«Business combinations and changes in ownership interests A guide to the revised IFRS 3 and IAS 27 Audit.Tax.Consulting.Financial Advisory. Contacts ...»
IFRS 3(2008) explains that the date on which the acquirer obtains control of the acquiree is generally the date on which the acquirer legally transfers the consideration, acquires the assets and assumes the liabilities of the acquiree – the closing date. However, the acquirer should consider all pertinent facts and circumstances in identifying the acquisition date, and it might be that control is achieved on a date that is either earlier or later than the closing date. For example, the acquisition date precedes the closing date if a written agreement provides that the acquirer obtains control of the acquiree on a date before the closing date. [IFRS 3(2008).9] The reference to a written agreement is taken to mean the purchase agreement or a separate agreement signed before the closing date that grants rights to the acquirer. Since the date of acquisition will be a matter of fact, it cannot be retrospectively altered (e.g. by indicating in the purchase agreement that control is deemed to exist from an earlier date, or that profits accrue to the purchaser from some earlier or later date). This latter feature may represent a mechanism to adjust the amount of purchase consideration.
In some cases, the entire purchase price may be in the form of deferred or contingent consideration. In such circumstances, the timing of the payment of the consideration will have little or no bearing on the determination of the acquisition date.
7.3 Equity securities transferred as consideration Consistent with the requirements in the previous version of the Standard, IFRS 3(2008) requires that the measurement date for equity securities transferred as consideration is the acquisition date (see section 9.1). [IFRS 3(2008).37]
The Basis for Conclusions to IFRS 3(2008) summarises the Board’s discussion of the measurement date for equity securities transferred. This is mainly to explain the Board’s decision to reject the approach reflected in certain US accounting literature. There is consequently no change to the previous position that the fair value of equity securities transferred is measured on a single date, being the date control passes. No consideration is given to movements in share prices before or after this date. [IFRS 3(2008).BC342]
7.4 Practical guidance IFRS 3(2008) does not contain any further detailed guidance on the determination of the acquisition date. The following examples may be a useful guide in some circumstances.
Public offer of shares Where a public offer of shares is made, the date that control passes is the date when the offer becomes unconditional and a controlling interest in the acquiree has therefore been achieved.
This is usually the date that the number of acceptances passes a predetermined threshold and that threshold is sufficient to provide control (i.e. usually more than 50%). In the absence of such a threshold, the acquisition date may be the date the offer is declared unconditional.
In making this assessment, other factors will also need to be considered, including where offers are declared unconditional before a controlling shareholding is achieved. In these cases, the acquisition date may occur when the level of shareholding has exceeded a particular level and the acquirer is able to effect change in the board of directors of the acquiree.
Private transfer For a private transfer, the date that control passes will be the date that an unconditional offer is accepted. Where agreements are subject to substantive preconditions, the acquisition date will usually be the date that the last of those preconditions is satisfied.
A number of indicators may be relevant, including:
(a) the date that the acquirer commences direction of operating and financial policies;
(b) the date from which the flow of economic benefits changes;
(c) the date that consideration passes (although this is not conclusive, since it is capable of being adjusted either forwards or backwards or settled in instalments);
(d) the appointment of the majority of the board of directors of the acquiree (although this may serve as a measure of the latest possible date that control passes in many cases); and (e) the date that competition authorities provide clearance of a referred bid.
In practice, the date identified as the acquisition date should reflect all the various circumstances surrounding the transfer of control.
Assets, liabilities and non-controlling interests
8. Recognising and measuring the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree IFRS 3(2008) sets out basic principles for the recognition and measurement of identifiable assets acquired, liabilities assumed and non-controlling interests (see sections 8.1, 8.2 and 8.3). Having established those principles, the Standard provides detailed application guidance for specific assets and liabilities (see 8.4), and a number of limited exceptions to the general principles (see 8.5).
8.1 Recognition principle IFRS 3(2008) requires that, as of the acquisition date, the acquirer should recognise, separately from goodwill, the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree. [IFRS 3(2008).10] 8.1.1 Conditions for recognition
To qualify for recognition as part of applying the acquisition method, an item should:
• meet the definition of an asset or liability in the Framework for the Preparation and Presentation of Financial Statements at the acquisition date [IFRS 3(2008).11]; and
• be part of the business acquired (the acquiree) rather than the result of a separate transaction (see section 9.3) [IFRS 3(2008).12].
The following are outcomes as a result of applying the first recognition condition above.
• Post-acquisition reorganisation Costs that the acquirer expects but is not obliged to incur in the future to effect its plan to exit an activity of an acquiree or to terminate the employment of or relocate an acquiree’s employees are not liabilities at the acquisition date. [IFRS 3(2008).11] This exclusion of an acquirer’s post-acquisition initiated costs is consistent with IFRS 3(2004).
Assets, liabilities and non-controlling interests
• Unrecognised assets and liabilities The acquirer may recognise some assets and liabilities that the acquiree had not previously recognised in its financial statements. For example, the acquirer recognises the acquired identifiable intangible assets (e.g. brand names, patents or customer relationships) that the acquiree did not recognise as assets in its financial statements because it developed them internally and charged the related costs to expense. [IFRS 3(2008).13] The recognition of assets and liabilities that were not recognised by the acquiree is consistent with IFRS 3(2004).
The following recognition criteria, which were included in IFRS 3(2004), have been eliminated from IFRS 3(2008).
