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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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IFRS 3(2008).19 states that the choice of measurement is available for each business combination. The Basis for Conclusions reiterates that this choice is available on a transactionby-transaction basis. [IFRS 3(2008).BC216] IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors indicates that where specific guidance is available in another Standard, that guidance overrides the requirements of IAS 8.13 to select and apply accounting policies consistently for similar transactions, other events or conditions. There is no requirement within IFRS 3(2008) to measure non-controlling interests on a consistent basis for similar types of business combinations and, therefore, an entity has a free choice between the two options for each transaction undertaken.

An example illustrating the choice, and its impact on goodwill, is set out in section 10.1.

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8.3.2 Implications of choice between alternatives for measuring non-controlling interests Where the option is taken to measure non-controlling interests at fair value (which is generally higher than the proportionate share of identified net assets), there is a corresponding impact on the residual amount of goodwill.

Further considerations include:

• the choice only affects the initial measurement of a non-controlling interest - the fair value option is not available for subsequent changes in non-controlling interests;

• an increased amount attributed to goodwill as a result of the non-controlling interest measurement choice is a permanent difference in the carrying amount of goodwill;

• this would suggest that the amount of goodwill that is subject to impairment testing under IAS 36 Impairment of Assets will differ. However, IFRS 3(2008) amends IAS 36 such that this effect is equalised. Where an entity measures a non-controlling interest at its proportionate interest in the net identifiable assets of a subsidiary at the acquisition date, rather than at fair value, for the purpose of impairment testing, the carrying amount of goodwill allocated to the unit is grossed up to include the goodwill attributable to the non-controlling interest.

This adjusted carrying amount is then compared with the recoverable amount of the unit to determine whether the cash-generating unit is impaired [IAS 36.C4];

• the revised US standard, SFAS 141 Business Combinations, requires an entity to use the fair value method for non-controlling interests. Therefore, entities that have US GAAP reporting obligations should consider adopting the fair value method; and

• where the option to measure non-controlling interests at fair value is not taken, any goodwill relating to non-controlling interests acquired subsequently will never be recognised since additional transactions after control has been obtained are accounted for as equity transactions. This feature is discussed further at section 12.3.1.

8.3.3 Measuring the fair value of non-controlling interests

For the purpose of measuring non-controlling interests at fair value, it may be possible to determine the acquisition-date fair value on the basis of active market prices for the equity shares not held by the acquirer. When a market price for the equity shares is not available because the shares are not publicly traded, the acquirer should measure the fair value of the non-controlling interests using other valuation techniques. [IFRS 3(2008).B44] The fair values of the acquirer’s interest in the acquiree and the non-controlling interest on a pershare basis may differ. The main difference is likely to be the inclusion of a control premium in the per-share fair value of the acquirer’s interest in the acquiree or, conversely, the inclusion of a discount for lack of control in the per-share fair value of the non-controlling interest. [IFRS 3(2008).B45] Assets, liabilities and non-controlling interests

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Potential for fair values reflecting different circumstances

A acquired B in two separate transactions:

• a one-third equity interest for which A paid CU10 per share, which resulted in A having significant influence over B; and

• a further one-third equity interest for which A paid CU15 per share, which resulted in A having a controlling interest.

Based on the market prices of the remaining shares, A assesses the fair value of the noncontrolling interest at CU9 per share.

In this case, it appears that three different fair values have been attributed to similar sized equity interests. However, each fair value reflects a different fact pattern and, therefore, a

different market:

• CU10 represents the fair value of an equity interest carrying significant influence in an entity where other holdings are dispersed and the holder has the potential to launch a bid for a controlling interest;

• CU15 represents the fair value of a controlling interest, including a control premium; and

• CU9 represents the fair value of a minority non-controlling interest in an entity which is controlled by another party.

8.3.4 Subsequent measurement of non-controlling interests Whichever choice is made as regards the initial measurement of non-controlling interests, the amount initially recognised when accounting for the business combination is subsequently adjusted by the non-controlling interests’ share of changes in equity from the date of the combination.

[IAS 27(2008).18(c)] In other words, where an entity elects to measure a non-controlling interest based on fair value at the date of the business combination, subsequent changes in the fair value of the non-controlling interest are not recognised.

8.3.5 Debit balances on non-controlling interests IAS 27(2008) requires that total comprehensive income be attributed to the owners of the parent and to the non-controlling interests, even if this results in the non-controlling interests having a deficit balance. [IAS 27(2008).28] This differs from the previous version of IAS 27 where a deficit balance was allocated against the parent except to the extent that the non-controlling interests had a binding obligation and were able to make an additional investment to cover losses.

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8.4 Guidance on specific assets and liabilities 8.4.1 Operating leases IFRS 3(2008) includes specific guidance on how operating leases should be recognised and measured when accounting for a business combination.

