«Business combinations and changes in ownership interests A guide to the revised IFRS 3 and IAS 27 Audit.Tax.Consulting.Financial Advisory. Contacts ...»
Example 16.4.1 illustrates the type of disclosure that may be appropriate (according to the individual circumstances of the entity).
Example 16.4.1 Impact of revised Standards in advance of application At the date of authorisation of these financial statements, the following Standards and Interpretations (which have not been applied in these financial statements) were in issue but are
not effective until annual accounting periods beginning on or after 1 July 2009:
… IAS 27(2008) Consolidated and Separate Financial Statements; and IFRS 3(2008) Business Combinations.
The directors anticipate that they will adopt all of the above Standards and Interpretations in the Group’s financial statements for the period commencing 1 January 2009.
Apart from matters of presentation, the principal amendments to IAS 27 that will impact the Group concern the accounting treatment for transactions that result in changes in a parent’s interest in a subsidiary. It is likely that these amendments will significantly affect the accounting for such transactions in future accounting periods, but the extent of such impact will depend on the detail of the transactions, which cannot be anticipated. The changes will be adopted prospectively for transactions after the date of adoption of the revised Standard and, therefore, no restatements will be required in respect of transactions prior to the date of adoption.
Similarly, IFRS 3 is concerned with accounting for business combination transactions. The changes to the Standard are significant, but their impact can only be determined once the detail of future business combination transactions is known. The amendments to IFRS 3 will be adopted prospectively for transactions after the date of adoption of the revised Standard and, therefore, no restatements will be required in respect of transactions prior to the date of adoption.
16.4.2 Discussion of impact of revised Standards in the period of adoption
In the year in which IFRS 3(2008) and IAS 27(2008) are first adopted, IAS 8.28 applies. That paragraph requires that when initial application of a Standard has an effect on the current period or any prior period, would have such an effect except that it is impracticable to determine the amount
of the adjustment, or might have an effect on future periods, an entity should disclose:
• when applicable, that the change in accounting policy has been made in accordance with its transitional provisions;
• the nature of the change in accounting policy;
• when applicable, a description of the transitional provisions;
Disclosure • when applicable, the transitional provisions that might have an effect on future periods;
• for the current period and each prior period presented, to the extent practicable, the amount
of the adjustment:
– for each financial statement line item affected; and – if IAS 33 Earnings per Share applies to the entity, for basic and diluted earnings per share;
• the amount of the adjustment relating to periods before those presented, to the extent practicable; and • if retrospective application required of the Standard is impracticable for a particular prior period, or for periods before those presented, the circumstances that led to the existence of that condition and a description of how and from when the change in accounting policy has been applied.
If the Standards are adopted in advance of their effective dates, that fact should be disclosed.
[IFRS 3(2008).64 and IAS 27(2008).45] The following example illustrates how the required disclosures might be made in an accounting period beginning on 1 January 2008. Note that these are intended as an illustration of the type of disclosures that will be required, and they do not illustrate all of the required disclosures in all circumstances.
Example 16.4.2 Impact of revised Standards in year of adoption
The Group has elected to adopt the following Standards in advance of their effective dates:
• IFRS 3 Business Combinations (as revised in 2008); and
• IAS 27 Consolidated and Separate Financial Statements (as revised in 2008).
The revisions to these Standards have resulted in a number of changes to the Group’s accounting policies.
In accordance with the transitional provisions of IFRS 3(2008), that Standard has been applied prospectively to business combinations for which the acquisition date is on or after 1 January 2008.
• to allow a choice on a transaction-by-transaction basis for the measurement of noncontrolling interests (previously referred to as ‘minority’ interests);
• to change the recognition and subsequent accounting requirements for contingent consideration;
• to change the basis for allocating a portion of the purchase consideration in a business combination to replacement share-based payment awards granted at the time of the combination;
• to require that acquisition-related costs be accounted for separately from the business combination, generally leading to those costs being expensed when incurred; and
• for business combinations achieved in stages, to require reclassification from equity to profit or loss at the date of acquisition of amounts related to previously-held interests in the acquiree.
