Chương 2

Nguyễn Thị Thu Hiền

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 Learning objectives

 Understand and classify business combination

 Understand and explain consolidation process
 Determine fair value of consideration transferred
 Measure and recognize identifiable assets and liabilities at fair value
 Determine non-controlling interests (NCI) at acquisition date & consolidation
theories
 Measure goodwill and evaluate goodwill impairment
 Prepare journal business combination valuation and pre-acquisition entries

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Nội dung
1.Hợp nhất kinh doanh Video 3
2.Quá trình hợp nhất
3.Khoản thanh toán (giá phí hợp nhất kinh doanh)
3.1. Xác định khoản thanh toán (giá mua/ giá phí HNKD) (trả
bao nhiêu?) Video 4
3.2. Các thành phần của giá mua (mua cái gì?) Video 5

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Contents

1.Business combination
2. Acquisition method
3.Consideration transferred
4. Goodwill or a gain from a bargain purchase
5.Consolidation process

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 1. Business Combinations
 Business: “An integrated set of activities and assets that is capable
of being conducted and managed for the purpose of providing a
return in the form of dividends, lower costs or other economic
benefits directly to investors or other owners, members or
participants” (IFRS 3)

An entity shall determine whether a transaction or other event is a

business combination by applying the definition in this IFRS, which
requires that the assets acquired and liabilities assumed constitute a
business.
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1. Business Combinations

Business
combinations

Net assets
Businesses of combining
Direct acquisition
become entities transferred
of net assets of
subsidiaries of to a newly-formed
acquired business
acquirer entity

A+B=A+B A+B=C
A+B=A
Tập đoàn
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 Business combination - Merger
A Ltd acquires net assets of B Ltd B Ltd liquidates

• Receipt of assets and liabilities of B • Liquidation account, including gain/loss on

Ltd
• Consideration transferred, e.g.
shares, cash or other consideration
liquidation
• Receipt of purchase consideration
• Distribution of consideration to appropriate
parties, including shareholders via the
Shareholders’ Distribution account

A+B= A
Former owners of a combining entity obtains control of combined
entity
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 Business combination - Acquisition
A Ltd acquires equity of B Ltd
• Receipt of assets and liabilities
of B Ltd
• Consideration transferred, e.g.
shares, cash or other
consideration
B Ltd continues, holding shares
in A Ltd
• Sale of assets and liabilities to A
Ltd (shares)
• Gain or loss on sale
• Receipt of consideration
transferred, e.g. shares, cash or
other consideration

A+B=A+B
Businesses become subsidiaries of acquirer

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 Business combination - Consolidation
C Ltd is formed A Ltd, and B Ltd liquidate

• Formation of C Ltd with issue of • Liquidation account, including

shares.
• Acquisition of assets and
liabilities of A Ltd and B Ltd
• Payment for net assets of A Ltd
and B Ltd via cash outlays or
issue of shares in C Ltd
gain/loss on liquidation
• Receipt of purchase consideration
• Distribution of consideration to
appropriate parties, including
shareholders via the
Shareholders’ Distribution

A+B= C
account

Net assets of combining entities transferred to a newly-formed entity

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Contents

1.Business combination
2. Acquisition method
3.Consideration transferred
4. Goodwill or a gain from a bargain purchase
5.Consolidation process

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 2. Acquisition method
• IFRS 3 requires all business combinations to be accounted for using the
acquisition method from the perspective of an acquirer.
• An acquirer can obtain control in an acquiree through:
1. Acquisition of assets and assumption of liabilities of acquiree
 Include assets and liabilities not previously recognised by acquiree:
contingent liabilities, brand name, in-process R&D etc.
2. Acquisition of controlling interest in the equity of acquiree
 Deemed to be effective acquisition of assets and assumption of
liabilities of acquiree
 Control over an acquiree in substance means that acquirer has control
over net assets of acquiree
 Effects: (2) accounted for as if they are effects of (1)
3. Combination of (1) and (2)
 Effects: Accounted for as if they are effects of (1)

