Business Combinations (1)

Business combinations.

A-IFRS Workshop

Objectives

•This module is designed to:– develop an understanding of:

– AASB 3 Business Combinations– AASB 127 Consolidated and Separate Financial Statements– AASB 128 Investments in Associates– AASB 131 Interests in Joint Ventures

– communicate major changes from current practice

– outline transitional adjustments

2 ©2004 Deloitte Touche TohmatsuBusiness combinations

1. OverviewObjectives• key pronouncements• major impact areas

Overview•AASB 3 Business Combinations

– Supersedes AASB 1013 Accounting for Goodwill AASB 1015 Acquisitions of Assets

•AASB 127 Consolidated and Separate Financial Statements

– Supersedes AASB 1024 Consolidated Accounts

•AASB 128 Investments in Associates– Supersedes AASB 1016 Accounting for Investments in Associates

•AASB 131 Interests in Joint Ventures– Supersedes AASB 1006 Interests in Joint Ventures

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2. Business Combinations- Scope

Objectives• scope of AASB 3• concept of a ‘business’• identifying an acquirer

What is a ‘business combination’?

“the bringing together of separate entities or businesses into one reporting entity”

•AASB 3 - business combinations only– look to other A-IFRSs for acquisitions of assets

•AASB 1015 covered acquisitions of all assets (and businesses)

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AASB 3/IFRS 3 scope differences

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Business combinations… AASB 3 IFRS 3

…forming a joint venture excluded excluded

…involving entities under common control

included excluded

…involving two or more mutual entities

excluded excluded

(ED - include)

…in which separate entities or businesses are brought together by contract alone

excluded excluded

(ED - include)

Business combinations - scope

AASB 3/IFRS 3 scope differences


Business combinations… AASB 3 IFRS 3

…involving entities under common control

included excluded

Business combinations - scope

– must apply requirements of AASB 3

– exemption for non-Corps Act entities, can elect to use existing book values in some limited circumstances

Non-Corps Act scope exclusion

Is the transaction a reconstruction

within an economic entity?

Apply the purchase method

of accounting

Yes

No

Measure net assets at their carrying amounts

immediately prior to the reconstruction

Yes

Yes No

Is the entity reporting under the

Corporations Act 2001?

Has the entity elected to account for the combination

at book values?

No

Reconstruction within a reporting entity

• Business transferred from one entity to another entity in the same reporting entity

OR

• Ownership interest in the ultimate parent entity of a reporting entity transferred to a newly formed reporting entity

AND

• Acquirer only issues its own equity instruments as purchase consideration and relative ownership interests remain unchanged.


Reconstruction within a reporting entity

Following the June 2005 revision of AASB 3, DTF and HoTARAC will review its

policy on reconstruction/transfers within the reporting entity.

Preliminary View:Account for reconstructions within a

reporting entity at book value


Concept of a ‘business’

• Key concepts:– integrated set of activities and assets– managed for a return or other economic

benefits– generally consists of inputs, processes and

resulting outputs– goodwill present → presumed to be a business– an entity is not always a business

Exercise 2.1– identifying businesses, implications– Page 14



Answers

1. B’s service operation

2. D’s net assets, excluding

systems and management

3. Computers & telephone systems 4. M, single investment property 5. Q, gas pipeline Depends

13 ©2004 Deloitte Touche TohmatsuBusiness combinations - scope


Exercise 2.2– Do your recent acquisitions represent

‘businesses’?– Page 15

Exercise 2.3– What are the consequences of an acquisition

representing a ‘businesses’?– Page 15


Identifying an acquirer

• Key concepts:– acquirer must be identified for all acquisitions

– the combining entity that obtains control of the other combining entities or businesses

– if difficult, consider:– relative fair values of combining entities– entity giving up cash might be the acquirer– domination of management team



The acquirer under AASB 3can be different to the legal acquirer

Exercise 2.4– identifying the acquirer– Page 17



Answers

1. CD acquires AB Entity AB

2. Group restructureNO ACQUIRER

17 ©2004 Deloitte Touche TohmatsuBusiness combinations - scope


Exercise 2.5– Could any of you recent acquisitions be

regarded as a ‘reverse acquisition’?–


3. Business Combinations- Accounting requirementsObjectives• understand the key requirements

Accounting for business combinations

• Key concepts:– must use ‘purchase method’– acquirer must be identified for all acquisitions– measure the cost of the combination– allocate cost to net assets and contingent

liabilities– cost > fair values → goodwill– cost < fair values → income*

* contribution by owners if involving entities under common control and conditions met

