Advanced Financial Accoun.ng (Spring 2023)
Summary
Note that Lectures 4 and 11 are not included, as these were tutorials.
Lecture 1 – Se+ng the Scene
1
,Lecture 2 - Business Combina9ons (IFRS 3)
Disclosure requirements:
• The impact on revenue and income in the year of acquisi@on
• Currently no requirement to disclose the impact in later years; under discussion with
IASB
Business combina-on = a transac@on or other event in which an acquirer obtains control of
one or more businesses
• Control = the 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:
E.g.,
o Majority of vo@ng rights
o Nomina@on of majority of members of decision-making body
o Contractual right to determine most relevant decisions, etc.
• Business = Integrated set of ac@vi@es 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 par@cipant
o At least an input and one substan@ve process
o Op@onal concentra@on test = If substan@ally all of the fair value of the
gross assets acquired is concentrated in a single asset or group of similar
iden@fiable assets, it is not a business combina@on. If not, further analysis
required
• Types:
o Acquisi@on of shares in another en@ty
o Acquisi@on of a business without acquiring shares; certain liabili@es and
assets can remain with the acquiree
o Combina@on of both
Scenarios:
• From NCI to business combina@on: Sell NCI at fair value -> book gain or loss -> buy
new stake at fair value
• From control to addi@onal interest: Reclassifica@on in equity -> no P&L effect
• Sell interest but s@ll hold > 50%: Reclassifica@on in equity -> no P&L effect
• Sell interest and hold < 50%: Book gain or loss on total % owned before -> buy NCI
at fair value
Acquirer = the combining en@ty that obtains control of the other combining en@@es or
businesses, usually the parent except in reverse acquisi@ons
• Reverse acquisi-on = acquisi@on in which the legal acquiror is the accoun@ng
acquiree and the legal acquiree is the accoun@ng acquiror. Scoped within IFRS 3 if
the accoun@ng acquiree contains a business
o E.g., Shareholders of A offer their shares to B in return for which they get
shares in B, such that they control B. Here A is the accoun@ng acquiror and
B the accoun@ng acquiree
2
, § E.g., Large unlisted en@ty is being taken over by dormant listed
en@ty; if A would be private and B public -> Purchase accoun@ng is
done by the legal acquiree
Date of business combina-on = date when control is transferred, i.e., date when
management of acquiror can take decisions in respect of acquiree
-> Relevant for determining fair value of business and net assets acquired
Value of business acquired = fair value at exchange date of:
• Assets given up
• Liabili@es incurred or assumed
• Equity instruments issued
By the acquiror + fair value of exis@ng interest in the acquiree owned by the acquiror
o Not including:
§ Costs of legal, tax and accoun@ng advice (expensed as incurred)
§ Costs of issuing shares (deducted from equity)
§ Costs of issuing bonds and loans (included in carrying amount of
financial liability)
-> Reason: acquired business must be recognized at fair value
Con-ngent considera-on = the es@mated amount of any adjustment that is probable and
can be measured reliably
• If the considera@on given up is subject to adjustment depending on the outcome
of future events
• Subsequent adjustments if actuals deviate from es@mates:
o If considera@on is paid in cash or other assets: adjustments recognized as
gain/loss in P&L
o If considera@on is secled in shares of the acquiror: no adjustment
(because the shares that would be addi@onally issued are in fact not)
• Note: if it is linked with employee services, it is expensed and not con@ngent
liability
Iden@fica@on net assets acquired = recognize all iden@fiable assets and liabili@es of the
acquiree that existed at the date of acquisi@on at their fair values, even if they had not been
recognized by the acquiree yet
• Con-ngent liabili-es = the higher of
o The amount that would be recognized under IAS 37 Provisions, and
o The ini@al amount
-> If chance increases, CL increases ; If chance decreases, CL remains
o Ouelow of future economic benefits need not be probable, but fair value
of CL must be reliably measurable
• Provisions = liabili@es that were exis@ng obliga@ons of the acquiree at acquisi@on
