IFRS 3 BUSINESS COMBINATIONS. LACPA – Roger Nasr July 6, 2006.

IFRS 3IFRS 3

BUSINESS COMBINATIONSBUSINESS COMBINATIONS..

LACPA – Roger NasrLACPA – Roger NasrJuly 6, 2006July 6, 2006

AGENDAAGENDA

IntroductionIntroduction ScopeScope Application of the purchase methodApplication of the purchase method

– including impairment of goodwill (IAS 36) & including impairment of goodwill (IAS 36) & acquired intangible assets (IAS 38)acquired intangible assets (IAS 38)

Changes from IAS 22Changes from IAS 22 QuestionsQuestions

http://www.deloitte.com/dtt/home/0,2334,stc%253DHOME%2526lid%253D1,00.html

INTRODUCTIONINTRODUCTION

IFRS 3, Business CombinationsIFRS 3, Business Combinations

Revised versions Revised versions

• IAS 36, Impairment of Assets IAS 36, Impairment of Assets

• IAS 38, Intangible AssetsIAS 38, Intangible Assets

Supersedes IAS 22, Business Combinations Supersedes IAS 22, Business Combinations (1998)(1998)

SIC 9, 22 and 28 withdrawnSIC 9, 22 and 28 withdrawn


Main Changes in IFRS Main Changes in IFRS 33

Method?Must be accounted for using

the purchase method

Assets and liabilities acquired?

More intangible assets & contingent liabilities

recognised and measured at fair values

Goodwill?Not amortised and tested for impairment annually

Negative goodwill?Recognised in profit or loss

immediately

Restructuring costs?Only recognised to the

extent acquiree’s liability exists at acquisition date


SCOPESCOPE

Business combinationBusiness combination = = A business combination A business combination is the bringing together of separate entities or is the bringing together of separate entities or businesses into one reporting entitybusinesses into one reporting entity

IFRS 3 applies to all business combinations IFRS 3 applies to all business combinations exceptexcept

– combinations of entities under common controlcombinations of entities under common control

– combinations by contract without exchange of combinations by contract without exchange of ownership interestownership interest

– formations of joint venturesformations of joint ventures


APPLICATION OF APPLICATION OF THE PURCHASE THE PURCHASE METHODMETHOD

All business combinations are accounted for All business combinations are accounted for by the purchase methodby the purchase method

Applying the purchase methodApplying the purchase method

• An acquirer is identifiedAn acquirer is identified

• The cost of the business combination is measuredThe cost of the business combination is measured

• The cost is allocated, at acquisition, to the assets, The cost is allocated, at acquisition, to the assets, liabilities and contingent liabilitiesliabilities and contingent liabilities


Identifying an Identifying an acquireracquirer

An acquirer An acquirer mustmust be be identifiedidentified

The acquirer is the entity The acquirer is the entity that obtains control of the that obtains control of the other entities other entities

IFRS 3 contains significant IFRS 3 contains significant guidance on identifying the guidance on identifying the acquirer (e.g. relative fair acquirer (e.g. relative fair values)values)

The acquirer for accounting The acquirer for accounting purposes may not always be purposes may not always be the legal acquirer (reverse the legal acquirer (reverse acquisitions)acquisitions)


Cost of a business Cost of a business combinationcombination

An acquirer measures the cost as the total ofAn acquirer measures the cost as the total of

– fair values at date of exchange of assets given, fair values at date of exchange of assets given, liabilities incurred and equity instruments issued, plusliabilities incurred and equity instruments issued, plus

– any directly attributable costs any directly attributable costs

Equity instrumentsEquity instruments

– If market price exists - use price at date of exchangeIf market price exists - use price at date of exchange

– If market price doesn’t exist/unreliable - use other If market price doesn’t exist/unreliable - use other valuation techniquevaluation technique


Cost adjustmentsCost adjustments

Accounting for adjustments to the cost of a Accounting for adjustments to the cost of a business combination which are contingent business combination which are contingent on future eventson future events

– include in the cost of combination if include in the cost of combination if probableprobable and can be and can be measured reliablymeasured reliably at acquisition at acquisition date date

– treat as an adjustment to cost if subsequently treat as an adjustment to cost if subsequently meets conditionmeets condition

– otherwise excludeotherwise exclude


Allocating the costAllocating the cost

• Allocate cost by recognising, at fair values, Allocate cost by recognising, at fair values, identifiable assets, liabilities and contingent identifiable assets, liabilities and contingent liabilities of acquireeliabilities of acquiree

• Goodwill =Goodwill =

• Cost of acquisition - Total of net assetsCost of acquisition - Total of net assets