• Classification as operating or finance Classification of a lease contract as either an operating or a finance lease at the acquisition date is based on factors at the inception of the lease, which is generally before the acquisition date. If the terms of the contract have been changed subsequent to the inception of the lease such that the classification of the lease would change, then the classification at the acquisition date is based on the contractual terms and other factors at the date of that change. This means that an acquiree’s lease classifications are not changed when accounting for the business combination, unless a lease contract is modified at the date of acquisition. [IFRS 3(2008).17] • Measurement where acquiree is the lessee In general, the acquirer should not recognise any asset or liability related to an operating lease in which the acquiree is the lessee.

[IFRS 3(2008).B28] It follows that any lease incentive that is being amortised by the acquiree will not be recognised by the acquirer. However, the acquiree may be party to operating lease arrangements that involve future lease payments at below or above market rates. The acquirer determines whether the terms of each operating lease in which the acquiree is the lessee are favourable or unfavourable. The acquirer recognises an intangible asset if the terms of an operating lease are favourable relative to market terms, and a liability if the terms are unfavourable relative to market terms. [IFRS 3(2008).B29] • Separate identifiable intangible An identifiable intangible asset may be associated with an operating lease, which may be evidenced by market participants’ willingness to pay a price for the lease even if it is at market terms. For example, a lease of gates at an airport or of retail space in a prime shopping area might provide entry into a market or other future economic benefits that qualify as identifiable intangible assets (e.g. as a customer relationship). In such circumstances, a separate identifiable intangible is recognised – see section 8.4.2 below.

[IFRS 3(2008).B30] • Measurement where acquiree is the lessor Where an asset such as a building or a patent is leased out by the acquiree under an operating lease, the acquirer takes the terms of the lease into account in measuring the acquisition-date fair value of the asset. In other words, the acquirer does not recognise a separate asset or liability if the terms of the operating lease are either favourable or unfavourable when compared with market terms (as is required for leases in which the acquiree is the lessee), but instead reflects the terms of the lease in the determination of the fair value of the leased asset. [IFRS 3(2008).B42]

8.4.2 Intangible assets

The acquirer should recognise, separately from goodwill, the identifiable intangible assets acquired in a business combination. An asset is identifiable if it meets either the separability or contractuallegal criteria in IAS 38.12 (see below). [IFRS 3(2008).B31] Assets, liabilities and non-controlling interests Separability criterion An intangible is separable if it is capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, identifiable asset or liability, regardless of whether the entity intends to do so. [IAS 38.12(a)] An acquired intangible meets the separability criterion if there is evidence of exchange transactions for that type of asset or an asset of a similar type, even if those transactions are infrequent and regardless of whether the acquirer is involved in them. [IFRS 3(2008).B33] Example 8.4.


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[IFRS 3(2008).B33] Customer and subscriber lists are frequently licensed and thus meet the separability criterion.

Even if an acquiree believes its customer lists have characteristics different from other customer lists, the fact that customer lists are frequently licensed generally means that the acquired customer list meets the separability criterion. However, a customer list acquired in a business combination would not meet the separability criterion if the terms of confidentiality or other agreements prohibit an entity from selling, leasing or otherwise exchanging information about its customers.

An intangible asset that is not individually separable from the acquiree or combined entity meets the separability criterion if it is separable in combination with a related contract, identifiable asset or liability. [IFRS 3(2008).B34] Example 8.4.

2.1B Depositor relationships [IFRS 3(2008).B34(a)] Market participants exchange deposit liabilities and related depositor relationship intangible assets in observable exchange transactions. Therefore, the acquirer should recognise the depositor relationship intangible asset separately from goodwill.

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Example 8.4.

2.1C Trademarks [IFRS 3(2008).B34(b)] An acquiree owns a registered trademark and documented but unpatented technical expertise used to manufacture the trademarked product. To transfer ownership of a trademark, the owner is also required to transfer everything else necessary for the new owner to produce a product or service indistinguishable from that produced by the former owner. Because the unpatented technical expertise must be separated from the acquiree or combined entity and sold if the related trademark is sold, it meets the separability criterion. Contractual-legal criterion An intangible that arises from contractual or other legal rights is identifiable regardless of whether those rights are transferable or separable from the acquiree or from other rights and obligations.

[IFRS 38.12(b)] IFRS 3(2004) included reliability of measurement as a recognition condition for intangible assets.

IFRS 3(2008) presumes that where an intangible asset satisfies either of the criteria above, sufficient information should exist to measure its fair value reliably.

Example 8.4.

2.2A Manufacturing facility under an operating lease [IFRS 3(2008).B32(a)] An acquiree leases a manufacturing facility under an operating lease that has terms that are favourable relative to market terms. The lease terms explicitly prohibit transfer of the lease (through either sale or sublease). The amount by which the lease terms are favourable compared with the terms of current market transactions for the same or similar items is an intangible asset that meets the contractual-legal criterion for recognition separately from goodwill, even though the acquirer cannot sell or otherwise transfer the lease contract.

Assets, liabilities and non-controlling interests Example 8.4.

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