Universit degli studi di PaviaUniversit degli studi di PaviaUniversit degli studi di PaviaUniversit degli studi di PaviaFacolt di EconomiaFacolt di Economia

a.a.a.a. 20142014--20152015

Lesson 10 International Accounting

Lelio Bigogno, Stefano Santucci

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IAS/IFRS: IAS/IFRS: IFRSIFRS 3 Business 3 Business CombinationCombination

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HistoryHistory of IFRS 3of IFRS 3 April 2001 Project carried over from the old IASC

July 2001 Project added to IASB agenda

5 December 2002 Exposure Draft Business Combinations and related exposure drafts proposing amendments to IAS 36 and IAS 38

31 March 2004 IFRS 3 Business Combinations and related amended versions of IAS 36 and IAS 38 - FRS 3 supersedes IAS 22

1 April 2004 Effective date of IFRS 3 1 April 2004 Effective date of IFRS 3

29 April 2004 Exposure Draft of Proposed Amendments to IFRS 3Combinations by Contract Alone or Involving Mutual EntitiesAfter considering comments on this ED, the Board decided to include the issues addressed in the ED in the 30 June 2005 exposure draft.

25 June 2005 Exposure Draft of Proposed Amendments to IFRS 3

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HistoryHistory of IFRS 3of IFRS 3

10 January 2008 Revised IFRS 3 (2008) issued. Click for Information about the 2008 revisions to IFRS 3 (2008)

1 July 2009 Effective date of IFRS 3 (2008)

6 May 2010 IFRS 3 amended for Annual Improvements to IFRSs 2010

12 December 2013 - Amended by Annual Improvements to IFRSs 20102012 Cycle(contingent consideration) - applicable for BC for which 2012 Cycle(contingent consideration) - applicable for BC for which acquisition date is on or after 1 July 2014.

12 December 2013 - Amended by Annual Improvements to IFRSs 20112013 Cycle (scope exception for joint ventures) - Effective for annualperiods beginning on or after 1 July 2014

AMENDEMENTS UDER CONSIDERATION BY IASB

Common Control Transactions

Post-implementation review - IFRS 3

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Key Key DefinitionsDefinitions

Business combination : A transaction or other event in which anacquirer obtains control of one or more businesses. Transactionssometimes referred to as 'true mergers' or 'mergers of equals' are also business combinations as that term is used in [IFRS 3]

Business : An integrated set of activities and assets that is capableof being conducted and managed for the purpose of providing a of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs or other economicbenefits directly to investors or other owners, members or participants

Acquisition date:The date on which the acquirer obtains controlof the acquiree

Acquirer: The entity that obtains control of the acquiree

Acquiree :The business or businesses that the acquirer obtainscontrol of in a business combination

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ScopeScope

IFRS 3 must be applied when accounting forfor

business combination

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ScopeScope

but does not apply to:

The formation of a joint venture*

The acquisition of an asset or group of assets The acquisition of an asset or group of assetsthat is not a business, although general guidanceis provided on how such transactions should beaccounted for

* Annual Improvements to IFRSs 20112013 Cycle, effective for annual periods beginningon or after 1 July 2014, amends this scope exclusion to clarify that is applies to theaccounting for the formation of a joint arrangement in the financial statements ofthe joint arrangement itself

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ScopeScope

Combinations of entities or businesses under common control (the IASB has a separate agenda project on common controltransactions) transactions)

Acquisitions by an investment entity of a subsidiary that is required to be measured at fair value through profit or loss under IFRS 10 Consolidated Financial Statements.

