Summary of IFRS 3 Background IFRS 3 (2008) seeks to enhance the relevance, reliability and co!arability o" in"oration !rovided about business cobinations (e#g# ac$uisitions and ergers) and their e%ects# It sets out the !rinci!les on the recognition and easureent o" ac$uired assets and liabilities, the deterination o" good&ill and the necessary disclosures# IFRS 3 (2008) resulted "ro a 'oint a 'oint !ro'ect !ro'ect &ith &ith the S Financial ccounting Standards Board (FSB) and re!laced IFRS 3 (200*)# FSB issued a siilar standard in +eceber 200 (SFS -*-(R))# .he revisions result in a high degree o" convergence convergence bet&een IFRSs and S / in the accounting "or business cobinations, cobinations, although soe !otentially signi1cant di%erences reain#
Key denitions IFRS 3, !!endi 4 business combination - transaction or other event in &hich an ac$uirer obtains control o" one or ore businesses# .ransactions soeties re"erred to as 5true ergers5 or 5ergers o" e$uals5 are also business cobinations as that ter is used in IFRS 34 business 6 n integrated set o" activities and assets that is ca!able o" being conducted and anaged "or the !ur!ose o" !roviding a return in the "or o" dividends, lo&er costs or other econoic bene1ts directly to investors or other o&ners, ebers or !artici!ants acquisition date 6 .he date on &hich the ac$uirer obtains control o" the ac$uiree acquirer 6.he entity that obtains control o" the ac$uiree acquire6 .he business or businesses that the ac$uirer obtains control o" in a business cobination Scope IFRS 3 ust be a!!lied &hen accounting "or business cobinations, but does not a!!ly to7 .he "oration "oration o" a 'oint venture venture IFRS IFRS 3#2(a)4 .he ac$uisition ac$uisition o" an asset asset or grou! grou! o" assets that is not a business, although although general guidance is !rovided on ho& such transactions should be accounted "or IFRS 3#2(b)4 9obinations o" entities or businesses under coon control (the ISB has a se!arate agenda !ro'ect on coon control transactions) transactions ) IFRS 3#2(c)4 • •
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c$uisitions by an investent entity o" a subsidiary that is re$uired to be easured at "air value through !ro1t or loss under IFRS -0 Consolidated Financial Statements# IFRS 3#24 Annual Improvements to IFRSs 2011–2013 Cycle, e%ective "or annual !eriods beginning on or a"ter - :uly 20-*, aends this sco!e eclusion to clari"y that is a!!lies to the accounting "or the "oration o" a 'oint arrangeent in the 1nancial stateents o" the 'oint arrangeent itsel"# •
Determining whether a transaction is a business combination IFRS 3 !rovides additional guidance on deterining &hether a transaction eets the de1nition o" a business cobination, and so accounted "or in accordance &ith its re$uireents# .his guidance includes7 Business cobinations can occur in various &ays, such as by trans"erring cash, incurring liabilities, issuing e$uity instruents (or any cobination thereo"), or by not issuing consideration at all (i#e# by contract alone) IFRS 3#B;4 Business cobinations can be structured in various &ays to satis"y legal, taation or other ob'ectives, including one entity becoing a subsidiary o" another, the trans"er o" net assets "ro one entity to another or to a ne& entity IFRS 3#B<4 .he business cobination ust involve the ac$uisition o" a business, &hich generally has three eleents7 IFRS 3#B4 Inputs = an econoic resource (e#g# non6current assets, intellectual o !ro!erty) that creates out!uts &hen one or ore !rocesses are a!!lied to it o Process = a syste, standard, !rotocol, convention or rule that &hen a!!lied to an in!ut or in!uts, creates out!uts (e#g# strategic anageent, o!erational !rocesses, resource anageent) o Output = the result o" in!uts and !rocesses a!!lied to those in!uts# •