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 2. Acquisition method
 The procedures:
Identify the acquirer

Determine the acquisition date

Recognize and measure the identifiable assets acquired

Group the liabilities assumed and any non-controlling
financial interest in the acquiree; and
statements
if acquire
subsidiaries Recognize and measure goodwill or
a gain from a bargain purchase

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2. Acquisition method
 IFRS 3 requires the identification of the acquirer in all circumstances
 Acquirer is the entity that obtains control of another combining entities
 Concept of control is based on IFRS 10 but the standard may not always
conclusively determine the identity of the acquirer.
 IFRS 3 Appendix B provides additional criteria to identify controlling acquirer.

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 2. Acquisition method
Identify the Acquirer
Additional control criteria under IFRS 3 Appendix B
Based on consideration
transferred
Acquirer is the entity that:
•Transfers cash or other assets
or incurs liabilities to acquire
another entity
•Issues shares as consideration
to acquire shares of another
entity
•Pays a premium over the fair
value of the equity interest
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Based on entity size Based on dominance
Acquirer is the entity:
Acquirer is the entity:
•Whose owners hold the largest
•Whose owners have the
relative voting rights in a
ability to elect, appoint or
combined entity
remove a majority of directors
•Whose owners hold the largest
•Whose management is
minority voting interest in the
dominant in the combined
combined entity (if no other
entity
entity has significant voting
interest)
•Who initiates the business
combination
•Which is larger in size
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2. Acquisition method
Identify the Acquirer – Reverse Acquisition
• Reverse acquisition
– Legal parent is the acquiree and legal subsidiary is the acquirer
– Often initiated by the legal subsidiary
– Motive for entering into such an arrangement often to seek a backdoor listing
• Exchange of shares in a reverse acquisition

1. Company A (Legal parent) takes Owners of Company B

over shares of Company B from (Legal subsidiary)
owners

2. Company A issues own shares to

Company A owners of Company B as
(Legal parent) purchase consideration

Company B
3. Company B has the power and ability (Legal subsidiary)
to affect the returns of the legal parent
after the share exchange

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Identify the Acquirer – Reverse Acquisition

Example
On 1 July 20x5, P (private), arranged to have all its shares acquired by L (public listed).
The arrangement required L to issue 20 million shares to P’s shareholders in exchange for the
existing 6 million shares of P. Existing shareholders of L owned 5 million of L.
After the issue of 20 million L shares, P’s shareholders now owned 80% (20 million
shares out of a total of 25 million shares) of the issued shares of L. L’s shareholders owned 20% of
the shares in the combined entity after the share issue. P’s shareholder act in concert to exercise
control over L.

L’s shareholders P’s shareholders

(5 million shares) (20 million shares)
20% 80%
L
100%

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Contents

1.Business combination
2. Acquisition method
3.Consideration transferred
4. Goodwill or a gain from a bargain purchase
5.Consolidation process

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 3.Consideration transferred
FV of + + Fair value of + Fair value of
= Fair value Fair value
Consideratio equity contingent
of assets of
n transferred interests consideration
transferre liabilities
d by the incurred issued by
acquirer acquirer

Fair value (FV) of the consideration transferred:

 Determined on the acquisition date
 Acquisition date is the date when the acquirer obtains control and not the
date when consideration is transferred
 Acquisition-related costs are not included

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 Consideration transferred – noncash payment

 If assets transferred or liabilities assumed are not carried at fair

value in the acquirer’s separate financial statements:
 Re-measure in fair value and recognize gain or loss in the
acquirer’s separate financial statements
 Re-measured gain or loss is not recognized if the asset or
liabilities remain in the combined entity’s financial
statements

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 Consideration transferred – deferred payment