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DeterminingDetermining whenwhen a a transactiontransaction isis a a BCBC

IFRS 3 provides additional guidance on determining whether a transaction meets the definition of a business combinationdefinition of a business combination

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DeterminingDetermining whenwhen a a transactiontransaction isis a a BCBC

This guidance includes:

Business combinations can occur in variousways, such as by transferring cash, incurringBusiness combinations can occur in variousways, such as by transferring cash, incurringliabilities, issuing equity instruments (or anycombination thereof), or by not issuingconsideration at all (i.e. by contract alone)

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DeterminingDetermining whenwhen a a transactiontransaction isis a a BCBC

Business combinations can be structured in various ways to satisfy legal, taxation or otherobjectives, including one entity becoming a subsidiary of another, the transfer of net assetssubsidiary of another, the transfer of net assetsfrom one entity to another or to a new entity

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DeterminingDetermining whenwhen a a transactiontransaction isis a a BCBC

The business combination must involve the acquisition of a business, which generally hasthree elements: three elements:

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DeterminingDetermining whenwhen a a transactiontransaction isis a a BCBC

Inputs an economic resource (e.g. non-current assets, intellectual property) thatcreates outputs when one or more processesare applied to it

Process a system, standard, protocol, Process a system, standard, protocol, convention or rule that when applied to aninput or inputs, creates outputs (e.g. strategicmanagement, operational processes, resourcemanagement)

Output the result of inputs and processesapplied to those inputs.

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MethodMethod of Accounting of Accounting forfor Business Business CombinationsCombinations

Acquisition method

The acquisition method is used for allbusiness combinations.business combinations.

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MethodMethod of Accounting of Accounting forfor Business Business CombinationsCombinations acquisitionacquisition methodmethod

Steps in applying the acquisition method:

1. Identification of the 'acquirer' the combining entity thatobtains control of the acquiree;

2. Determination of the 'acquisition date' the date on2. Determination of the 'acquisition date' the date onwhich the acquirer obtains control of the acquiree;

3. Recognition and measurement of the identifiable assetsacquired, the liabilities assumed and any non-controllinginterest (NCI, formerly called minority interest) in theacquiree;

4. Recognition and measurement of goodwill or a gain froma bargain purchase

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MethodMethod of Accounting of Accounting forfor Business Business CombinationsCombinations AcquisitionAcquisition methodmethod

The acquirer is usually the entity thattransfers cash or other assets where the business combination is effected in this manner

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MethodMethod of Accounting of Accounting forfor Business Business CombinationsCombinations AcquisitionAcquisition MethodMethod

If the guidance in IFRS 10 does not clearlyindicate which of the combining entities is anacquirer, IFRS 3 provides additional guidancewhich is then consideredwhich is then considered

.

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MethodMethod of Accounting of Accounting forfor Business Business CombinationsCombinations AcquisitionAcquisition MethodMethod

The acquirer is usually the entity that transferscash or other assets where the business combination is effected in this mannercombination is effected in this manner

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MethodMethod of Accounting of Accounting forfor Business Business CombinationsCombinations AcquisitionAcquisition MethodMethod

The acquirer is usually, but not always, the entityissuing equity interests where the transaction iseffected in this manner, however the entity alsoconsiders other pertinent facts and circumstancesincluding:including:

relative voting rights in the combined entity after the business combination

the existence of any ilarge minority interest if no otherowner or group of owners has a significant voting interest

the composition of the governing body and senior management of the combined entity

the terms on which equity interests are exchanged

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MethodMethod of Accounting of Accounting forfor Business Business CombinationsCombinations AcquisitionAcquisition MethodMethod

The acquirer is usually the entity with the largestrelative size (assets, revenues or profit)

For business combinations involving multiple entities, For business combinations involving multiple entities, consideration is given to the entity initiating the combination, and the relative sizes of the combiningentities

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MethodMethod of Accounting of Accounting forfor Business Business CombinationsCombinations AcquisitionAcquisition MethodMethod

Acquisition date

An acquirer considers all pertinent facts and circumstances when determining the acquisition date, i.e. the date on which it obtains control of the acquiree. i.e. the date on which it obtains control of the acquiree. The acquisition date may be a date that is earlier or later than the closing date.

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MethodMethod of Accounting of Accounting forfor Business Business CombinationsCombinations AcquisitionAcquisition MethodMethod

IFRS 3 does not provide detailed guidanceon the determination of the acquisition date and the date identified should reflect all relevantfacts and circumstances. facts and circumstances.

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MethodMethod of Accounting of Accounting forfor Busine