IFRS 3: BUSINESS COMBINATIONS:
Definition: Combination of two or more businesses (I.e. Through a merger or amalgamation)
Acquirer = Holding company
OBJECTIVE: (Par 1)
SCOPE: (Par 2)
− (b): Normal purchase of assets
− (c): No standard at the moment. Each company follows own rules, using IFRS 3 as a guideline.
DEFINITIONS (APENDIX A):
− IFRS 10 definition: Control
− IFRS 13 definition: Fair value (“FV”)
NB: ACQUISITION METHOD (Par 4 – 53)
Exceptions (Par 22 – 23): Contingent liabilities.
If meet (a) section of definition (E.g. not yet a court case)
− Separate (IAS 37): Note in FS
− Group (IFRS 3): Note in FS
If meet (b)(ii) of definition (E.g. court case instituted)
− Separate (IAS 37): Note in FS
− Group (IFRS 3): Note in FS
If meet (b)(i) of definition (E.g. court case instituted)
− Separate (IAS 37): Note in FS
− Group (IFRS 3): recognise a provision
Dt Expense/Retained Earnings (P/L or SCI)
Ct Provision (SFP)
[R-amount x prob%]
EXAMPLE 1: ACQUISITION METHOD
M (Acquirer) purchases all (100%) the shares in F. No NCI. The fair value of M’s shares is R30 per share and M settles the purchase
price by issuing 160 000 shares (R4 800 000) and by paying R200 000 cash. Total: R5 000 000. The fair value of F’s identifiable assets
is R3 600 000 (Revalue by 600’). Ignore tax.
Statements of Financial Position before acquisition:
M F
Identifiable assets 4 000 3 000
Share capital 2 000 1 900
Distributable reserves 1 200 500
Identifiable liabilities 800 600
4 000 3 000
Journal to record the acquisition in the records of M (H’s):
dr Investment in F (SFP) 5 000 000
cr Share capital (SCE) 160’ x R30 4 800 000
cr Cash (SFP) 200 000
ANALYSIS
100%
SC 1 900 000
Res 500 000
Reval 600 000 (without tax)
3 000 000 3 000 000
Invest 5 000 000
Goodwill 2 000 000
Consolidated Statement of Financial Position directly after combination:
Assets ((4000 – 200[cash paid])(M) + 3600(F)) 7 400
Goodwill 2 000
9 400
Share capital (M) (2000 + 4800 [new issued]) 6 800
Distributable reserves (M) 1 200
Liabilities (800(M) + 600(F)) 1 400
9 400
1
,EXAMPLE 2: MEASURING NCI
H acquired 70% of the shares in F at R750 000. The fair value of F’s identifiable assets amounts to R3 000 000 and the fair value of the
non-controlling interest in F to R680 000 at the acquisition date. Assume a tax rate of 30%.
Statements of financial position at the acquisition date:
H F
Identifiable assets 8 200 2 000
Investment in F Ltd 750 -
8 950 2 000
Equity 6 000 1 300
Identifiable liabilities 2 950 700
8 950 2 000
i) NCI MEASURED AT THEIR PROPORTIONATE INTEREST IN THE NET ASSETS
Main elimination journal:
Dt Equity 1300
Dt Reval 700
Ct Investment 750
Ct NCI 600
Ct Bargain purchase (current year- P/L)/ retained earnings (previous year- SCE) 650
ii) NCI MEASURED AT FAIR VALUE
Main elimination journal:
Dt Equity 1300
Dt Reval 700
Ct Investment 750
Ct NCI 680
Ct Bargain purchase/retained earnings 570
NO JOURNAL FOR R80 ADJUSTMENT!
What would the effect be if it was goodwill?
