Business Combinations
 Business combination is defined as:
‘A transaction or other event in which an acquirer obtains
control of one or more businesses’.
NZ IFRS 3 Appendix A
For example:
1. A Ltd acquires all assets and liabilities of B Ltd for
shares, cash or other consideration. B Ltd could
continue as a company (holding shares in A Ltd), or
on receipt of consideration B Ltd could liquidate.
2. C Ltd is formed to acquire all assets and liabilities
of A Ltd and B Ltd. A Ltd and B Ltd liquidate.
Consolidated Financial Statements
Parent and subsidiary
 If one entity (B Ltd) is controlled by another (A Ltd),
the controlling entity (A Ltd) is a parent and the
company controlled a subsidiary (B Ltd).
 A Ltd is the acquirer and B Ltd is the acquiree.
 Note that not all the net assets need to be acquired –
it could be a proportion. Provided that proportionate
interest constitutes control, the remaining
percentage belongs to the non-controlling
interests.
 A parent entity is required to present consolidated
financial statements (NZ IFRS 10, para 4).
Acquisition method
 The acquisition method is used for all business
combinations (NZ IFRS 3 para 4).
Acquisition Method
Step 1: Identify the acquirer
Step 2: Determining the acquisition date
Step 3: Recognising and measuring the identifiable
assets, liabilities and non-controlling interest
Step 4: Recognising and measuring goodwill
or a gain from a bargain purchase
The Acquirer – and Control (Step 1)
 The acquirer is the entity that obtains control of the
acquiree (NZ IFRS 3 para 7).
 NZ IFRS 10 shall be used to identify the acquirer
(parent). Under paragraph 7 of NZ IFRS 10, the
following three elements are required in order for an
entity to have control:
Power over the investee (subsidiary)
2. Exposure or rights to variable returns from its
involvement with the investee
3. The ability to use its power over the subsidiary to affect
the amount of the investor’s (parent’s) returns
 All three elements must be present for control to exist.
1.
The Acquirer – and Control (Step 1)
 Power
 Power is defined as existing rights that give the current
ability to direct the relevant activities. It arises from rights
which generally arise from a legal contract.
e.g. Voting rights, rights to appoint, reassign or remove the
subsidiaries’ key management personnel.
 Note that voting rights of less than 50% can result in an investor
having power over a subsidiary (NZ IFRS para B38). The
following factors need to be considered when assessing whether
there is power in this case:

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Size of voting interest
Dispersion of other shareholders
Attendance at AGMs
Existence of contracts
The Acquirer – and Control (Step 1)
 The second element of the control definition requires
that the investor has the rights to variable returns from
the investee.
 Examples of returns include dividends, economies of scale, cost
savings, gaining access to proprietary knowledge, and
remuneration for servicing a subsidiaries’ assets or liabilities.
 The third element requires that the parent have the
ability to increase its benefits and limit its losses from the
subsidiary’s activities.
 All three elements must be present for control to exist
 No control = no parent-subsidiary relationship = no
consolidation
Determining the acquisition date
(Step 2)
 Acquisition date is the date that the acquirer
obtains control of the acquiree (NZ IFRS 3 para
8)
 Determining the correct acquisition date is
important as the following are affected by the
choice of date:
 The fair values of the net assets acquired
 Consideration given, where the consideration takes a
non-cash form
 Measurement of the non-controlling interest
Recognising and measuring the identifiable
assets, liabilities and non-controlling interest
(Step 3)
 The acquirer identifies and measures the
identifiable assets acquired and the liabilities
(including contingent liabilities) assumed at their
acquisition-date fair values at acquisition date
(NZ IFRS 3 paras 15 and 18)
 If the consideration given on acquisition exceeds
the fair value of the net assets acquired, goodwill
is recognised
Recognising and measuring goodwill
or a gain from a bargain purchase
(Step 4)
Goodwill
 Goodwill represents the future economic
benefits arising from other assets acquired in a
business combination that are not individually
identified and separately recognised (NZ IFRS 3
App A)
 This goodwill asset is initially measured at cost
but is subject to annual impairment testing.
Goodwill is not amortised.
Recognising and measuring goodwill
or a gain from a bargain purchase
(Step 4)
Bargain purchase
 If the net asset fair value exceeds the
purchase price, the values are all reassessed to
ensure correctness (NZ IFRS 3 para 36)
 However, if the resulting gain remains it must be
recognised in profit or loss on the acquisition
date (para 34)