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Cost of a business combination


Cost of combination

= Fair values +Costs

attributable

At ‘date of exchange’

Assets given

Liabilities incurred or assumed

Equity instruments issued by acquirer

Must be directly attributable

Excludes general admin costs

Excludes costs of issuing equity instruments,

financial instruments

Business combinations – accounting requirements


Supplementary Case study 3.1– cost of a business combination

–



Answersa) 3,000,000 shares x $10.75 = $32,250,000

b) as follows:

1. Finders’ fee of $20,000 NO

2. Lawyers fees of $80,000 YES

3. Costs incurred by DEF NO

4. Accountants fees YES

5. Valuers fees YES

6. Costs of issuing shares NO

7. Costs of arranging finance NO



Answers, continuedd) total cost:

Cost of shares issued $32,250,000

Cash consideration paid 3,000,000

Other costs 145,000

TOTAL $35,395,000

e) journal entry:

DR Investment 35,395,000 CR Equity 32,225,000 CR Borrowings 2,990,000 CR Cash/payables 200,000DR Expense 20,000


Determining fair values


Item Measurement Recognition criteria

Assets other than intangibles

Fair value Probable, reliably measurable

Intangibles Fair value Identifiable, reliably measurable

Non-current assets held for sale

Fair value less costs to sell

As above

Liabilities Fair value Probable, reliably measurable

Restructuring liabilities

Fair value Acquiree has existing liability under AASB 137

Contingent liabilities Fair value Reliably measurable

Goodwill Cost None


• AASB 3, Appendix B has guidance on fair values for various items

– see table on page 26



• Provisionally determined fair values – 12 month window to restate acquisition entry– subsequent changes to estimates impact profit– recalculate everything from acquisition date– restate comparative information, if applicable

• 12 month limit does not apply to:– errors, can always be corrected (as above)– contingent consideration, adjust cost of combination– deferred tax assets, special requirements


Accounting after initial recognition

• Key requirements after initial recognition:

– no goodwill amortisation, impairment test

– contingent liabilities measured higher of:– amount that would be recognised under AASB 137– original amount, less any amortisation under AASB 118

– adjust provisional items, within 12 months

– errors, contingent consideration adjusted


4. Impairment of goodwill

Objectives• understand approach to impairment testing of goodwill

Goodwill – basic principles

• Must test annually

• Allocate goodwill to individual CGUs or groups of CGUs

• Take allocated goodwill into account when measuring disposals

• Impairment losses cannot be reversed

Business combinations ©2004 Deloitte Touche Tohmatsu30

Goodwill – allocation to CGUs

• Goodwill allocated:– lowest level of CGUs at which goodwill is

monitored → look to management structure– cannot be larger than a segment– completed before end of reporting period when

acquired, extend to next period with disclosure– cannot change allocation, unless restructured– goodwill is ‘grossed up’ for minorities

Exercise 4.1– allocating goodwill to CGUs– page 35

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Goodwill – impairment test

• Annual impairment test– same time each year for each CGU– where acquired during the year, test by the end

of the year– first test any assets or CGUs, then test CGUs

with goodwill– can use prior year calculation in some cases

Discussion 4.1 and 4.2– testing other assets first

©2004 Deloitte Touche Tohmatsu32 Business combinations

5. Business Combinations - First-time adoption

Objectives• initial adjustments under AASB 1

Transitional adjustments under AASB 1• Transitional requirements in AASB 3

overridden by AASB 1– comparative information restated– retrospectively apply standard at date of

transition, subject to voluntary exceptions

First-time adoption ©2004 Deloitte Touche Tohmatsu34

Business combination options under AASB 1

• AASB 1 allows– full restatement of past business combinations– no restatement before date of transition– restatement from a particular date

FRD 113 “Investments in Subsidiaries, Jointly Controlled Entities and Associates:Do not restate business combinations