NCI INCREASED; GOODWILL INCREASED
NCI DECREASED; GOODWILL DECREASED
2
, Recognising and measuring goodwill or a gain from a bargain purchase (Par 32 - 40)
(a) Sum of:
i. Investment
ii. FV or Proportionate interest
iii. E.g. Associate before it became a S
(b) Total equity on acquisition date
ANALYSIS
80% 20%
Share cap 500 000
Retained 200 000
700 000 560 000 140 000 (Proportionate interest)
Investment 600 000
Goodwill 40 000
a) i) Consideration transferred = 600 000 +
ii) NCI recog = 140 000 +
iii) FV prev interest =-
740 000
b) Net assets + liab (700 000)
GW 40 000
Positive = GW
Negative = BP
Par 33: H buys shares in S; H pays by issuing shares. H gets shares of S and pays buy issuing shares = exchange of
equity interest. S’s share might be more reliable in this case.
Par 34-34: Reassess a Bargain Purchase as it is unlikely that you will get a BP when purchasing a S.
− Only then recognize in P/L (current year) OR retained earnings (previous years)
− Attributed to acquirer (not NCI)
Consideration transferred (Par 37 - 40) = Investment
− Assets: Including cash or assets given as part of consideration
− Equity interest issued: shares issued
Par 38: Transfer of ASSETS where the CA not = to FV
− If A are transferred to former owners: recognise difference between CA and FV in P/L
− If A are transferred to acquiree: measure at CA immediately before acquisition date (don’t recognise G/L in
P/L) – effectively still have control over A
H, S and D (previous owners). H wants to buy the S, but the S is already owned by D. H approaches D to buy S and
pays the purchase price to D in cash/assets. D will then give H equity (control over S by transfer of shares)
IF the Assets CA not = FV
Then REVALUE TO FV IN H’S BOOKS BEFORE TRANSFER TO D AS A PAYMENT
Revaluation goes directly to P/L.
Dt Plant (SFP)
Ct Profit with revaluation (P/L)
H and S. H wants to buy shares in S, but no one owns the shares already. S issues the shares and the H is going to pay
the purchase price (cash/assets) to S. Assets does not go to outside party – stays in the group.
IF the Assets CA not = FV
DO NOT HAVE TO REVALUE. Stays at the CA, because H still has control over his own assets.
Additional guidance:
− Par 41-42: Step acquisition
− Par 43-44: Without consideration (unusual)
Measurement Period (Par 45-50)
− Estimate the A and L of the S
3
Definition: Combination of two or more businesses (I.e. Through a merger or amalgamation)
Acquirer = Holding company
OBJECTIVE: (Par 1)
SCOPE: (Par 2)
− (b): Normal purchase of assets
− (c): No standard at the moment. Each company follows own rules, using IFRS 3 as a guideline.
DEFINITIONS (APENDIX A):
− IFRS 10 definition: Control
− IFRS 13 definition: Fair value (“FV”)
NB: ACQUISITION METHOD (Par 4 – 53)
Exceptions (Par 22 – 23): Contingent liabilities.
If meet (a) section of definition (E.g. not yet a court case)
− Separate (IAS 37): Note in FS
− Group (IFRS 3): Note in FS
If meet (b)(ii) of definition (E.g. court case instituted)
− Separate (IAS 37): Note in FS
− Group (IFRS 3): Note in FS
If meet (b)(i) of definition (E.g. court case instituted)
− Separate (IAS 37): Note in FS
− Group (IFRS 3): recognise a provision
Dt Expense/Retained Earnings (P/L or SCI)
Ct Provision (SFP)
[R-amount x prob%]
EXAMPLE 1: ACQUISITION METHOD
M (Acquirer) purchases all (100%) the shares in F. No NCI. The fair value of M’s shares is R30 per share and M settles the purchase
price by issuing 160 000 shares (R4 800 000) and by paying R200 000 cash. Total: R5 000 000. The fair value of F’s identifiable assets
is R3 600 000 (Revalue by 600’). Ignore tax.