In the current period, these changes in policies have affected the accounting for the acquisition
of ABC Limited as follows:
Liability recognised in respect of the fair value of contingent consideration that would not have been required under the previous version of the Standard 500
Reclassification from equity to profit or loss of fair value movements on available-for-sale investments held by ABC Limited that were recognised in other comprehensive income when ABC Limited was accounted for as an associate in previous accounting periods 200
Disclosure Increase in basic earnings per share as a result of the adoption of IFRS 3(2008) 23 cents Increase in diluted earnings per share as a result of the adoption of IFRS 3(2008) 19 cents The revised Standard has also required additional disclosures in respect of the combination (see note xx).
Results in future periods may be affected by future impairment losses in respect of the increased goodwill, and by potential changes in the liability recognised for contingent consideration.
The revised Standard is also expected to affect the accounting for business combinations in future accounting periods, but the impact will only be determined once the detail of future business combination transactions is known.
IAS 27(2008) IAS 27(2008) has been adopted for periods beginning on of after 1 January 2008. The revised Standard has been applied prospectively in accordance with the relevant transitional provisions.
The revised Standard has resulted in a change in accounting policy regarding increases or decreases in the Group’s ownership interests in its subsidiaries. In prior years, in the absence of specific requirements in IFRSs, increases in interests in existing subsidiaries were treated in the same manner as the acquisition of subsidiaries, with goodwill or a bargain purchase gain being recognised where appropriate. The impact of decreases in interests in existing subsidiaries that did not involve loss of control (being the difference between the consideration received and the carrying amount of the share of net assets disposed of) was recognised in profit or loss. Under IAS 27(2008), these treatments are no longer acceptable. All increases or decreases in such interests are dealt with in equity, with no impact on goodwill or profit or loss.
In respect of the disposal during the period of part of the Group’s interest in XYZ Limited, the impact of the change in policy has been that the difference of CU3 million between the consideration received and the transfer between the parent’s equity and non-controlling interests has been recognised directly in equity. Had the previous accounting policy been applied, this amount would have been recognised in profit or loss. Therefore, the change in accounting policy has resulted in a decrease in the profit for the period of CU3 million, with a consequential decrease in basic earnings per share of CU1.43 and in diluted earnings per share of CU1.28.
16.4.3 Disclosure of accounting policies
Following the adoption of IFRS 3(2008) and IAS 27(2008), the summary of accounting policies should be amended to reflect the revised accounting policies in respect of business combinations and consolidations. The following examples illustrate the type of disclosures that might be appropriate. Note, however, that the examples do not address all of the aspects of the revised Standards and that where other aspects of the Standards are significant to an entity, they should be addressed in the entity’s accounting policies.
Disclosure Example 16.4.3 Extracts from summary of significant accounting policies Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and entities (including special purpose entities) controlled by the Company (its subsidiaries) made up to 31 December each year. Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities.
Non-controlling interests in the net assets of consolidated subsidiaries are identified separately from the Group’s equity therein. The interest of non-controlling shareholders may be initially measured either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s identifiable net assets. The choice of measurement basis is made on an acquisitionby-acquisition basis. Subsequent to acquisition, non-controlling interests consist of the amount attributed to such interests at initial recognition and the non-controlling interest’s share of changes in equity since the date of the combination.
The results of subsidiaries acquired or disposed of during the year are included in the consolidated statement of comprehensive income from the effective date of acquisition or up to the effective date of disposal, as appropriate.
Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by the Group.
All intragroup transactions, balances, income and expenses are eliminated on consolidation.
Changes in the Group’s interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions. Any difference between the amount by which the noncontrolling interests are adjusted and the fair value of the consideration paid or received is recognised directly in equity and attributed to the Group.