IAS 38 Intangible IAS 38 Intangible assets (recognition)assets (recognition)

• Recognised separately from goodwill if:Recognised separately from goodwill if:

• meet the definition of an assetmeet the definition of an asset

- controlled by the entitycontrolled by the entity

- provide economic benefitsprovide economic benefits

• either separable or arise from contractual/legal either separable or arise from contractual/legal rightsrights

• fair value can be measured reliablyfair value can be measured reliably


IAS 38 Intangible Assets IAS 38 Intangible Assets (measurement)(measurement)

Cost modelCost model– Cost less accumulated amortisation and/or Cost less accumulated amortisation and/or

impairment lossesimpairment losses

OROR

Revaluation modelRevaluation model– Fair value at date of revaluation less accumulated Fair value at date of revaluation less accumulated

amortisation and/or impairment lossesamortisation and/or impairment losses– Only allowed if an active market existsOnly allowed if an active market exists


IAS 38 Intangible Assets IAS 38 Intangible Assets (measurement)(measurement)

Subsequent expenditureSubsequent expenditure – Only capitalise if will generate future Only capitalise if will generate future

economic benefits in excess of originally economic benefits in excess of originally assessed standard of performanceassessed standard of performance


IAS 38 Intangible IAS 38 Intangible assets assets (classification)(classification)

No am ortisationIm pairment test

(annually and w heneverindication of im pairm ent)

Indefin ite usefu l lives

Am ortisation(systematically over useful life)

Im pairment test(if indication)

D efin ite usefu l lives

In tangib le assets


Contingent liabilitiesContingent liabilities

• Initial recognitionInitial recognition - Recognised separately if - Recognised separately if fair value can be measured reliably fair value can be measured reliably

• Subsequent recognitionSubsequent recognition – Remeasure at the – Remeasure at the higher ofhigher of

• IAS 37 valueIAS 37 value

• Initial amount less amortisation Initial amount less amortisation


GoodwillGoodwill

Recognised as an asset Recognised as an asset – cost of acquisition - total of net assetscost of acquisition - total of net assets

Annual impairment test in accordance with Annual impairment test in accordance with IAS 36IAS 36– amortisation not allowedamortisation not allowed

No negative goodwillNo negative goodwill– total of net assets > cost of acquisitiontotal of net assets > cost of acquisition– reassess fair values and cost of acquisitionreassess fair values and cost of acquisition– recognise immediately as a gainrecognise immediately as a gain


IAS 36 Impairment of IAS 36 Impairment of Goodwill Goodwill

Allocate goodwill to cash generating units (CGU) Allocate goodwill to cash generating units (CGU) before impairment testbefore impairment test– the smallest group of assets generating independent the smallest group of assets generating independent

cash inflowscash inflows– represents the lowest level at which goodwill is represents the lowest level at which goodwill is

monitored internallymonitored internally– not larger than a segment (IAS 14)not larger than a segment (IAS 14)

Impairment test annually per CGUImpairment test annually per CGU– not necessarily at year endnot necessarily at year end


New carrying amount(after write-down)

Carrying amount before the impairment test

Recoverable amount

Lowest of

Fair value less costs to sell

Value in use

Highest of

IAS 36 - Impairment IAS 36 - Impairment model (reminder)model (reminder)


IAS 36 – Allocation of IAS 36 – Allocation of impairment lossimpairment loss

The The impairment loss is allocated in the impairment loss is allocated in the following order following order – 11stst reduce the carrying amount of any goodwill reduce the carrying amount of any goodwill

allocated to the CGU (or group of units)allocated to the CGU (or group of units)– 22ndnd reduce the carrying amounts of the other assets reduce the carrying amounts of the other assets

(pro rata based on carrying amounts)(pro rata based on carrying amounts)

A write-down due to an impairment is A write-down due to an impairment is recognised in profit or lossrecognised in profit or loss

Reversal of write-down of goodwill is Reversal of write-down of goodwill is prohibitedprohibited


IFRS 3IFRS 3BUSINESS BUSINESS COMBINATIONSCOMBINATIONS..

(Case Studies)(Case Studies)

IFRS 3 Business IFRS 3 Business CombinationsCombinations

ScopeScope

FactsFacts– Strawberry Ltd acquired the shares in Lemon Ltd Strawberry Ltd acquired the shares in Lemon Ltd

on 1 July 2004, based on a valuation performed by on 1 July 2004, based on a valuation performed by corporate financiers, for Euro 15 million.corporate financiers, for Euro 15 million.