First-time adoption ©2004 Deloitte Touche Tohmatsu36

6. Business Combinations - Disclosure

Objectives• be aware of disclosure requirements

7. Consolidations, Joint Ventures and AssociatesObjectives• Understand the key differences

Consolidations

•AASB 127 “Consolidated and Separate Financial Statements” – Parent entity must present consolidated financial

statements (consolidating all subsidiaries)

– Subsidiaries based on ‘control’– consistent with AASB 1024 concepts

– Public sector:– control may be established by legislation or executive

authority or by administrative arrangements– ministerial approval is required for budgets– power of the minister to appoint remove members of the board– ministerial power of direction

Consolidation ©2004 Deloitte Touche Tohmatsu42

Consolidations

•Key differences:– Subsidiaries’ financial statements used for

consolidation purposes:– should be the same date as parent entity– may differ by up to 3 months (but must adjust for

significant transactions and events)

– Losses attributable to minority interests– only if minority has a binding obligation to make good

– Parent entity’s increase or decrease in ownership (without impacting control)– treated as an equity transaction


Consolidations

•Separate financial statements of the parent entity

– measure investment in subsidiaries, jointly controlled entities and associates:– cost; or– in accordance with AASB 139

FRD 113 “Investments in Subsidiaries, Jointly Controlled Entities and Associates:

- Measure at cost.


Investments in associates

•AASB 128 “Investments in Associates” – Associates based on ‘significant influence’

– consistent with AASB 1016 concepts

– Investments in associates must be measured using the equity method in the consolidated financial statements

– Scope exclusions:– venture capital organisations– mutual funds, unit trusts, etc– investments designated as ‘fair value through profit and

loss’ under AASB 139

Associates ©2004 Deloitte Touche Tohmatsu45


•Other Exemptions: – Investment held for sale under AASB 5

– If the following conditions are satisfied:– all owners agree that equity accounting not be applied– investor’s debt/equity securities not traded– accounts not filed for purpose of issuing securities– parent entity prepares consolidated accounts, which adopt

equity accounting, and accounts are publicly available



•Reporting date of investee:– Investor uses the most recent available financial

statements of associate (in order to apply equity accounting)

– If associate has a different reporting date:– associate prepares “investor” financial statements using

the investor’s reporting date (unless impracticable)

– if associate prepares financial statements at a different reporting date, the investor must adjust for any significant transactions or events that occur between the two dates

– in any case, the reporting dates cannot differ by more than 3 months



•Key differences:– No amortisation of notional goodwill

– consistent with AASB 3 Business Combinations

– If entity ceases to be an associate, investment is treated as a financial asset under AASB 139– AASB 1016 required investment to be measured at cost

– Investor’s net investment includes long-term loans and receivables– therefore, equity accounted losses may be applied against

long-term loans and receivables if the investment is reduced to zero



•First time adoption: – Same rules as business combinations

– full restatement of past business combinations– no restatement before date of transition– restatement from a particular date

FRD 113 “Investments in Subsidiaries, Jointly Controlled Entities and Associates:

Do not restate prior acquisitions of associates


Joint ventures

• AASB 131 “Interests in Joint Ventures”

• JV entities - equity method of accounting under AASB 128 “Investments in Associates”– same scope exclusions, first time adoption, etc,

AASB 131

Jointly

controlled

operations

Jointly

controlled

assets

Jointly

controlled

entities

AASB 1006 Joint venture operationsJoint venture

entities

Joint ventures ©2004 Deloitte Touche Tohmatsu50

Workshop summary

Summary

Points to note – business combinations:– goodwill not amortised (impairment test)– separate identification of intangible assets– restructuring provisions more difficult– contingent liabilities recognised– IPR&D recognised based on probability– discount on acquisition recognised as revenue– limited timeframe to adjust acquisition entries– Implementation

– Refer implementation guidance typical tasks


Summary

Points to note – Associates:– some scope exclusions– no amortisation of notional goodwill– rules for difference reporting dates– definition of net investment in associate

Points to note – Joint Ventures:– jointly controlled operations, jointly controlled

assets, and jointly controlled entities– JV entities – equity accounting under AASB 128


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Business Combinations (1)

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