Business Combination

Business Combination

• A transaction/event where an acquirer gains control of one or more businesses.
  • Types of Business Combination:
  • Direct: Buying the assets and liabilities of another company.
  • Indirect: Buying shares of another company.
• Required to prepare Consolidated Financial Statements.

Acquisition Method Steps

1. Identifying the Acquirer: Determine who is obtaining control.
2. Determining the Acquisition Date: This is when the acquirer gains control of the acquiree.
3. Recognizing and Measuring Identifiable Assets and Liabilities:
   • Identify and measure assets acquired, liabilities assumed, and any non-controlling interest (NCI).
   • Measure NCI using either:
     • Fair Value
     • NCI’s percentage of Identifiable Net Assets.
4. Recognizing and Measuring Goodwill or Bargain Purchase Gain:
   • Assets and liabilities must be recorded at their acquisition-date fair values, consistent with IFRS 3 (para. 5).

Considerations for Acquisition

• Watch for Contingent Liabilities:
  • Recognized if there is a present obligation from past events & fair value can be measured reliably, even if not probable (contradicts IAS 37).
• Exceptions in IFRS 3:
  • Contingent liabilities
  • Reacquired rights
  • Share-based payment awards
  • Assets held for sale

Goodwill Calculation

• Goodwill Formula: ext{Goodwill} = ext{Net Identifiable Asset} = ext{Assets} - ext{Liabilities}
  • Example of Goodwill:
    • NCI Calculation using Full or Partial Goodwill Method:
    • Full Goodwill Method:
      • Fair Value of NCI is considered.
    • Partial Goodwill Method:
      • NCI% x Identifiable Net Assets is used.

Example of Goodwill Calculation

• Scenario:
  • Shoes Ltd acquires 90% shares in Socks Ltd for $500,000:
  • Net identifiable assets of Socks Ltd: $600,000
  • Fair value of NCI: $120,000

Full Goodwill Method Calculation:

• ext{Goodwill} = ext{Consideration} + ext{FV of NCI} - ext{Fair Value of Identifiable Net Assets}
  • ext{Goodwill} = 500,000 + 120,000 - 600,000 = 20,000

Partial Goodwill Method Calculation:

• ext{Goodwill} = ext{Consideration} + (NCI ext{%} imes ext{Identifiable Net Assets}) - ext{Fair Value of Identifiable Net Assets}
  • ext{Goodwill} = 500,000 + (0.10 imes 600,000) - 600,000 = 60,000

Acquisition-Related Costs

• These costs are NOT included in the consideration transferred:
  • Examples:
  • Finders fees
  • Legal Fees
  • Valuation fees
  • Consulting fees
  • General administrative costs
• Costs are accounted for as expenses in the period incurred.

Recognizing Identifiable Assets and Liabilities

• Example of Identifiable Assets at Fair Value:
  • Accounts Receivable: $400,000
  • Inventory: $600,000
  • Plant and Equipment: $2,000,000
  • Land and Buildings: $7,000,000
  • Trademark (not previously recognized): $1,000,000
  • Total Fair Value of Identifiable Assets = 10,000,000
  • Accounts Payable: ($500,000)
  • Bank Loan: ($4,500,000)
  • Total Identifiable Net Assets = 6,000,000

Deferred Tax on Acquisition

• Reason:
  • Assets and liabilities measured at fair value may create temporary differences.
• Example:
  • Asset originally valued at $70,000, fair value at acquisition $100,000.
  • Temporary Difference = $30,000.
  • Deferred Tax Liability (DTL) = 30% x $30,000 = $9,000.

Implications of Deferred Tax

• If Deferred Tax Assets (DTA) are present:
  1. It increases identifiable net assets, reducing goodwill.
  2. DTL decreases identifiable net assets.
  3. DTL arising from goodwill cannot be recognized.

Contingent Liabilities and Assets

• If a contingent liability is recognized, expect to have a corresponding DTA if tax base is zero.
• Important Note:
  • Recognition of contingent liabilities differs in IFRS 3 compared to IAS 37.
  • Intangible assets must be recognized during business combinations based on IFRS 3, even if previously unrecognized.
  • Contingent assets are NOT recognized in business combinations.