• Reliability of measurement as a criterion for recognising an asset or liability separately from goodwill – the Board considered this an unnecessary duplication of the overall recognition criteria in the Framework. [IFRS 3(2008).BC125] The requirement to recognise a contingent liability only where its fair value can be measured reliably remains (see section 8.5.1 below).
• Probability of an inflow or outflow of economic benefits – as a result, there is a greater focus on the presence of an unconditional right or obligation. [IFRS 3(2008).BC130] 8.1.2 Classifying or designating identifiable assets acquired and liabilities assumed in a business combination 126.96.36.199 Conditions at the acquisition date IFRS 3(2008) requires that, at the acquisition date, the identifiable assets acquired and liabilities assumed should be classified or designated as necessary to apply other IFRSs subsequently.
The acquirer makes those classifications or designations on the basis of contractual terms, economic conditions, its operating or accounting policies, and other pertinent conditions as they exist at the acquisition date. [IFRS 3(2008).15]
Examples of classifications or designations made at the acquisition date include:
[IFRS 3(2008).16] (a) classification of financial assets as at fair value through profit or loss, available-for-sale or held-to-maturity;
(b) classification of financial liabilities as at fair value through profit or loss;
(c) designation of a derivative as a hedging instrument; and (d) assessment of whether an embedded derivative should be separated from a host contract (which is a classification matter).
Assets, liabilities and non-controlling interests 188.8.131.52 Conditions not at the acquisition date The Standard provides two exceptions to the principle (set out above) that classifications or designations are based on the terms of instruments and conditions at the acquisition date. The two
exceptions relate to:
[IFRS 3(2008).17] (a) the classification of a lease contract as either an operating lease or a finance lease in accordance with IAS 17 Leases; and (b) the classification of a contract as an insurance contract in accordance with IFRS 4 Insurance Contracts.
The acquirer classifies such leases and insurance contracts on the basis of the contractual terms and other factors at the inception of the contract (or, if the terms of the contract have been modified in a manner that would change its classification, at the date of that modification, which might be the acquisition date).
8.2 Measurement principle for assets and liabilities Identifiable assets acquired and liabilities assumed are measured at their acquisition-date fair values.
[IFRS 3(2008).18] 8.2.1 Assets with uncertain cash flows (valuation allowances) An acquirer is not permitted to recognise a separate valuation allowance as of the acquisition date for assets acquired in a business combination that are measured at their acquisition-date fair values because the effects of uncertainty about future cash flows are included in the fair value measure.
For example, because IFRS 3 requires the acquirer to measure acquired receivables, including loans, at their acquisition-date fair values, the acquirer does not recognise a separate valuation allowance for the contractual cash flows that are deemed to be uncollectible at that date. [IFRS 3(2008).B41] This is a change from IFRS 3(2004), which required receivables, beneficial contracts and other identifiable assets to be measured at the present values of the amounts to be received, determined at appropriate current interest rates, less allowances for uncollectibility and collection costs.
The principle of ‘no valuation allowance’ also extends to property, plant and equipment such that, following a business combination, such assets are stated at a single fair value amount, and not at a gross ‘deemed cost’ and accumulated depreciation.
8.2.2 Assets that the acquirer intends not to use or to use in a way that is different from the way other market participants would use them For competitive or other reasons, the acquirer may intend not to use an acquired asset (e.g. a research and development intangible asset or a brand name of an acquired competitor that is to be taken out of service), or it may intend to use the asset in a way that is different from the way in which other market participants would use it. In these circumstances, the general principle applies and the fair value of the asset is determined in accordance with its use by other market participants.
[IFRS 3(2008).B43] This requirement is an application of the principle that the fair value of an asset should reflect its highest and best use. The requirement has been stated explicitly in IFRS 3(2008) to avoid inconsistencies in practice.
2 Acquisition of an intangible that will not be used A acquires B. The identifiable net assets of B include a trademark, being the logo previously used by B as a direct competitor to A. A has no intention of using this logo in the future.
The logo is considered to be separable because it could, for example, be licensed to a third party. It also arises from legal rights. Therefore, the intangible asset should be recognised as part of the accounting for the acquisition (section 8.4.2 below deals more fully with intangible assets).
In practice, if A has no intention of using the logo after the acquisition, it will not be possible to allocate the logo to existing cash-generating units. Consequently, it should be identified as a cash-generating unit by itself as management intends to exclude the logo from the operating process. The cash inflows related to the logo are nil. However, immediately after acquisition, it would appear reasonable that the fair value less costs to sell are not significantly different from the amount recognised and, accordingly, an impairment loss is not recognised. However, the asset must be amortised over its useful life. The useful life to the entity is the length of time for which holding the logo will be effective in discouraging competition, which is likely to be a fairly short period, as an unexploited logo loses value very quickly. As A acquired the asset with the express intention of denying others the opportunity to use the asset, it appears unlikely that the asset will be sold in the future and, accordingly, the residual value is zero. As a result, an amortisation charge for the full carrying amount of the asset is recognised over the useful life (which may be as short as a single accounting period).
Assets, liabilities and non-controlling interests 8.3 Non-controlling interest in an acquiree 8.3.1 Choice of method
For each business combination, any non-controlling interest in the acquiree is measured either:
• at the non-controlling interest’s proportionate share of the acquiree’s identifiable net assets.
This choice is available for each business combination, so an entity may use fair value for one business combination and the proportionate share of the acquiree’s identifiable net assets for another.