and IAS 27 Audit.Tax.Consulting.Financial Advisory. Contacts ...»
These amendments are to be applied prospectively to the recognition of deferred tax assets acquired in business combinations from the effective date of IFRS 3(2008). [IAS 12.93] Therefore, following the adoption of IFRS 3(2008), the rules of the revised Standard as regards subsequent recognition or remeasurement of deferred tax assets arising in business combinations apply both to business combinations occurring after the adoption of IFRS 3(2008), and prospectively to the recognition or remeasurement of deferred tax assets acquired in business combinations occurring before the adoption of IFRS 3(2008). Therefore, following the adoption of IFRS 3(2008), irrespective of the date of the original acquisition, the impact of the recognition or remeasurement of such deferred tax assets is recognised in profit or loss unless the benefits are recognised within the measurement period and those adjustments result from new information about facts and circumstances that existed at the acquisition date. [IAS 12.94]
Example 15.3.3A Deferred tax assets determined provisionally Company M has an annual reporting period that ends in December. On 15 November 2009, Company M acquires a 100% controlling interest in Company N and the business combination is accounted for in accordance with IFRS 3(2004). At the acquisition date, Company N has certain carry-forward tax benefits. It is not clear that Company N will be able to carry forward those tax benefits following its acquisition – the position requires detailed assessment under the relevant tax law of the jurisdiction in which Company N operates.
Company M engages tax advisors to assess whether the tax benefits will be available to Company N after the acquisition. At 31 December 2009, this assessment has not been completed and, based on preliminary assessment of the application of the relevant laws, a deferred tax asset is not recognised in the initial accounting for the business combination in accordance with IFRS 3(2004). Accounting for the acquired deferred tax benefits is identified as an item determined only provisionally in the 31 December 2009 financial statements.
Company M first applies IFRS 3(2008) in the accounting period ending 31 December 2010. On 30 April 2010, Company M’s tax advisers conclude that 50 per cent of Company N’s tax benefits can be carried forward. Accordingly, the deferred tax asset arising from 50 per cent of the tax benefits is recognised and an adjustment is made to the goodwill arising in the initial accounting for the business combination (which is sufficient to absorb the adjustment).
In February 2011, when the case comes for final ruling by the taxation authorities, it is determined that all of the tax benefits are available for carry-forward. Under the requirements of IFRS 3(2008), because this adjustment arises after the end of the measurement period, the benefit is not adjusted against goodwill but is recognised in profit or loss. The requirements of IFRS 3(2008 are applied even though the acquisition of Company N was originally accounted for under IFRS 3(2004).
Example 15.3.3B Favourable change in tax law during the measurement period Assume the same facts as in example 15.3.3A except that, in making their assessment in April 2010, the tax advisers make reference to a favourable change in the tax law that is substantively enacted in February 2010. Without this change in tax law, the tax benefits could not have been carried forward by Company N.
In this case, the recognition of the deferred tax asset is a direct result of the change in tax law that occurs in February 2010 and, therefore, it does not result from new information about facts and circumstances that existed at the acquisition date. Accordingly, the recognition of the deferred tax asset in April 2010 is recognised in profit or loss, even though it is recognised during the measurement period.
Effective date and transition 15.3.4 Amendments to IAS 28 and IAS 31 IAS 27(2008) effects consequential amendments to IAS 28 and IAS 31 to introduce accounting requirements for the loss of significant influence over an associate or joint control over a jointly controlled entity (see section 12.5). These requirements are required to be applied to annual reporting periods beginning on after 1 July 2009, or such earlier period to which IFRS 3(2008) and IAS 27(2008) has been applied by the entity.
The amendments to IAS 28 and IAS 31 are not expressed as applying on a prospective or retrospective basis, and do not have transitional provisions equivalent to those under IAS 27 to prohibit the restatement of prior transactions that result in a loss of significant influence or joint control. However, it is suggested that it would be appropriate to apply these changes on a basis that is consistent with the transitional provisions in IAS 27, i.e. only apply the new requirements to transactions occurring after the beginning of the annual reporting period beginning after initial application of IFRS 3(2008) and IAS 27(2008).
15.3.5 Amendments to other IFRSs
IFRS 3(2008) and IAS 27(2008) introduce a number of consequential amendments to various other IFRSs. These amendments are required to be applied to annual reporting periods beginning on after 1 July 2009 or such earlier period to which IFRS 3(2008) and IAS 27(2008) has been applied by the entity. Although not specifically stated, the effect of these amendments is effectively applied on a prospective basis due to their nature.
16.1 Business combinations in the current period or after the reporting period IFRS 3(2008) requires that the acquirer should disclose information that enables users of its financial
statements to evaluate the nature and financial effect of a business combination that occurs either:
• during the current reporting period; or
• after the end of the reporting period but before the financial statements are authorised for issue.
Detailed guidance as to the disclosures required to meet the objectives of IFRS 3(2008).59 is set out in Appendix B to the Standard. These requirements are set out below, accompanied by extracts from the Illustrative Examples issued with IFRS 3(2008) which illustrate some (but not all) of the requirements.
If the specific disclosures set out below and those required by other IFRSs do not meet the objectives set out in IFRS 3(2008).59, the acquirer should disclose whatever additional information is necessary to meet those objectives. [IFRS 3(2008).63] The disclosures are generally required for each business combination that occurs during the reporting period and after the end of the reporting period (see section 16.1.12 below). However, for individually immaterial business combinations occurring during the reporting period that are material collectively, the disclosures may be made in aggregate. [IFRS 3(2008).B65] For the purposes of the illustrative examples, AC (the acquirer) is assumed to be a listed entity and TC (the acquiree) is an unlisted entity.