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Method of accounting for business combinations cquisition method .he ac$uisition ethod (called the 5!urchase ethod5 in the 200* version o" IFRS 3) is used "or all business cobinations# IFRS 3#*4 Ste!s in a!!lying the ac$uisition ethod are7 IFRS 3#;4 -# Identi1cation o" the 5ac$uirer5 2# +eterination o" the 5ac$uisition date5 3# Recognition and easureent o" the identi1able assets ac$uired, the liabilities assued and any non6controlling interest (>9I, "orerly called inority interest) in the ac$uiree *# Recognition and easureent o" good&ill or a gain "ro a bargain !urchase Identifying an acquirer
.he guidance in IFRS -0 Consolidated Financial Statements is used to identi"y an ac$uirer in a business cobination, i#e# the entity that obtains 5control5 o" the ac$uiree# IFRS 3#4 I" the guidance in IFRS -0 does not clearly indicate &hich o" the cobining entities is an ac$uirer, IFRS 3 !rovides additional guidance &hich is then considered7 .he ac$uirer is usually the entity that trans"ers cash or other assets &here the business cobination is e%ected in this anner IFRS 3#B-*4 .he ac$uirer is usually, but not al&ays, the entity issuing e$uity interests &here the transaction is e%ected in this anner, ho&ever the entity also considers other !ertinent "acts and circustances including7 IFRS 3#B-;4 relative voting rights in the cobined entity a"ter the business o cobination o the eistence o" any large inority interest i" no other o&ner or grou! o" o&ners has a signi1cant voting interest o the co!osition o" the governing body and senior anageent o" the cobined entity •
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the ters on &hich e$uity interests are echanged .he ac$uirer is usually the entity &ith the largest relative si?e (assets, revenues or !ro1t) IFRS 3#B-<4 For business cobinations involving ulti!le entities, consideration is given to the entity initiating the cobination, and the relative si?es o" the cobining entities# IFRS 3#B-4 o
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cquisition date n ac$uirer considers all !ertinent "acts and circustances &hen deterining the ac$uisition date, i#e# the date on &hich it obtains control o" the ac$uiree# .he ac$uisition date ay be a date that is earlier or later than the closing date# IFRS 3#86@4 IFRS 3 does not !rovide detailed guidance on the deterination o" the ac$uisition date and the date identi1ed should reAect all relevant "acts and circustances# 9onsiderations ight include, aong others, the date a !ublic o%er becoes unconditional (&ith a controlling interest ac$uired), &hen the ac$uirer can e%ect change in the board o" directors o" the ac$uiree, the date o" acce!tance o" an unconditional o%er, &hen the ac$uirer starts directing the ac$uiree5s o!erating and 1nancing !olicies, or the date co!etition or other authorities !rovide necessarily clearances# c$uired assets and liabilities IFRS 3 establishes the "ollo&ing !rinci!les in relation to the recognition and easureent o" ites arising in a business cobination7
Recognition princip!e# Identi1able assets ac$uired, liabilities assued, and non6controlling interests in the ac$uiree, are recognised se!arately "ro good&ill IFRS 3#-04
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Measurement princip!e# ll assets ac$uired and liabilities assued in a business cobination are easured at ac$uisition6date "air value# IFRS 3#-84
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"#ceptions to the recognition and measurement princip!es .he "ollo&ing ece!tions to the above !rinci!les a!!ly7 $ontingent !iabi!ities = the re$uireents o" IS 3 Provisions, Continent !ia"ilities and Continent Assets do not a!!ly to the recognition o" contingent liabilities arising in a business cobination IFRS 3#226234 •
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Income ta#es = the recognition and easureent o" incoe taes is in accordance &ith IS -2 Income #a$es IFRS 3#2*62;4 "mp!oyee benets = assets and liabilities arising "ro an ac$uiree5s e!loyee bene1ts arrangeents are recognised and easured in accordance &ith IS -@ %mployee &ene'ts (20--) IFRS 2#2<4 Indemnication assets 6 an ac$uirer recognises indeni1cation assets at the sae tie and on the sae basis as the indeni1ed ite IFRS 3#26284 Reacquired rights = the easureent o" reac$uired rights is by re"erence to the reaining contractual ter &ithout rene&als IFRS 3#2@4 Share-based payment transactions 6 these are easured by re"erence to the ethod in IFRS 2 S(are)"ased Payment ssets he!d for sa!e = IFRS ; *on)current Assets +eld or Sale and -iscontinued Operations is a!!lied in easuring ac$uired non6current assets and dis!osal grou!s classi1ed as held "or sale at the ac$uisition date#