– The sole asset of Lemon was the patent right for The sole asset of Lemon was the patent right for genetically engineered fruit technologies.genetically engineered fruit technologies.

– Strawberry recognised Euro 15 million as goodwill.Strawberry recognised Euro 15 million as goodwill.


IFRS 3 Business IFRS 3 Business CombinationsCombinationsScope Scope (cont)(cont)

QuestionQuestion– Is this treatment correct?Is this treatment correct?

Lemon(Patent)

Strawberry

100%



Definition of businessDefinition of business– Integrated set of activities and assets conducted Integrated set of activities and assets conducted

and managed for the purposes of providing:and managed for the purposes of providing: A return to investors orA return to investors or Lower costs or other economic benefitsLower costs or other economic benefits

– Consists of:Consists of: InputsInputs Process applied to inputsProcess applied to inputs Outputs used to generate revenuesOutputs used to generate revenues



GuidanceGuidance– InputsInputs

PPE, Intangibles, Intellectual property, Ability to PPE, Intangibles, Intellectual property, Ability to obtain access to necessary materials, Employeesobtain access to necessary materials, Employees

– Processes Processes Systems, standards, protocols that define Systems, standards, protocols that define

processesprocesses– OutputsOutputs

Ability to obtain access to customers that Ability to obtain access to customers that purchase outputpurchase output



Acquisition dateAcquisition date

FactsFacts– A company acquires a business. A company acquires a business. – The acquisition needs approval from a The acquisition needs approval from a

Competitions Authority (antitrust legislation) Competitions Authority (antitrust legislation) before acquisition can be implemented.before acquisition can be implemented.

QuestionQuestion– Is this approval necessary prior to the recognition Is this approval necessary prior to the recognition

of the acquisition as a business combination?of the acquisition as a business combination?



Identification of acquirerIdentification of acquirer

FactsFacts– Nedcor makes partial offer for Stanbic on the basis Nedcor makes partial offer for Stanbic on the basis

of 1 Nedcor share for every 5.5 Stanbic sharesof 1 Nedcor share for every 5.5 Stanbic shares– Value of bidValue of bid

Nedcor ZAR 27 750 millionNedcor ZAR 27 750 million Stanbic ZAR 29 238 millionStanbic ZAR 29 238 million

– Market capitalisationMarket capitalisation Nedcor ZAR 27 039 millionNedcor ZAR 27 039 million Stanbic ZAR 29 624 millionStanbic ZAR 29 624 million



Identification of acquirer Identification of acquirer (cont)(cont)

Facts (cont)Facts (cont)– aStatement of intentaStatement of intent

““Nedcor intends, in conjunction with Stanbic Nedcor intends, in conjunction with Stanbic management to realise benefits of merger. Nedcor management to realise benefits of merger. Nedcor intends to retain key staff and clients in both intends to retain key staff and clients in both banks to ensure that both parties participate in banks to ensure that both parties participate in new entity.” new entity.”

QuestionQuestion– Who is the acquirer?Who is the acquirer?



Identification of acquirer Identification of acquirer (cont)(cont)

TheoryTheory– ““the combining entity that obtains control of other the combining entity that obtains control of other

combining entities”combining entities”– IndicatorsIndicators

Fair valueFair value Entity giving up cash or assetsEntity giving up cash or assets ManagementManagement


IFRS 3IFRS 3..(IFRS 2 Link)(IFRS 2 Link)

IFRS 3 Cost of acquisition- IFRS 3 Cost of acquisition- IFRS 2 linkIFRS 2 link

FactsFacts– Company A purchases 100% of Company B’s Company A purchases 100% of Company B’s

shares from management for a combination of shares from management for a combination of cash and shares. cash and shares.

– In addition, Company A will pay additional In addition, Company A will pay additional consideration to the previous owners/management consideration to the previous owners/management if revenues exceed 100 million over the next year.if revenues exceed 100 million over the next year.

– Each individual must be employed with the new Each individual must be employed with the new company for the duration of the contingency company for the duration of the contingency period to receive the additional consideration.period to receive the additional consideration.


IFRS 3 IFRS 3 Cost of acquisition - IFRS 2 Cost of acquisition - IFRS 2

link (cont)link (cont) QuestionQuestion

– Would such transactions be within the scope of Would such transactions be within the scope of IFRS 2 or IFRS 3?IFRS 2 or IFRS 3?



Questions?Questions?


IFRS 3 BUSINESS COMBINATIONS. LACPA – Roger Nasr July 6, 2006.

Documents

Transcript of IFRS 3 BUSINESS COMBINATIONS. LACPA – Roger Nasr July 6, 2006.