16.1.1 Details of the business combination
The acquirer is required to disclose:
[IFRS 3(2008).64(a) – (d)]
• the name and a description of the acquiree;
• the acquisition date;
• the percentage of voting equity interests acquired; and
• the primary reasons for the business combination and a description of how the acquirer obtained control of the acquiree.
Disclosure Example 16.1.1 [IFRS 3(2008).IE72] On 30 June 20X0 AC acquired 15 per cent of the outstanding ordinary shares of TC.
On 30 June 20X2 AC acquired 60 per cent of the outstanding ordinary shares of TC and obtained control of TC. TC is a provider of data networking products and services in Canada and Mexico. As a result of the acquisition, AC is expected to be the leading provider of data networking products and services in those markets. It also expects to reduce costs through economies of scale.
The acquirer is required to provide a qualitative description of the factors that make up the goodwill recognised, such as expected synergies from combining operations of the acquiree and the acquirer, intangible assets that do not qualify for separate recognition, or other factors. [IFRS 3(2008).B64(e)] The acquirer is also required to disclose the total amount of goodwill that is expected to be deductible for tax purposes. [IFRS 3(2008).B64(k)] Example 16.1.2 [IFRS 3(2008).IE72] The goodwill of CU2,500 arising from the acquisition consists largely of the synergies and economies of scale expected from combining the operations of AC and TC.
None of the goodwill recognised is expected to be deductible for income tax purposes.
16.1.3 Fair value of consideration and details of contingent consideration The acquirer is required to disclose the acquisition-date fair value of the total consideration
transferred and the acquisition-date fair value of each major class of consideration, such as:
• other tangible or intangible assets, including a business or subsidiary of the acquirer;
• liabilities incurred (e.g. a liability for contingent consideration); and
• equity interests of the acquirer, including the number of instruments or interests issued or issuable and the method of determining the fair value of those instruments or interests.
For contingent consideration arrangements and indemnification assets, the acquirer is required to
• the amount recognised as of the acquisition date;
• a description of the arrangement and the basis for determining the amount of the payment;
• an estimate of the range of outcomes (undiscounted) or, if a range cannot be estimated, that fact and the reasons why a range cannot be estimated. If the maximum amount of the payment is unlimited, the acquirer should disclose that fact.
Example 16.1.3 [IFRS 3(2008).IE72]
The fair value of the 100,000 ordinary shares issued as part of the consideration paid for TC (CU4,000) was determined on the basis of the closing market price of AC’s ordinary shares on the acquisition date.
The contingent consideration arrangement requires AC to pay the former owners of TC 5 per cent of the revenues of XC, an unconsolidated equity investment owned by TC, in excess of CU7,500 for 20X3, up to a maximum amount of CU2,500 (undiscounted). The potential undiscounted amount of all future payments that AC could be required to make under the contingent consideration arrangement is between CU0 and CU2,500.
The fair value of the contingent consideration arrangement of CU1,000 was estimated by applying the income approach. The fair value estimates are based on an assumed discount rate range of 20–25 per cent and assumed probability-adjusted revenues in XC of CU10,000–20,000.
Disclosure 16.1.4 Details of acquired receivables
For acquired receivables, the acquirer is required to disclose:
• the fair value of the receivables;
• the gross contractual amounts receivable; and
• the best estimate at the acquisition date of the contractual cash flows not expected to be collected.
These disclosures are required by major class of receivable, such as loans, direct finance leases and any other class of receivables.
Example 16.1.4 [IFRS 3(2008).IE72] The fair value of the financial assets acquired includes receivables under finance leases of data networking equipment with a fair value of CU2,375. The gross amount due under the contracts is CU3,100, of which CU450 is expected to be uncollectible.
16.1.5 Details of assets acquired and liabilities assumed The acquirer is required to disclose the amounts recognised as of the acquisition date for each major class of assets acquired and liabilities assumed. [IFRS 3(2008).B64(i)] Example 16.1.5 [IFRS 3(2008).IE72]
16.1.6 Details of contingent liabilities recognised For each contingent liability recognised in accordance with IFRS 3(2008).23 (see section 8.5.1), the acquirer is required to disclose the information required in paragraph 85 of IAS 37 Provisions, Contingent Liabilities and Contingent Assets. [IFRS 3(2008).B64(j)] IAS 37 sets out the general disclosure requirements for provisions recognised under that Standard.
The effect of IFRS 3(2008).B64(j) is to require the same disclosures for contingent liabilities
recognised in a business combination, as follows:
• a brief description of the nature of the obligation and the expected timing of any resulting outflow of economic benefits;
• an indication of the uncertainties about the amount or timing of those outflows. Where necessary to provide adequate information, the acquirer should disclose the major assumptions made concerning future events; and
• the amount of any expected reimbursement, stating the amount of any asset that has been recognised for that expected reimbursement.
Example 16.1.6 [IFRS 3(2008).IE72] A contingent liability of CU1,000 has been recognised for expected warranty claims on products sold by TC during the last three years. We expect that the majority of this expenditure will be incurred in 20X3 and that all will be incurred by the end of 20X4. The potential undiscounted amount of all future payments that AC could be required to make under the warranty arrangements is estimated to be between CU500 and CU1,500.
If a contingent liability is not recognised because its fair value cannot be measured reliably, the
acquirer is required to disclose:
• the information required by paragraph 86 of IAS 37; and
• the reasons why the liability cannot be measured reliably.
IAS 37 sets out the general disclosure requirements for contingent liabilities, as follows:
• a brief description of the nature of the contingent liability; and
• where practicable: