Advanced Accounting

IFRS 3: Business Combinations

A Business Combination is ´the bringing together of separate businesses or entities into one reporting entityµ (IASB) IFRS 3 require that all business combinations be accounted for using the ´purchase methodµ Purchase method recognizes all intangible assets acquired in a business combination The purchase method is part of the convergence project with FASB

and equity investments issued by the acquirer. of assets given.IFRS 3: Business Combinations An acquirer must be identified for every business combination Acquirer is defined as. ´the combining entity that obtains control of the other combining entities or businessesµ (IASB) The acquirer must measure the cost of the business combination including the following: † ´the fair values. at the date of exchange. plus any costs directly attributable to the combinationµ (IASB) . in exchange for control of the acquiree. liabilities incurred or assumed.

the fair value must be able to be measured reliably (IASB) These must be measured at the acquisition date. liabilities. at their fair values. by the acquirer .IFRS 3: Business Combinations The acquirer must separately recognize the acquiree·s identifiable assets. and contingent liabilities at the acquisition date These must satisfy certain recognition criteria even if they have been previously recognized in the acquiree·s financial statements: † † † Any assets (other than intangible assets) where it is probable that associated future economic benefits will flow to the acquirer and fair value of the asset can be measured reliably (IASB) Liabilities (other than contingent liabilities) where it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and fair value of the liability can be measure reliably (IASB) For intangible assets and contingent liabilities.

IFRS 3: Business Combinations Goodwill: If acquired in a business combination: † † Must be recognized as an asset from the acquisition date Initially. goodwill is a measure of the excess of the cost of the business combination over the acquirer·s interest in the net fair value of the acquiree·s identifiable assets. and contingent liabilities (IASB)  These were previously recognized above It is prohibited to amortize goodwill Goodwill must be tested for impairment annually Must be tested more frequently if events or circumstances indicate that the asset may be impaired (IASB) This is in accordance with IAS 36 Impairment of Assets . liabilities.

IFRS 3: Business Combinations In addition. goodwill can include: † The fair value of the going concern element of the acquiree † The fair value of the expected synergies † Overpayments by the acquirer † Errors in measuring and recognizing fair value of either the cost of the business combination or the acquiree·s identifiable assets. and contingent liabilities (IASB) . liabilities.

liabilities.IFRS 3: Business Combinations If the net fair value of the acquiree·s identifiable assets. liabilities. and contingent liabilities exceeds the cost of the business combination: † Acquirer must reassess the identification and measurement of those identifiable assets. and contingent liabilities † Any excess that remains after the reassessment must be recognized by the acquirer as profit or loss (IASB) .

IFRS 3: Business Combinations Business combinations may involve more than one exchange transaction This may happen when ´stagesµ of share purchases occur Each of these ´stageµ transactions must be treated separately Important to assess the cost of the transaction and fair value information at the date of each of these subsequent transactions Goodwill determined for each separate transaction .

2.IFRS 3: Business Combinations If the acquirer does not obtain full consideration of the acquire. The difference between the consideration paid and the purchaser·s share of identifiable net assets acquired (Partial Goodwill) Full Goodwill: recognized for the non controlling interest in a subsidiary as well as the controlling interest . goodwill can be recorded in 2 ways: 1.

non controlling interest is measured at fair value Under partial goodwill.Goodwill Example Partial Goodwill † † † † † Identifiable net assets (fair value) = 1000 Non controlling interest (20% * 1000) = 200 Net assets required (1000 ² 200) = 800 Purchase Consideration = 900 Goodwill (900 ² 800) = 100 Identifiable net assets (fair value) = 1000 Non controlling interest (measured at fair value) = 210 Net assets required (1000 ² 210) = 790 Purchase consideration = 900 Goodwill = 110 Full Goodwill † † † † † Under full goodwill. non controlling interest is the percentage not acquired (20%) multiplied by the identifiable net assets .

IFRS 3: Business Combinations .

Pooling of interest method is permitted by IAS 22 in instances were an acquirer could not be identified Under the purchase method of accounting. the pooling of interest method is permitted under US GAAP. also known as united interest or merger accounting.IFRS 3: Business Combinations In many jurisdictions. the acquirer's identifiable assets and liabilities should be measured at fair value at acquisition date It requires more effort than pooling of interest method and usually results in the recognition of goodwill or negative goodwill on acquisition ‡ ‡ ‡ ‡ .