In a!!lying the !rinci!les, an ac$uirer classi1es and designates assets ac$uired and liabilities assued on the basis o" the contractual ters, econoic conditions, o!erating and accounting !olicies and other !ertinent conditions eisting at the ac$uisition date# For ea!le, this ight include the identi1cation o" derivative 1nancial instruents as hedging instruents, or the se!aration o" ebedded derivatives "ro host contracts#IFRS 3#-;4 o&ever, ece!tions are ade "or lease
classi1cation (bet&een o!erating and 1nance leases) and the classi1cation o" contracts as insurance contracts, &hich are classi1ed on the basis o" conditions in !lace at the ince!tion o" the contract# IFRS 3#-4 c$uired intangible assets ust be recognised and easured at "air value in accordance &ith the !rinci!les i" it is se!arable or arises "ro other contractual rights, irres!ective o" &hether the ac$uiree had recognised the asset !rior to the business cobination occurring# .his is because there is al&ays suCcient in"oration to reliably easure the "air value o" these assets# IS 38#33634 .here is no 5reliable easureent5 ece!tion "or such assets, as &as !resent under IFRS 3 (200*)#
%oodwi!! %oodwi!! is measured as the di&erence between' the aggregate o" (i) the value o" the consideration trans"erred (generally at "air value), (ii) the aount o" any non6controlling interest (>9I, see belo&), and (iii) in a business cobination achieved in stages (see belo&), the ac$uisition6date "air value o" the ac$uirer5s !reviously6held e$uity interest in the ac$uiree, and the net o" the ac$uisition6date aounts o" the identi1able assets ac$uired and the liabilities assued (easured in accordance &ith IFRS 3)# IFRS 3#324 •
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.his can be &ritten in si!li1ed e$uation "or as "ollo&s7 /ood&ill
D
9onsideration trans"erred
E
ount o" non6controlling interests
I" the di%erence above is negative, the resulting gain is a bargain !urchase in !ro1t or loss, &hich ay arise in circustances such as a "orced seller acting under co!ulsion# IFRS 3#3*63;4 o&ever, be"ore any bargain !urchase gain is recognised in !ro1t or loss, the ac$uirer is re$uired to undertake a revie& to ensure the identi1cation o" assets and liabilities is co!lete, and that easureents a!!ro!riately reAect consideration o" all available in"oration# IFRS 3#3<4 9hoice in the easureent o" non6controlling interests (>9I) IFRS 3 allo&s an accounting !olicy choice, available on a transaction by transaction basis, to easure non6controlling interests (>9I) either at7 IFRS 3#-@4 "air value (soeties called the "ull good&ill ethod), or the >9I5s !ro!ortionate share o" net assets o" the ac$uiree# • •
.he choice in accounting !olicy a!!lies only to !resent o&nershi! interests in the ac$uiree that entitle holders to a !ro!ortionate share o" the entity5s net assets in the event o" a li$uidation (e#g# outside holdings o" an ac$uiree5s ordinary shares)# ther co!onents o" non6controlling interests at ust be easured at ac$uisition
date "air values or in accordance &ith other a!!licable IFRSs (e#g# share6based !ayent transactions accounted "or under IFRS 2 S(are)"ased Payment )# IFRS 3#-@4
"#amp!e !ays 800 to ac$uire an 80G interest in the ordinary shares o" S# .he aggregated "air value o" -00G o" S5s identi1able assets and liabilities (deterined in accordance &ith the re$uireents o" IFRS 3) is <00, and the "air value o" the non6controlling interest (the reaining 20G holding o" ordinary shares) is -8;# .he easureent o" the non6controlling interest, and its resultant i!acts on the deterination o" good&ill, under each o!tion is illustrated belo&7 ($I based on fair )a!ue
($I based on net assets
9onsideration trans"erred
800
800
>on6controlling interest
-8; (-)
-20 (2)
@8;
@20
>et assets
(<00)
(<00)
/ood&ill
38;
320