Statements of Financial Position before acquisition:
M F
Identifiable assets 4 000 3 000
Share capital 2 000 1 900
Distributable reserves 1 200 500
Identifiable liabilities 800 600
4 000 3 000
Journal to record the acquisition in the records of M (H’s):
dr Investment in F (SFP) 5 000 000
cr Share capital (SCE) 160’ x R30 4 800 000
cr Cash (SFP) 200 000
ANALYSIS
100%
SC 1 900 000
Res 500 000
Reval 600 000 (without tax)
3 000 000 3 000 000
Invest 5 000 000
Goodwill 2 000 000
Consolidated Statement of Financial Position directly after combination:
Assets ((4000 – 200[cash paid])(M) + 3600(F)) 7 400
Goodwill 2 000
9 400
Share capital (M) (2000 + 4800 [new issued]) 6 800
Distributable reserves (M) 1 200
Liabilities (800(M) + 600(F)) 1 400
9 400
1
,EXAMPLE 2: MEASURING NCI
H acquired 70% of the shares in F at R750 000. The fair value of F’s identifiable assets amounts to R3 000 000 and the fair value of the
non-controlling interest in F to R680 000 at the acquisition date. Assume a tax rate of 30%.
Statements of financial position at the acquisition date:
H F
Identifiable assets 8 200 2 000
Investment in F Ltd 750 -
8 950 2 000
Equity 6 000 1 300
Identifiable liabilities 2 950 700
8 950 2 000
i) NCI MEASURED AT THEIR PROPORTIONATE INTEREST IN THE NET ASSETS
Main elimination journal:
Dt Equity 1300
Dt Reval 700
Ct Investment 750
Ct NCI 600
Ct Bargain purchase (current year- P/L)/ retained earnings (previous year- SCE) 650
ii) NCI MEASURED AT FAIR VALUE
Main elimination journal:
Dt Equity 1300
Dt Reval 700
Ct Investment 750
Ct NCI 680
Ct Bargain purchase/retained earnings 570
NO JOURNAL FOR R80 ADJUSTMENT!
What would the effect be if it was goodwill?
NCI INCREASED; GOODWILL INCREASED
NCI DECREASED; GOODWILL DECREASED
2
, Recognising and measuring goodwill or a gain from a bargain purchase (Par 32 - 40)
(a) Sum of:
i. Investment
ii. FV or Proportionate interest
iii. E.g. Associate before it became a S
(b) Total equity on acquisition date
ANALYSIS
80% 20%
Share cap 500 000
Retained 200 000
700 000 560 000 140 000 (Proportionate interest)
Investment 600 000
Goodwill 40 000
a) i) Consideration transferred = 600 000 +
ii) NCI recog = 140 000 +
iii) FV prev interest =-
740 000
b) Net assets + liab (700 000)
GW 40 000
Positive = GW
Negative = BP
Par 33: H buys shares in S; H pays by issuing shares. H gets shares of S and pays buy issuing shares = exchange of
equity interest. S’s share might be more reliable in this case.
Par 34-34: Reassess a Bargain Purchase as it is unlikely that you will get a BP when purchasing a S.
− Only then recognize in P/L (current year) OR retained earnings (previous years)
− Attributed to acquirer (not NCI)
Consideration transferred (Par 37 - 40) = Investment
− Assets: Including cash or assets given as part of consideration
− Equity interest issued: shares issued
Par 38: Transfer of ASSETS where the CA not = to FV
− If A are transferred to former owners: recognise difference between CA and FV in P/L
− If A are transferred to acquiree: measure at CA immediately before acquisition date (don’t recognise G/L in
P/L) – effectively still have control over A
H, S and D (previous owners). H wants to buy the S, but the S is already owned by D. H approaches D to buy S and
pays the purchase price to D in cash/assets. D will then give H equity (control over S by transfer of shares)
IF the Assets CA not = FV
Then REVALUE TO FV IN H’S BOOKS BEFORE TRANSFER TO D AS A PAYMENT
Revaluation goes directly to P/L.
Dt Plant (SFP)
Ct Profit with revaluation (P/L)
H and S. H wants to buy shares in S, but no one owns the shares already. S issues the shares and the H is going to pay
the purchase price (cash/assets) to S. Assets does not go to outside party – stays in the group.
IF the Assets CA not = FV
DO NOT HAVE TO REVALUE. Stays at the CA, because H still has control over his own assets.
Additional guidance:
− Par 41-42: Step acquisition
− Par 43-44: Without consideration (unusual)
Measurement Period (Par 45-50)
− Estimate the A and L of the S
3