date can be recognized by acquiror
o Restructuring provisions can only be recognized if they were already a
liability of the acquiree
3
, • Intangible assets = fair value must be reliably measurable, but inflow of future
economic benefits need not be probable + meet defini@on of intangible asset
under IAS 38:
o Iden@fiable non-monetary asset without physical substance
o Separable from the en@ty, or arise from contractual or other legal rights
-> Internally generated intangibles are usually not in acquiree’s books, but
need to be recognized by acquiror -> Oien high increase in recognized
amount
• Provisional alloca-ons = provisional values in ini@al accoun@ng for the business
combina@on can be adjusted retroperspec@vely to reflect addi@onal informa@on
that becomes available within 12 months aier the combina@on
Goodwill = fair value of the business – fair value of net assets
o E.g., supplier/customer rela@onships, knowledge, synergies, brand name
• Net assets = assets – liabili@es = shareholders equity
->
• Posi-ve goodwill: annual impairment test, and with indicators of impairment
o Cri@cism: goodwill impairment recognized too licle too late; internally
generated goodwill cannot be capitalized, but acquired goodwill can be
and stays on BS
• Nega-ve goodwill: probably due to error -> redo assessment -> book as gain
-> Companies oien start restructuring soon aier acquisi@on, to match gain on
goodwill and restructuring expense in the same period
Calcula@ng goodwill:
1. Full goodwill method = the difference between fair value of the business and fair
value of the net assets acquired; alloca@ng part to NCI
2. Par-al goodwill method = the difference between the actual considera@on given up
and the propor@onate share in net assets of the acquiree
-> Op@on 1 leads to higher goodwill, because it includes goodwill allocable to NCI
-> Companies are free to choose which method to use; usually consider consequences for
financial ra@os
Control premium = the premium you are willing to pay to gain control
-> ! Take into account difference between goodwill and control premium in journal entries
4
Summary
Note that Lectures 4 and 11 are not included, as these were tutorials.
Lecture 1 – Se+ng the Scene
1
,Lecture 2 - Business Combina9ons (IFRS 3)
Disclosure requirements:
• The impact on revenue and income in the year of acquisi@on
• Currently no requirement to disclose the impact in later years; under discussion with
IASB
Business combina-on = a transac@on or other event in which an acquirer obtains control of
one or more businesses
• Control = the 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:
E.g.,
o Majority of vo@ng rights
o Nomina@on of majority of members of decision-making body
o Contractual right to determine most relevant decisions, etc.
• Business = Integrated set of ac@vi@es 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 par@cipant
o At least an input and one substan@ve process
o Op@onal concentra@on test = If substan@ally all of the fair value of the
gross assets acquired is concentrated in a single asset or group of similar
iden@fiable assets, it is not a business combina@on. If not, further analysis
required
• Types:
o Acquisi@on of shares in another en@ty
o Acquisi@on of a business without acquiring shares; certain liabili@es and
assets can remain with the acquiree
o Combina@on of both
Scenarios:
• From NCI to business combina@on: Sell NCI at fair value -> book gain or loss -> buy
new stake at fair value
• From control to addi@onal interest: Reclassifica@on in equity -> no P&L effect
• Sell interest but s@ll hold > 50%: Reclassifica@on in equity -> no P&L effect
• Sell interest and hold < 50%: Book gain or loss on total % owned before -> buy NCI
at fair value
Acquirer = the combining en@ty that obtains control of the other combining en@@es or
businesses, usually the parent except in reverse acquisi@ons
• Reverse acquisi-on = acquisi@on in which the legal acquiror is the accoun@ng
acquiree and the legal acquiree is the accoun@ng acquiror. Scoped within IFRS 3 if
the accoun@ng acquiree contains a business
o E.g., Shareholders of A offer their shares to B in return for which they get
shares in B, such that they control B. Here A is the accoun@ng acquiror and