(-) .he "air value o" the 20G non6controlling interest in S &ill not necessarily be !ro!ortionate to the !rice !aid by "or its 80G interest, !riarily due to any control !reiu or discount IFRS 3#B*;4 (2) 9alculated as 20G o" the "air value o" the net assets o" <00#
*usiness combination achie)ed in stages +step acquisitions, rior to control being obtained, an ac$uirer accounts "or its investent in the e$uity interests o" an ac$uiree in accordance &ith the nature o" the investent by a!!lying the relevant standard, e#g# IS 28 Investments in Associates and .oint /entures (20--), IFRS -- .oint Arranements, IS 3@ Financial Instruments Reconition and easurement or IFRS @ Financial Instruments# s !art o" accounting "or the business cobination, the ac$uirer reeasures any !reviously held interest at "air value and takes this aount into account in the deterination o" good&ill as noted above IFRS 3#324 ny resultant gain or loss is recognised in !ro1t or loss or other co!rehensive incoe as a!!ro!riate# IFRS 3#*24 H .he accounting treatent o" an entity5s !re6cobination interest in an ac$uiree is consistent &ith the vie& that the obtaining o" control is a signi1cant econoic event
that triggers a reeasureent# 9onsistent &ith this vie&, all o" the assets and liabilities o" the ac$uiree are "ully reeasured in accordance &ith the re$uireents o" IFRS 3 (generally at "air value)# ccordingly, the deterination o" good&ill occurs only at the ac$uisition date# .his is di%erent to the accounting "or ste! ac$uisitions under IFRS 3(200*)# H
Measurement period I" the initial accounting "or a business cobination can be deterined only !rovisionally by the end o" the 1rst re!orting !eriod, the business cobination is accounted "or using !rovisional aounts# d'ustents to !rovisional aounts, and the recognition o" ne&ly identi1ed asset and liabilities, ust be ade &ithin the 5easureent !eriod5 &here they reAect ne& in"oration obtained about "acts and circustances that &ere in eistence at the ac$uisition date# IFRS 3#*;4 .he easureent !eriod cannot eceed one year "ro the ac$uisition date and no ad'ustents are !eritted a"ter one year ece!t to correct an error in accordance &ith IS 8# IFRS 3#;04 Related transactions and subse$uent accounting %enera! princip!es In general7 transactions that are not !art o" &hat the ac$uirer and ac$uiree (or its "orer o&ners) echanged in the business cobination are identi1ed and accounted "or se!arately "ro business cobination the recognition and easureent o" assets and liabilities arising in a business cobination a"ter the initial accounting "or the business cobination is dealt &ith under other relevant standards, e#g# ac$uired inventory is subse$uently accounted under IS 2 Inventories# IFRS 3#;*4 •
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hen deterining &hether a !articular ite is !art o" the echange "or the ac$uiree or &hether it is se!arate "ro the business cobination, an ac$uirer considers the reason "or the transaction, &ho initiated the transaction and the tiing o" the transaction# IFRS 3#B;04
$ontingent consideration 9ontingent consideration ust be easured at "air value at the tie o" the business cobination and is taken into account in the deterination o" good&ill# I" the aount o" contingent consideration changes as a result o" a !ost6ac$uisition event (such as eeting an earnings target), accounting "or the change in consideration de!ends on &hether the additional consideration is classi1ed as an e$uity instruent or an asset or liability7 IFRS 3#;84 I" the contingent consideration is classi1ed as an e$uity instruent, the original aount is not reeasured I" the additional consideration is classi1ed as an asset or liability that is a 1nancial instruent, the contingent consideration is easured at "air value •
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and gains and losses are recognised in either !ro1t or loss or other co!rehensive incoe in accordance &ith IFRS @ Financial Instruments or IS 3@ Financial Instruments Reconition and easurement I" the additional consideration is not &ithin the sco!e o" IFRS @ (or IS 3@), it is accounted "or in accordance &ith IS 3 Provisions, Continent !ia"ilities and Continent Assets or other IFRSs as a!!ro!riate#
