BUSINESS COMBINATIONS
INTRODUCTION:
• Companies invest in the share of other companies for the following reasons:
• 1. Realization of short-term capital gains
• 2. To earn dividend income
• 3. To gain control over the net assets of another entity
• To achieve faithful representation, underlying characteristics include:
• 1. The expected holding period
• 2. The purpose of the investment
• Expected holding period:
• Current financial asset: Shares acquired with the intention to dispose of them
within a holding period of less than 12 months.
• Non-current investment in shares: Shares acquired with the intention to hold
onto them for a period exceeding 12 months
• Purpose of the investment:
• 1. Minority passive investments:
• 2. Minority active investments
• 3. Majority active investments
• Minority passive investments: An investment in shares with the purpose of
generating future economic benefits in the form of dividend income or capital
gains.
• Investor has little power over investee
• Minority active investment: An acquisition of shares and/or other limited
contractual rights to exert significant influence, but not control, over the
direction of the relevant activities affecting the returns earned by the investor.
• Generally disclosed as non-current assets
• Majority Active investment: An acquisition of shares and/or other contractual
rights, enabling the investor to direct the relevant activities of an investee and
thereby affecting the returns earned by the investor from the investee.
• A business combination is defined as a transaction or other event
in which an acquirer obtains control of one or more businesses.
(IFRS 3, Business Combinations (Appendix A))
, 100%
Business X Business Y
(Acquirer), also (Parent) (Acquiree), also
(Subsidiary)
Business X acquires 100% of the equity instruments of Business Y.
• 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, (Appendix A))
• A business may decide to obtain control over another business and to operate
as a group of legally separate entities than a single entity for the following
reasons:
• 1. Reduction of legal and operating risk
• 2. Reduce the cost of jurisdiction-specific corporate and tax laws
• 3. To expand and diversify
• 4. To reduce the cost of divesting assets
• Where the acquisition of an asset or group of assets does not meet the
definition of a business:
• The acquirer identifies and recognizes the individual identifiable assets
acquired and liabilities assumed
• The acquirer allocates the cost of the group of assets and liabilities to the
individual identifiable assets and liabilities based on their relative fair values at
the date of purchase
• Acquirer and acquiree are terms that are interchangeable with parent and
subsidiary, respectively.
• Parent: An entity that controls one or more entities.
• Subsidiary: An entity that is controlled by another entity (known as a parent).
• These definitions are like those of acquirer and acquiree
Control:
• Defined as in IFRS 3 (Appendix A) and IFRS 10 (Appendix A
, • “An investor is exposed, or has rights, to variable returns from its
involvement with the investee and has the ability to affect those
returns through its power over the investee”
Control Power Exposure to variability in Link between
returns power and returns
• Power:
• Refers to existing rights held by the investor that give the investor the current
ability to direct the relevant activities of the investee
• Example: Voting rights through ownership and contractual rights
• It’s possible for an entity which holds less than 50% of the voting rights to
have control through the following contractual rights:
• 1. Power to govern the financial and operating policies of the other entity
through a statute or an agreement
• 2. Power to hire and fire the majority of members of the board of directors or
equivalent governing body
• 3. Power to cast more than half of the votes at a meeting of the board of
directors or similar governing body, where that board or body has the power
to control the entity
• It’s also possible for an entity who holds in excess 50% of the voting rights to
not have control through contractual rights.
• Returns:
• In order to control an investee, an investor must have exposure to, or rights
to, variable returns from its involvement with the investee.
• Link between power and returns:
• There must be a link between Returns and Power
• An investor must have the ability to use its power to affect its returns from its
involvement with the investee.
Acquisition method:
• 1. Identify the acquirer
• 2. Determine the acquisition date
• 3. Recognize and measure the identifiable assets acquired, liabilities
assumed and non-controlling interests in the acquiree
• 4. Recognize and measure goodwill or a gain from a bargain purchase
INTRODUCTION:
• Companies invest in the share of other companies for the following reasons:
• 1. Realization of short-term capital gains
• 2. To earn dividend income
• 3. To gain control over the net assets of another entity
• To achieve faithful representation, underlying characteristics include:
• 1. The expected holding period
• 2. The purpose of the investment
• Expected holding period:
• Current financial asset: Shares acquired with the intention to dispose of them
within a holding period of less than 12 months.
• Non-current investment in shares: Shares acquired with the intention to hold
onto them for a period exceeding 12 months
• Purpose of the investment:
• 1. Minority passive investments:
• 2. Minority active investments
• 3. Majority active investments
• Minority passive investments: An investment in shares with the purpose of
generating future economic benefits in the form of dividend income or capital
gains.
• Investor has little power over investee
• Minority active investment: An acquisition of shares and/or other limited
contractual rights to exert significant influence, but not control, over the
direction of the relevant activities affecting the returns earned by the investor.
• Generally disclosed as non-current assets
• Majority Active investment: An acquisition of shares and/or other contractual
rights, enabling the investor to direct the relevant activities of an investee and
thereby affecting the returns earned by the investor from the investee.
• A business combination is defined as a transaction or other event
in which an acquirer obtains control of one or more businesses.
(IFRS 3, Business Combinations (Appendix A))
, 100%
Business X Business Y
(Acquirer), also (Parent) (Acquiree), also
(Subsidiary)
Business X acquires 100% of the equity instruments of Business Y.
• 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, (Appendix A))
• A business may decide to obtain control over another business and to operate
as a group of legally separate entities than a single entity for the following
reasons:
• 1. Reduction of legal and operating risk
• 2. Reduce the cost of jurisdiction-specific corporate and tax laws
• 3. To expand and diversify
• 4. To reduce the cost of divesting assets
• Where the acquisition of an asset or group of assets does not meet the
definition of a business:
• The acquirer identifies and recognizes the individual identifiable assets
acquired and liabilities assumed
• The acquirer allocates the cost of the group of assets and liabilities to the
individual identifiable assets and liabilities based on their relative fair values at
the date of purchase
• Acquirer and acquiree are terms that are interchangeable with parent and
subsidiary, respectively.
• Parent: An entity that controls one or more entities.
• Subsidiary: An entity that is controlled by another entity (known as a parent).
• These definitions are like those of acquirer and acquiree
Control:
• Defined as in IFRS 3 (Appendix A) and IFRS 10 (Appendix A
, • “An investor is exposed, or has rights, to variable returns from its
involvement with the investee and has the ability to affect those
returns through its power over the investee”
Control Power Exposure to variability in Link between
returns power and returns
• Power:
• Refers to existing rights held by the investor that give the investor the current
ability to direct the relevant activities of the investee
• Example: Voting rights through ownership and contractual rights
• It’s possible for an entity which holds less than 50% of the voting rights to
have control through the following contractual rights:
• 1. Power to govern the financial and operating policies of the other entity
through a statute or an agreement
• 2. Power to hire and fire the majority of members of the board of directors or
equivalent governing body
• 3. Power to cast more than half of the votes at a meeting of the board of
directors or similar governing body, where that board or body has the power
to control the entity
• It’s also possible for an entity who holds in excess 50% of the voting rights to
not have control through contractual rights.
• Returns:
• In order to control an investee, an investor must have exposure to, or rights
to, variable returns from its involvement with the investee.
• Link between power and returns:
• There must be a link between Returns and Power
• An investor must have the ability to use its power to affect its returns from its
involvement with the investee.
Acquisition method:
• 1. Identify the acquirer
• 2. Determine the acquisition date
• 3. Recognize and measure the identifiable assets acquired, liabilities
assumed and non-controlling interests in the acquiree
• 4. Recognize and measure goodwill or a gain from a bargain purchase