 If transfer of monetary assets or liabilities are deferred, the

time value of money should be recognized:
 The fair value will be the present value of the future cash
outflows
 E.g. Future cash settlement of $1,000,000 is due 3 years later
and 3% interest is levied
Present value to be recognized = $1,000,000 / (1+0.03)^3 =
$915,142

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 Consideration transferred – equity settled payment

 Fair value of equity interests issued is measured:

o By market price (e.g. published quoted prices of shares); and
o With reference to either the acquisition date fair value of the
acquirer OR acquiree, whichever is more reliable. (For
example, if market price is not available or not reliable for the
acquiree, use the fair value of the acquirer)

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 Consideration transferred – equity settled payment

P Ltd acquires 100% of S Co. through an issue of 5,000,000

shares to the owners of S Co.

    P Ltd   S Co
Number of existing shares   10,000,000   2,000,000
Number of new shares issued   5,000,000    –
Market price per share   $2.00    –
Fair value of equity   30,000,000   9,000,000

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 Consideration transferred – equity settled payment

Situation 1: P Ltd’s market price is a reliable indicator

Consideration transferred = 5,000,000 shares x $2.00
= $10,000,000
Situation 2: Fair value of S Co. is a better estimate

Consideration transferred = $9,000,000

Explanation: Since P Ltd is acquiring 100% of S Co, the fair
value of the equity (FV of S Co. as a whole including the
implicit goodwill) acquired by P is $9 million.

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 Consideration transferred – Contingent consideration

• Contingent consideration
– Obligation (right) of the acquirer to transfer (receive) additional assets or equity
interests to (from) acquiree’s former owner if specific event occurs
• E.g. Event A: acquirer gets a refund of part of the consideration transferred if
the acquiree does not achieve the target profit
• Fair value of contingent consideration or refund will change as new
information arises

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 Consideration transferred – Contingent consideration

• Contingent consideration
– Fair value of the contingent consideration has to be
estimated through determining the present value of the
probability-weighted outcome; if the contingent event leads
to a refund (For example, event A) the fair value of the
refund (probability-weighted outcome) is deducted from
consideration transferred

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 Consideration transferred – Contingent consideration

• Contingent consideration:
– Fair value of contingent consideration is adjusted
retrospectively as a correction of error if events after
acquisition reveal information that was missed or misapplied
as at the acquisition date

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 Example – Contingent consideration

An acquirer undertakes to pay an additional $2 million to the

vendor at the end of 3 years from acquisition date if the annual
profit of the subsidiary does not fall below $5 million over a 3-
year period. Probability that annual profit will be at least $5
million over the 3-year period = 0.60. Present value factor at 5%
at the end of 3 years = 0.8638.

Fair value of contingent consideration:

= 0.8638 x [($2,000,000 x 0.60) + (0 x 0.40)]
= $1,036,560

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Acquisition-Related Costs

• All acquisition-related costs are expensed off

• Costs of issuing debt are recognized in accordance with IAS 39 or
IFRS 9
– As yield adjustment to the cost of borrowing and are amortized
over the tenure of the loan
– Journal entry for the payment of debt issuance cost
• Costs of issuing equity are recognized in accordance with IAS 32
– A reduction against equity
– Journal entry to record the payment of cost of issuing equity

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Contents

1.Business combination
2. Acquisition method
3.Consideration transferred
4. Goodwill or a gain from a bargain purchase
5.Consolidation process

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4. Goodwill or a gain from a bargain purchase
What the parent is paying for

Consideration Share of book Share of

transferred by = value of + excess of fair + Goodwill
parent subsidiary’s value over
net assets at book value of
acquisition identifiable net
date assets

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Revaluation of identifiable asset and liabilities
At acquisition date:
•Fair value differential will be
Fair value recognized in the consolidation
differential worksheet
In subsequent years:
•Depreciation/amortization/cost
of sale of asset will be based on
Book value of Fair value of the fair value recognized at the
subsidiary’s subsidiary’s acquisition date
identifiable identifiable net
•These entries have to be re-
net assets assets
enacted every year until the
disposal of investment