>ote7 Annual Improvements to IFRSs 2010–2012 Cycle changes these re$uireents "or business cobinations "or &hich the ac$uisition date is on or a"ter - :uly 20-*# nder the aended re$uireents, contingent consideration that is classi1ed as an asset or liability is easured at "air value at each re!orting date and changes in "air value are recognised in !ro1t or loss, both "or contingent consideration that is &ithin the sco!e o" IFRS @JIS 3@ or other&ise# here a change in the "air value o" contingent consideration is the result o" additional in"oration about "acts and circustances that eisted at the ac$uisition date, these changes are accounted "or as easureent !eriod ad'ustents i" they arise during the easureent !eriod (see above)# IFRS 3#;84
cquisition costs 9osts o" issuing debt or e$uity instruents are accounted "or under IS 32 Financial Instruments Presentation and IS 3@ Financial Instruments Reconition and easurement JIFRS @ Financial Instruments# ll other costs associated &ith an ac$uisition ust be e!ensed, including reiburseents to the ac$uiree "or bearing soe o" the ac$uisition costs# Ka!les o" costs to be e!ensed include 1nder5s "eesL advisory, legal, accounting, valuation and other !ro"essional or consulting "eesL and general adinistrative costs, including the costs o" aintaining an internal ac$uisitions de!artent# IFRS 3#;34 re-e#isting re!ationships and reacquired rights I" the ac$uirer and ac$uiree &ere !arties to a !re6eisting relationshi! ("or instance, the ac$uirer had granted the ac$uiree a right to use its intellectual !ro!erty), this ust ust be accounted "or se!arately "ro the business cobination# In ost cases, this &ill lead to the recognition o" a gain or loss "or the aount o" the consideration trans"erred to the vendor &hich e%ectively re!resents a 5settleent5 o" the !re6eisting relationshi!# .he aount o" the gain or loss is easured as "ollo&s7 "or !re6eisting non6contractual relationshi!s ("or ea!le, a la&suit)7 by re"erence to "air value •
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"or !re6eisting contractual relationshi!s7 at the lesser o" (a) the "avourableJun"avourable contract !osition and (b) any stated settleent !rovisions in the contract available to the counter!arty to &ho the contract is un"avourable# IFRS 3#B;-6;34
o&ever, &here the transaction e%ectively re!resents a reac$uired right, an intangible asset is recognised and easured on the basis o" the reaining contractual ter o" the related contract ecluding any rene&als# .he asset is then subse$uently aortised over the reaining contractual ter, again ecluding any rene&als# IFRS 3#;;4
$ontingent !iabi!ities ntil a contingent liability is settled, cancelled or e!ired, a contingent liability that &as recognised in the initial accounting "or a business cobination is easured at the higher o" the aount the liability &ould be recognised under IS 3 Provisions, Continent !ia"ilities and Continent Assets , and the aount less accuulated aortisation under IS -8 Revenue# IFRS 3#;<4 $ontingent payments to emp!oyees and shareho!ders s !art o" a business cobination, an ac$uirer ay enter into arrangeents &ith selling shareholders or e!loyees# In deterining &hether such arrangeents are !art o" the business cobination or accounted "or se!arately, the ac$uirer considers a nuber o" "actors, including &hether the arrangeent re$uires continuing e!loyent (and i" so, its ter), the level or reuneration co!ared to other e!loyees, &hether !ayents to shareholder e!loyees are increental to non6 e!loyee shareholders, the relative nuber o" shares o&ns, linkages to valuation o" the ac$uiree, ho& the consideration is calculated, and other agreeents and issues# IFRS 3#B;;4 here share6based !ayent arrangeents o" the ac$uiree eist and are re!laced, the value o" such a&ards ust be a!!ortioned bet&een !re6cobination and !ost6 cobination service and accounted "or accordingly# IFRS 3#B;<6B<2B4