B the accoun@ng acquiree
2
, § E.g., Large unlisted en@ty is being taken over by dormant listed
en@ty; if A would be private and B public -> Purchase accoun@ng is
done by the legal acquiree
Date of business combina-on = date when control is transferred, i.e., date when
management of acquiror can take decisions in respect of acquiree
-> Relevant for determining fair value of business and net assets acquired
Value of business acquired = fair value at exchange date of:
• Assets given up
• Liabili@es incurred or assumed
• Equity instruments issued
By the acquiror + fair value of exis@ng interest in the acquiree owned by the acquiror
o Not including:
§ Costs of legal, tax and accoun@ng advice (expensed as incurred)
§ Costs of issuing shares (deducted from equity)
§ Costs of issuing bonds and loans (included in carrying amount of
financial liability)
-> Reason: acquired business must be recognized at fair value
Con-ngent considera-on = the es@mated amount of any adjustment that is probable and
can be measured reliably
• If the considera@on given up is subject to adjustment depending on the outcome
of future events
• Subsequent adjustments if actuals deviate from es@mates:
o If considera@on is paid in cash or other assets: adjustments recognized as
gain/loss in P&L
o If considera@on is secled in shares of the acquiror: no adjustment
(because the shares that would be addi@onally issued are in fact not)
• Note: if it is linked with employee services, it is expensed and not con@ngent
liability
Iden@fica@on net assets acquired = recognize all iden@fiable assets and liabili@es of the
acquiree that existed at the date of acquisi@on at their fair values, even if they had not been
recognized by the acquiree yet
• Con-ngent liabili-es = the higher of
o The amount that would be recognized under IAS 37 Provisions, and
o The ini@al amount
-> If chance increases, CL increases ; If chance decreases, CL remains
o Ouelow of future economic benefits need not be probable, but fair value
of CL must be reliably measurable
• Provisions = liabili@es that were exis@ng obliga@ons of the acquiree at acquisi@on
date can be recognized by acquiror
o Restructuring provisions can only be recognized if they were already a
liability of the acquiree
3
, • Intangible assets = fair value must be reliably measurable, but inflow of future
economic benefits need not be probable + meet defini@on of intangible asset
under IAS 38:
o Iden@fiable non-monetary asset without physical substance
o Separable from the en@ty, or arise from contractual or other legal rights
-> Internally generated intangibles are usually not in acquiree’s books, but
need to be recognized by acquiror -> Oien high increase in recognized
amount
• Provisional alloca-ons = provisional values in ini@al accoun@ng for the business
combina@on can be adjusted retroperspec@vely to reflect addi@onal informa@on
that becomes available within 12 months aier the combina@on
Goodwill = fair value of the business – fair value of net assets
o E.g., supplier/customer rela@onships, knowledge, synergies, brand name
• Net assets = assets – liabili@es = shareholders equity
->
• Posi-ve goodwill: annual impairment test, and with indicators of impairment
o Cri@cism: goodwill impairment recognized too licle too late; internally
generated goodwill cannot be capitalized, but acquired goodwill can be
and stays on BS
• Nega-ve goodwill: probably due to error -> redo assessment -> book as gain
-> Companies oien start restructuring soon aier acquisi@on, to match gain on
goodwill and restructuring expense in the same period
Calcula@ng goodwill:
1. Full goodwill method = the difference between fair value of the business and fair
value of the net assets acquired; alloca@ng part to NCI
2. Par-al goodwill method = the difference between the actual considera@on given up
and the propor@onate share in net assets of the acquiree
-> Op@on 1 leads to higher goodwill, because it includes goodwill allocable to NCI
-> Companies are free to choose which method to use; usually consider consequences for
financial ra@os
Control premium = the premium you are willing to pay to gain control
-> ! Take into account difference between goodwill and control premium in journal entries
4