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Non-recognised assets and liabilities

Intangible asset
Are these considered intangible assets?
Assembled workforce with × No: Firm-specific and integrated with
specialized knowledge acquiree
× (Fails separability criterion)
Potential contracts or contracts × No: Fails separability or contractual-legal
under negotiation criterion
Acquiree-owned brandname  Yes: Meets the contractual-legal criterion

Customer and subscriber lists  Yes: Meets the separability criterion (show
of acquiree evidence of exchange transactions for
similar types of lists)

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Non-recognised assets and liabilities

Contingent liability
• Contingent liabilities are recognized by
acquirer if they are:
– Present obligations arising from past events
and
– Reliably measurable, even if outcome is
not probable (IFRS 3:23)
Probable
• Example: Provisions for restructuring & outflow of Reliably
measurable
economic
termination costs are recognized if they are: resources

Present
constructive or
legal obligations
arising from
past events

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 Deferred Tax Relating to FV Differentials of
Identifiable Assets and Liabilities
• The recognition of fair value differential may give rise to future
tax payable or future tax deduction
– tax effects need to be accounted for because the basis for
taxation does not change in a business combination
– i.e. The excess of fair value over book value of identifiable
net assets will give rise to a taxable temporary difference
and vice versa.
• No deferred tax liability is recognized on goodwill as goodwill
is a residual

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 Non-controlling interest
• IFRS 3 allows NCI at acquisition date to be measured at either:
• Fair value; or
• The present ownership instruments’ proportionate share in the
recognized amount of identifiable assets

Fair value method Proportionate method

• Obtain a reliable measure of fair • Applies present ownership interests
value of NCI (e.g. quoted price in held by NCI to the recognized amounts
active market). In absence of of identifiable net assets to determine
quoted price, use valuation initial amount of NCI
techniques to value NCI (e.g. peer
companies’ valuation or • If NCI have potential ordinary shares,
appropriate assumptions) they should be measured at fair value

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 Goodwill in business combination
• A premium that an acquirer pays to achieve synergies from business combination
• Must be recognized separately as an asset
• Determined as a residual
• IFRS 3 allows 2 ways of determining goodwill:

= –
Goodwill Fair value of consideration transferred Acquiree’s net
+ identifiable assets
NCI at acquisition date
+
Fair value of the acquirer’s previously held
interest in the acquiree

Measured under fair value method

NCI at acquisistion
date
Measured under proportionate method

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 Example - Goodwill
On 1 July 20x1, P purchased 1.5 million shares from S Co’s existing owners.
Total number of shares issued by S Co. was 2 million. A reliable FV of S Co’s
share was $10/share. P Co. was obligated to pay an additional $1 million to
vendors of S Co. if S Co. maintained existing profitability over the subsequent
two years from 1 July 20x1. It was highly likely that S Co. would achieve this
expectation and the fair value of the contingent consideration was assessed at
$1 million. FV of NCI as at 1 July 20x1 was $5 million. Assume a tax rate of
20%
Additional information of S Co.
Book value of net assets: $3,650,000
FV of net assets: $14,350,000
FV less book value (net assets): $10,700,000
Share capital: $2,000,000
Retained earnings: $1,650,000

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Solution

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 Goodwill - Gain from a Bargain Purchase
• A gain from bargain purchase arises when:

Fair value of consideration transferred

+ Fair value of
Fair value of non-controlling interests
+
< identifiable net assets

Fair value of the acquirer’s previously held

interest in the acquiree
• In essence, a windfall gain to acquirer
• The acquirer must re-assess the fair value of identifiable net assets, consideration transferred and non-controlling
interests. If there is no measurement error:
– The gain will be recognized immediately in the income statement

