ACCOUNTING 3AB
UNIT 15 IFRS 3 BUSINESS COMBINATIONS
Introduction
Accounting for business activities…
Accounting refers to the process of documenting the results of business activities and this process is
also known as record keeping;
The process therefore involves identifying which of the 5 elements you are dealing with for each business
activity:
1.
2.
3.
4.
5.
Asset
Liability
Expense
Income
Equity
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What happens where the business activity is “buying another business”?
Nothing different to the previous slide would happen. The process of identifying which of the 5 elements
you are dealing with when “buying another business” would still continue:
When “buying another business” are you buying A, L, E, I or E?
• Because you are not acquiring goods or services for immediate consumption in your business we
can therefore eliminate expenses and income.
When “buying another business” we are either buying assets and assuming liabilities or buying equity
Let us recap on the concept of business combinations as per IFRS 3 Business Combinations
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IFRS 3 Recap…
What is a business combination?
•
If the acquisition does not meet
the definition of a “business” then
it’s a normal asset acquisition –
Refer to example 2.2 in the
textbook
A transaction or other event in which an acquirer obtains control of one or more businesses.
What is a business?
• An integrated set of activities and assets that is capable of being conducted and managed for the
purpose of providing goods or services to customers, generating investment income.
In the transaction of “buying another business” the acquirer obtains control and obtains that control in one
of two ways:
Reference from previous slide
1. Purchase the assets and liabilities of the acquiree; or
When “buying another
business” we are either buying
2. Purchase the shares in an acquiree (Investment in Shares)
assets and assuming liabilities
or buying equity
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Accounting for a Business Combination
• Accounting Treatment refers to:
 Identification
 Recognition
 Measurement
 Presentation
 Disclosure
• Applicable accounting standard is IFRS 3 Business Combinations
• Chapter 2, Group Statements Volume 1, 17th edition
• By applying the “acquisition method”
 Identify the acquirer
 Determine the acquisition date
 Recognise and measure the identifiable assets acquired, the liabilities assumed and any noncontrolling interests
 Recognise and measure goodwill or a gain from a bargain purchase
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Identification
Identification refers to DEFINITIONS
• Important and applicable definitions include:
• Acquisition date
The date on which the acquirer obtains control of the acquiree
• Acquirer (Buyer)
The entity that obtains control of the acquiree
• Acquiree (Seller)
The business or businesses that the acquirer obtains control of in a business combination
• Business combination
A transaction or other event in which an acquirer obtains control of one or more businesses.
• Business
An integrated set of activities and assets that is capable of being conducted and managed for the
purpose of providing goods or services to customers, generating investment income.
• Control
An investor controls an investee when 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
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Recognition
How is a business combination formed?
Other words used to describe the two methods:
1. Direct acquisition of assets and/or takeover
of liabilities or
2. Indirect acquisition of assets and/or
assumption of liabilities through an equity
investment of another entity
Two methods to forming a business combination:
1. Purchase the assets and liabilities of Acquiree
2. Purchase shares in an Acquiree (Investment in Shares)
Where 1 or 2 is achieved then the “element” can be recognized in the books of the acquirer.
Reference from previous slide
When “buying another
business” we are either buying
assets and assuming liabilities
or buying equity
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Recognition cont…
Recognition principle
The acquirer shall:
• at the acquisition date,
• RECOGNISE, separately from goodwill,
• the identifiable assets acquired, the liabilities assumed and any non-controlling interests in
the acquiree.
Recognition conditions
• Firstly, the identifiable assets acquired and liabilities assumed must meet the definitions of
assets and liabilities in the Conceptual Framework.
• Secondly, the identifiable assets acquired and liabilities assumed must be part of what the
acquirer and acquiree exchanged in the business combination transaction and not the result of
separate transactions.
• Thirdly, the acquirer’s application of the recognition principle and conditions may result in
recognising some assets and liabilities that the acquiree had previously not recognised as assets
and liabilities in its pre-acquisition financial statements.
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Acquisition of assets and Liabilities…
1-Jan-19 Dr Asset 1 (Eg PPE)
XXX
Dr Asset 1 (Eg Land and Buildings
XXX
Dr Asset 1 (Eg Receivables)
XXX
Dr Asset 1 (Eg Bank)
XXX
Cr Liability 1 (Eg Payables)
YYY
Cr Liability 1 (Eg Long Term Loan)
YYY
Dr Goodwill/ Cr Gain on Bargain Purchase Price
WWW
Cr Bank
ZZZ
Cr Equity/Share Capital
ZZZ
Initial recognition of the acquisition in the Separate financial statements of Acquirer Ltd
1-Jan-19 Dr Other expenses/Future costs (Eg legal and retrenchment) XXX
Cr Bank
Account for separate costs or future expenses separately
YYY
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Investment in Shares…
1-Jan-19 Dr Investment in Shares: Acquiree Ltd
XXX
Cr Bank
YYY
Initial recognition of the acquisition in the Separate financial statements of Acquirer Ltd
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Measurement
The acquirer shall measure the identifiable assets acquired and the liabilities assumed at their acquisition-date
fair values.
This is best illustrated by way of examples.
Purchase the assets and liabilities of the acquiree
• Refer to video tutorial 1 where an example on acquiring the assets and liabilities of another entity in
terms of a business combination is discussed in detail. (example 2.17 in Group Statements Volume 1,
17th edition)
Investment is shares of the acquiree
• Refer to video tutorial 2 where an example on acquiring an interest in an entity’s equity shares in terms
of a business combination is discussed in detail. (example 2.18 in Group Statements Volume 1, 17th
edition)
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Presentation and Disclosure
For each business combination that occurred during a financial a reporting period, certain disclosure
requirements by the acquirer are necessary.
Refer to example 2.19 in Group Statements Volume 1, 17th edition for an illustration of the disclosure
requirements, pg73 to pg77.
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END
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