Indemnication assets Indeni1cation assets recognised at the ac$uisition date (under the ece!tions to the general recognition and easureent !rinci!les noted above) are subse$uently easured on the sae basis o" the indeni1ed liability or asset, sub'ect to contractual i!acts and collectibility# Indeni1cation assets are only derecognised &hen collected, sold or &hen rights to it are lost# IFRS 3#;4 .ther issues In addition, IFRS 3 !rovides guidance on soe s!eci1c as!ects o" business cobinations including7 business cobinations achieved &ithout the trans"er o" consideration, e#g# 5dual listed5 and 5sta!led5 arrangeents IFRS 3#*36**4 reverse ac$uisitions IFRS 3#B-@4 identi"ying intangible assets ac$uired IFRS 3#B3-63*4 •
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Disc!osure +isclosure o" in"oration about current business cobinations n ac$uirer is re$uired to disclose in"oration that enables users o" its 1nancial stateents to evaluate the nature and 1nancial e%ect o" a business cobination that occurs either during the current re!orting !eriod or a"ter the end o" the !eriod but be"ore the 1nancial stateents are authorised "or issue# IFRS 3#;@4 ong the disclosures re$uired to eet the "oregoing ob'ective are the "ollo&ing7 IFRS 3#B<*6B<<4 nae and a descri!tion o" the ac$uiree ac$uisition date !ercentage o" voting e$uity interests ac$uired !riary reasons "or the business cobination and a descri!tion o" ho& the ac$uirer obtained control o" the ac$uiree descri!tion o" the "actors that ake u! the good&ill recognised $ualitative descri!tion o" the "actors that ake u! the good&ill recognised, such as e!ected synergies "ro cobining o!erations, intangible assets that do not $uali"y "or se!arate recognition ac$uisition6date "air value o" the total consideration trans"erred and the ac$uisition6date "air value o" each a'or class o" consideration details o" contingent consideration arrangeents and indeni1cation assets details o" ac$uired receivables the aounts recognised as o" the ac$uisition date "or each a'or class o" assets ac$uired and liabilities assued details o" contingent liabilities recognised total aount o" good&ill that is e!ected to be deductible "or ta !ur!oses details about any transactions that are recognised se!arately "ro the ac$uisition o" assets and assu!tion o" liabilities in the business cobination in"oration about a bargain !urchase in"oration about the easureent o" non6controlling interests details about a business cobination achieved in stages in"oration about the ac$uiree5s revenue and !ro1t or loss in"oration about a business cobination &hose ac$uisition date is a"ter the end o" the re!orting !eriod but be"ore the 1nancial stateents are authorised "or issue • • • •
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Disc!osure of information about ad/ustments of past business combinations n ac$uirer is re$uired to disclose in"oration that enables users o" its 1nancial stateents to evaluate the 1nancial e%ects o" ad'ustents recognised in the current re!orting !eriod that relate to business cobinations that occurred in the !eriod or !revious re!orting !eriods# IFRS 3#<-4
ong the disclosures re$uired to eet the "oregoing ob'ective are the "ollo&ing7 IFRS 3#B<4 details &hen the initial accounting "or a business cobination is inco!lete "or !articular assets, liabilities, non6controlling interests or ites o" consideration (and the aounts recognised in the 1nancial stateents "or the business cobination thus have been deterined only !rovisionally) "ollo&6u! in"oration on contingent consideration "ollo&6u! in"oration about contingent liabilities recognised in a business cobination a reconciliation o" the carrying aount o" good&ill at the beginning and end o" the re!orting !eriod, &ith various details sho&n se!arately the aount and an e!lanation o" any gain or loss recognised in the current re!orting !eriod that both7 relates to the identi1able assets ac$uired or liabilities assued in a o business cobination that &as e%ected in the current or !revious re!orting !eriod, and o is o" such a si?e, nature or incidence that disclosure is relevant to understanding the cobined entity5s 1nancial stateents# •
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