Section 19

Overview
• Scope
• Definition
• Identification of a Business Combination
• Accounting for Business Combinations
• Disclosure
• Differences between IFRS for SMEs and Full
IFRS
 Scope
• This section applies to accounting for business
combinations.
• It provides guidance on identifying the
acquirer, measuring the cost of the business
combination, and allocating that cost to the
assets acquired and liabilities and provisions for
contingent liabilities assumed.
• It also addresses accounting for goodwill both at
the time of a business combination and
subsequently.
 Scope
This section specifies the accounting for all business
combinations except:
(a) combinations of entities or businesses under
common control.
Common control means that all of the combining
entities or businesses are ultimately controlled by the
same party both before and after the business
combination, and that control is not transitory.
(b) the formation of a joint venture.
(c) acquisition of a group of assets that do not
constitute a business.
 Definition
• A business combination is the bringing
together of separate entities or businesses into
one reporting entity.
• The result of nearly all business combinations
is that one entity, the acquirer, obtains control
of one or more other businesses, the acquire.
 Identification of a Business Combination
• When considering whether a particular transaction is a
business combination, an entity must determine whether
the assets acquired and the liabilities assumed constitute a
business.
• A business is define as an integrated set of activities and
assets conducted and managed for the purpose of:
Providing a return to investors, Lowered costs or other
economic benefit directly and proportionately
shareholders, policyholders, or participants.
• A business generally consists of inputs, processes applied
to those inputs, and resulting outputs that are, or will be,
used to generate revenues.
Identification of a Business Combination

Specifically , it is presumed
in the Standard that any
transferred set of activities
that included goodwill is a
business.
 Identification of a Business Combination
A business combination may be effected

Issue of equity instruments

The transfer of cash, cash

equivalents

None cash asset, and incurrence

of liability

Mixture of these

The transaction may be between the shareholders of the combining

entities or between one entity and the shareholders of another entity.
 Example
• SME A acquired a petrol station from SME B,
which had been closed 18 months before the
acquisition date. SME A did not acquire the
rights to any trade name from SME B. SME A
also did not acquire any processes to run the
station from SME B nor did it ‘take on’ any of
SME B’s employees (ie it only purchased the
property, plant and equipment).
Identification of a Business Combination

• If a business is acquired directly, the accounting

for business combinations is applied in the
acquiring entity’s records.
• Where a business is acquired indirectly, the
accounting for the business combination is only
applied in the preparation of the consolidated
financial statements.
 Accounting for Business
Combinations

All business combinations

shall be accounted for by
applying the purchase
method.
 Steps of Purchase Method
Identifying an acquirer.

Measuring the cost of the business combination.

Allocating, at the acquisition date, the cost of the business

combination to the assets acquired and liabilities and provisions

Calculate Good will

 Step 1: Identifying the Acquirer
• The acquirer is the entity that obtains control
of the other entities or businesses.
• Control is define as the power to govern the
financial and operating policies of an entity or
business so as to obtain benefit from its
activities.
 Step 2: Measuring the Cost of a Business
Combination
The cost of a business combination is the aggregate
of:
1. The fair value of assets given by the acquirer
2. Liabilities incurred or assumed by the acquirer
3. Equity instruments issued by the acquirer, (the
consideration)
4. Any costs directly attributable to the business
combination
Cost of a Business Combination

The cost of a business

combination is the
purchase consideration
plus direct acquisition
costs.
 Cost of a Business Combination
• If the potential adjustment is not recognized at
the acquisition date but subsequently becomes
probable and can be measured reliably, the
additional consideration shall be treated as an
adjustment to the cost of the combination.
• The adjustment to the cost of the business
combination will affect the amount of
goodwill recognized in respect of the business
combination.
 Step 3: Recognition
• The identifiable assets of the acquire, as well as
the liabilities, and contingent liabilities of the
acquire assumed in terms of the business
combination agreement are recognized at fair
value.
 Step 3: Recognition
The acquirer shall recognize
(a) In the case of an asset other than an intangible
asset, it is probable that any associated future
economic benefits will flow to the acquirer, and its
fair value can be measured reliably.
(b) In the case of a liability other than a contingent
liability, it is probable that an outflow of resources
will be required to settle the obligation, and its fair
value can be measured reliably.
(c) In the case of an intangible asset or a contingent
liability, its fair value can be measured reliably.
Step 4: Goodwill and Negative Goodwill

If purchase The fair vale of

consideration identifiable
+
direct acquisition
> assets, liabilities
and contingent
liabilities
costs
 Step 4: Goodwill and Negative Goodwill
• Initial Recognition. Goodwill acquired in a
business combination is recognized as an asset in
the consolidated financial statements and initially
measured at its cost.
• Subsequent Recognition. After initial recognition,
goodwill is measured at cost less accumulated
amortization and accumulated impairment losses.
when an entity is unable to make a reliable
estimate of the useful life of goodwill, the life is
presumed to be a maximum of ten years.
 Disclosure
• Names and descriptions of the combining entities or
businesses
• Acquisition date
• Percentage of voting equity instruments acquired
• Cost of the combination and its components (cash,
shares, or loans)
• Amounts for each class of the acquires assets
(including goodwill), liabilities, and contingent
liabilities recognized at the acquisition date
 Disclosure
• Amount of any negative goodwill recognized in
profit or loss and the line item in which it was
recognized
• A reconciliation of the carrying amount of
goodwill (only for the current period) from the
opening to closing balance, showing separately:
• New acquisitions
• Impairment losses
• Disposals
• Other changes, such as amortization
 Differences between IFRS for SMEs
and Full IFRS
IFRS for SMEs
1. Goodwill is only based on the
parent’s interest, and therefore
the full goodwill method is not
applied.
2. Goodwill must be amortized
3. Acquisition costs are included
in the purchase consideration
and therefore in goodwill.
4. No option to measure the non-
controlling interest at fair value
at the date of acquisition.
5. Less disclosure requirements.
Full IFRS
1. The full goodwill method may
be applied.
2. Goodwill is not amortized.
3. Acquisition costs are expensed
4. Option to measure the non-
controlling interest at fair value
at the date of acquisition.
5. More stringent disclosure
requirements