Business combinations Acquisitions of subsidiaries and businesses are accounted for using the acquisition method.
The cost of the acquisition is measured at the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree. Acquisition-related costs are recognised in profit or loss as incurred.
Where appropriate, the cost of acquisition includes any asset or liability resulting from a contingent consideration arrangement, measured at its acquisition-date fair value. Subsequent changes in such fair values are adjusted against the cost of acquisition where they qualify as measurement period adjustments (see below). All other subsequent changes in the fair value of contingent consideration classified as an asset or liability are accounting for in accordance with Disclosure relevant IFRSs. Changes in the fair value of contingent consideration classified as equity are not recognised.
The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3(2008) are recognised at their fair value at the acquisition date, except
• deferred tax assets or liabilities and liabilities or assets related to employee benefit arrangements are recognised and measured in accordance with IAS 12 Income Taxes and IAS 19 Employee Benefits respectively; and
• liabilities or equity instruments related to the replacement by the Group of an acquiree’s share-based payment awards are measured in accordance with IFRS 2 Share-based Payment; and
• assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5 Noncurrent Assets Held for Sale and Discontinued Operations are measured in accordance with that Standard.
If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Group reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement period (see below), or additional assets or liabilities are recognised, to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the amounts recognised as of that date.
The measurement period is the period from the date of acquisition to the date the Group receives complete information about facts and circumstances that existed as of the acquisition date – and is subject to a maximum of one year.
Where a business combination is achieved in stages, the Group’s previously-held interests in the acquired entity are remeasured to fair value at the acquisition date (i.e. the date the Group attains control) and the resulting gain or loss, if any, is recognised in profit or loss. Amounts arising from interests in the acquiree prior to the acquisition date that have previously been recognised in other comprehensive income are reclassified to profit or loss, where such treatment would be appropriate if that interest were disposed of.
Goodwill arising on the acquisition of a subsidiary is recognised as an asset at the date that control is acquired (the acquisition date). Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interest in the acquiree and the fair value of the acquirer’s previously-held equity interest (if any) in the entity over the net fair value of the identifiable net assets recognised.
If, after reassessment, the Group’s interest in the net fair value of the acquiree’s identifiable net assets exceeds the sum of the consideration transferred, the amount of any non-controlling interest in the acquiree and the fair value of the acquirer’s previously-held equity interest (if any), the excess is recognised immediately in profit or loss as a bargain purchase gain.
Goodwill is not amortised, but is reviewed for impairment at least annually. Any impairment loss is recognised immediately in profit or loss and is not subsequently reversed.
On disposal of a subsidiary, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.
Appendix 1 Appendix 1 Comparison of IFRS 3(2008) and IFRS 3(2004) Business combinations
Scope of the Standard Mutual entities and The revised Standard applies to Previously, IFRS 3 did not apply to business combinations these types of transactions. these types of transactions.
achieved by contract alone Definitions and terminology
Assets the acquirer Requires the acquirer to measure No specific guidance.
intends to dispose of the asset at a ‘neutral’ fair value.
or use in a different way from other market participants Exceptions to recognition or measurement principles, or both, on initial recognition
Appendix 2 Continuing differences between IFRSs and US GAAP Following the issue of IFRS 3(2008) and IAS 27(2008) by the IASB, and SFAS 141R Business Combinations and SFAS 160 Noncontrolling Interests in Consolidated Financial Statements by the FASB, IFRSs and US GAAP are substantially converged in their treatment of business combinations and changes in ownership interests. However, some important differences remain, largely due to differences in related standards that were not addressed by this project, the most significant of which are summarised below.
Deloitte IFRS resources In addition to this publication, Deloitte Touche Tohmatsu has a range of tools and publications to
assist in implementing and reporting under IFRSs. These include:
Interim financial reporting: 3rd edition (June 2007). Guidance on applying the interim A guide to IAS 34 reporting Standard, including a model interim financial report and an IAS 34 compliance checklist.
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