IFRS 3: Business Combinations Cost of Business Combinations: Acquirer measures cost of business combinations as the total FV at date of exchange of assets given. . liabilities incurred and equity instruments issued by the acquirer in exchange of control of the acquirer and any costs directly attributable to the business combination inquired by acquirer. If equity instruments are issued as consideration for the acquisition. the market price of those instruments would be the FV at the date of the transaction.

IFRS 3: Business Combinations Allocating Costs of Business Combinations: At the acquisition date the acquirer must allocate the cost of business combination by recognizing at FV the identifiable assets. and contingent liabilities of the acquirer Any difference between total of net assets and acquired and cost of acquisition is treated as goodwill or negative goodwill . liabilities.

2. 4. the intangible asset is recognized separately if it meets the following criteria 1.IFRS 3: Business Combinations Intangible Assets: When a company acquires intangible assets as part of a business combination. Separately identifiable Controlled by the acquirer Source of future economic benefit FV can be measured reliably On initial recognition of an intangible assets at the date of the transaction. The fair value of the intangible asset is the amount the entity would have paid for the asset in an arm·s length transaction between knowledgeable and willing parties. 3. the cost of the intangible is measured at FV. on the basis of best information available Advice from an independent specialist with experience in the market can also be sought .

Recoverable amount= higher of FV-costs to sell. . To determine if a write-down is required. the recoverable amount of the cash-generating unit is compared to is carrying amount.IFRS 3: Business Combinations Goodwill: Has to be tested for impairment at least annually(According to IAS 36) In determining of goodwill being impaired as a result of business combination. or value in use. goodwill is allocated to a cash-generating unit.

Any additional write-down is done in a pro rata basis to the other assets in the cash generating unit. If a write-down is required. If there is no binding sales agreement.IFRS 3: Business Combinations Goodwill (Cont. the FV (less costs to sell) would be based upon the best available information the entity would get for the asset in disposal. . it would be first allocated to the recognized goodwill of the cash-generating unit.): Best estimable of FV-costs to sell is the agreed price in a binding sales agreement for that cash generating unit. it would be the bid price for the same asset in an active market If there is no active market.

3. If goodwill has been recognized prior to March 31. Business combinations made prior are not required to be restated.2004 Entities may choose to apply to transactions prior to March 31 2004 if they have sufficient information to apply the standard. they must also restate any other business combinations occurred from the date of the first one to the date of adopting IFRS.IFRS 3: Business Combinations Effective Date of IFRS 3: Effective for business combinations for which the agreement date is on or after mach 31. If companies choose to do so. the entity is required to: 1. IFRS 3 must be applied at transition date. 2004 resulting from business combinations. . 2. Discontinue amortization of goodwill Eliminate carrying amount of goodwill of accumulated amortization Test goodwill for impairment For first time adopters of IFRS.



Implementation of IFRS Reevaluation of Louis Vuitton brand at historical cost (Equal to the value retained by Christian Dior) Accounting for goodwill against deferred taxes on brands Eliminating the accumulated goodwill amortization Reclassification of the goodwill to trademarks or other intangible assets Accounting against goodwill ´Other noncurrent liabilityµ in relation to minority interest purchase commitments .

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Questions The article from the NYSSCPA states that this particular topic has raised a lot of concerns and tension in terms of convergence. they are not exact copies. What do you think the major differences are between the GAAP and IFRS standards that is causing such controversy in the global accounting community? The key differences between consolidation when using GAAP or IFRS involves the process of asserting control over the new combined company. The article also states that while US GAAP and IFRS standards regarding business combinations are very similar. IFRS has clearer rules on who takes control after a merger than GAAP does. There are also differences in rules for voting rights as well as for booking investments belonging to the combining companies. .

. as mentioned in The CPA Journal article? The advantages of the fresh-start method are that it gives companies the opportunity to restructure and revalue their assets and liabilities using a fair value option. It is frequently used after a company declares bankruptcy. The disadvantages are that the company is likely not in a strong financial position (especially if they are coming off bankruptcy) and revaluing their assets using fair value could lead to even bigger losses if the market is down.Questions What are some of the advantages/disadvantages of the fresh-start accounting method. and when should this method be used.

com article identifies many differences between GAAP and IFRS for business combinations and consolidated financial statements. .Questions The ifrsaccounting. A few of these differences can also still create a problem down the road. The majority of these differences seem to be minimal. the small differences still create an issue that is keeping the two sides from coming to an agreement. Do you believe a combination of these small differences could together create a material difference between IFRS and GAAP? What does this mean for convergence? While the two systems are very similar. There needs to be a clear ruling on things such as the rules governing control.especially concerning convergence. goodwill. and a booking assets belonging to the converging companies.

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