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 Measurement Period
• IFRS 3 allows adjustments to be made retrospectively to “provisional amounts”
relating to goodwill, fair value of identifiable net assets and consideration
transferred if:
– New information about facts and circumstances existing at acquisition date arises,
– Within 1 year of acquisition date (“Measurement period”)

• Events and circumstances arising after acquisition date does not lead to
measurement period adjustments
‒ Adjustments only allowed because of incorrect or incomplete information available
as at acquisition date but was missed or misapplied

• After measurement period (1 year), any correction of errors will be deemed as

a prior - period adjustment (IAS 8)
‒ Exception: Any change in estimate arising from information on new events and
circumstances arising after acquisition date will be recognized in the current period
‒ Example: acquirer may fail to obtain information on all contracts of acquiree as at
acquisition date

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Measurement Period – Summary
Retrospective
Error: Discovery of Any correction of
change: Adjust
info on facts and error after end of
goodwill, fair value
circumstances measurement period
of identifiable net
existing as of requires prior period
assets, fair value of
acquisition date item disclosures
NCI as if the
accounting was
completed on
acquisition date
Acquisition 12 months
date End of
measurement
Prospective period
Change in change: no
estimate: correction of
Circumstances goodwill, fair
arising after value of
acquisition date identifiable net
assets or fair value
of NCI
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Purchase of Assets that Do Not Constitute a Business

 A target which does not constitute a business when

acquired would not be accounted for as an acquisition of
an asset or a group of assets.
 Purchaser will have to identify and recognize the
individual identifiable assets acquired as well as liabilities
assumed in the transaction
 All assets purchased and liabilities incurred would be
measured at fair value
 Goodwill will not be recognized from the transaction

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Illustration 2: Acquisition of Assets that do not
Constitute a Business
 X Co. paid $600,000 in cash to acquire a group of net assets from Y Co.
 Group of assets did not meet the definition of a business under IFRS 3

Carrying values ($) Fair value at date of Allocated cost

acquisition ($) ($)
Intangible asset – 200,000 300,000 324,000
club membership
Plant 150,000 200,000 216,000
Inventories 50,000 55,000 60,000
400,000 555,000 600,000

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 Illustration 2: Acquisition of Assets that do not
Constitute a Business

Being accounting for acquisition of assets

Dr
Intangible asset 324,000
Dr Plant 216,000
Dr Inventory 60,000
Cr Cash 600,000

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Conclusion
• All business combinations are characterized by three conditions:
1. Existence of acquirer
2. Acquirer has control over an acquiree
3. Acquiree is a business
• Many modes of business combinations:
– Acquirers acquires net assets of the business
(Consequence: Assets and liabilities acquired recognized in the acquirer’s legal
entity financial statements)
– Acquirer acquires control over the equity of the acquiree
(Consequence: acquirer and acquiree retain separate legal identities but
economically, these entities belong to same group)
– Regardless of form, economic substance of combination is the same and acquisition
method should be applied

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Conclusion

• Acquisition method
– Identify acquirer with reference to the control criteria of IFRS 10
– Recognize and measure identifiable net assets at fair value at acquisition date
– Goodwill is a residual figure and is determined on a “top-down” approach
 May include recognition and measurement errors and identifiable elements
• Measurement period
– Acquirers are allowed a 12 month measurement period to correct and revise the
following on a retrospectively basis:
1. Provisional amounts of goodwill
2. Fair value of identifiable net assets
3. Fair value of Non-controlling interests
4. Fair value of previously held interests

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Contents

1.Business combination
2. Acquisition method
3.Consideration transferred
4. Goodwill or a gain from a bargain purchase
5.Consolidation process

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5.Consolidation process

This method is used for acquisition transaction only.

Line-by-line Pre-acquisition Intragroup

combination entry transactions

Non-controlling interest

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52 thuhienueh-22
 RE= 62.000 + 45.000*80% = 98.000

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Tham khảo
 https://www.youtube.com/watch?
v=ess7UICI17w&t=199s

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 End

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