International Financial Reporting Standards
Quiz:
Business combinations
and consolidated
financial statements
Joint World Bank and IFRS Foundation
‘train the trainers’ workshop hosted by the
ECCB, 30 April to 4 May 2012
The views expressed in this presentation are those of the
presenter, not necessarily those of the IASB or IFRS Foundation.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Quiz: Business combinations
2
Question 1:
Entity A owns a 60 per cent voting interest in Entity B.
Entity B owns a 70 per cent voting interest in Entity C.
How should Entity A account for its investment in Entity C
in its consolidated financial statements?
a. consolidate Entity C.
b. account for investment in Entity C using the equity
method.
c. account for its investment in Entity C using the policy it
has adopted to account for associates
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Quiz: Business combinations
3
Question 1:
Entity A owns a 60 per cent voting interest in Entity B.
Entity B owns a 70 per cent voting interest in Entity C.
How should Entity A account for its investment in Entity C
in its consolidated financial statements?
a. consolidate Entity C. Note confusion is because A
effective interest is 42%, but it has control
b. account for investment in Entity C using the equity
method.
c. account for its investment in Entity C using the policy it
has adopted to account for associates
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Quiz: Business combinations
4
Question 2:
The facts are the same as those in Question 1. Determine
the appropriate percentage for the attribution of postacquisition increases in Entity C’s equity to Entity A.
a. 70 per cent.
b. 60 per cent.
c. 42 per cent.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Quiz: Business combinations
5
Question 2:
The facts are the same as those in Question 1. Determine
the appropriate percentage for the attribution of postacquisition increases in Entity C’s equity to Entity A.
a. 70 per cent.
b. 60 per cent.
c. 42 per cent.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Quiz: Business combinations
6
Question 3:
Does investor A have control?
An investor holds 48% of the equity (and related voting
rights) of an investee. The remaining equity and voting
rights are held by numerous other shareholders, none
individually holding more than 1% of the voting rights.
None of the shareholders has arrangements to consult
any of the others or make collective decisions.
Decisions about the relevant activities of the investee
require the approval of a majority of votes cast at relevant
shareholders’ meetings.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Quiz: Business combinations
7
Question 3 continued:
70% of the voting rights of the investee have been cast at
recent relevant shareholder meetings, with the exception
of one meeting when 78% of the voting rights were cast.
Decisions taken at that meeting included changing the
financing arrangements entered into by the investee that
could affect future dividend payments to shareholders.
There are no other contractual arrangements that would
affect the assessment of power.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Quiz: Business combinations
8
Question 3:
Given the level of shareholder participation and
considering the size and dispersion of shareholdings, in
accordance with IFRS 10, the investor with 48 per cent of
the voting rights would conclude that it controls the
investee:
(i) its rights are sufficient to give it power over the
investee (ie it has the practical ability to direct the
relevant activities of the investee unilaterally);
(ii) it has exposure to variable returns; and
(iii) the ability to affect those variable returns through its
voting rights.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Quiz: Business combinations
9
Question 3 continued:
In accordance with IFRS 12, there are a number of
disclosures that the investor would be required to make to
help users understand and evaluate the nature of its
relationship with the investee. Those disclosures would
include:
(i) disclosures about significant judgements it has made
in determining that it has control of the investee; and
(ii) disclosures about non-controlling interests in the
investee (eg summarised financial information about
the investee).
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Quiz: Business combinations
10
Question 4:
An investment vehicle is created to purchase a portfolio of
financial assets, funded by debt and equity instruments
issued to a number of investors.
The equity tranche is designed to absorb the first losses
incurred by the portfolio and to receive residual returns of
the investment vehicle.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Quiz: Business combinations
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Question 4 continued:
Investor A holds 35 per cent of the equity tranche and is
also the asset manager, managing the vehicle’s asset
portfolio within portfolio guidelines.
Managing the fund includes decisions about the selection,
acquisition and disposal of the assets within that
portfolio’s guidelines and the management upon default of
any asset in the portfolio.
Investor A also receives market-based fixed and
performance-related fees for its asset management
services.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Quiz: Business combinations
12
Question 4:
Investor A would, in accordance with IFRS 10, conclude
that it controls the investment vehicle and must
consolidate it:
(i) investor A has the ability to direct the relevant
activities;
(ii) has rights to variable returns from the performance of
the vehicle; and
(iii) has the ability to use its power to affect the returns it
receives.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Quiz: Business combinations
Question 4 continued:
In accordance with IFRS 12, there are a number of
disclosures that Investor A must make to help users
understand and evaluate the nature
of its relationship with the consolidated investment
vehicle.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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Quiz: Business combinations
14
Question 5:
Fund Manager A has a 45% shareholding in
Fund B, which it also manages within defined parameters.
The constitution of the fund defines the fund’s purpose
and sets out the investment parameters within which the
fund manager can invest. The constitution also requires
Fund Manager A to act in the best interests of the
shareholders. Within the defined parameters, however,
the investment manager (Fund Manager A) has discretion
about the assets in which Fund B will invest.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Quiz: Business combinations
15
Question 5:
Fund Manager A would, in accordance with
IFRS 10, conclude that it controls Fund B because:
(i) it has the power to direct Fund B’s relevant activities
through directing the investment decisions;
(ii) has exposure to variable returns from Fund B; and
(iii) can use its power to affect the amount of its returns.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Quiz: Business combinations
16
Question 5 continued:
In accordance with IFRS 12, there are a number of
disclosures that Fund Manager A would be required to
make to help users understand and evaluate the nature of
its relationship with Fund B.
In addition, Fund Manager A would need to disclose any
significant risks associated with Fund B, including the
terms of any contractual arrangements that require it to
provide financial support to Fund B.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Quiz: Business combinations
17
Question 6:
Investor A holds 70% of the voting rights of Investee C,
with Investor B holding the remaining 30% of the voting
rights as well as an option to acquire half of the voting
rights of Investor A.
The option can be exercised over the next two years but is
exercisable at a fixed price that is currently deeply out of
the money, and the option is expected to remain out of the
money over the course of the three-year period.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Quiz: Business combinations
18
Question 6:
Investors A and B would, in accordance with
IFRS 10, look at the purpose and design of the potential
voting rights, and their terms and conditions, to assess
whether they are substantive. In this case, Investors A
and B would conclude that the potential voting rights are
not substantive because the exercise price creates a
barrier to exercise during the exercise period. Therefore,
Investor A would consolidate Investee C because it has
the current ability to direct the relevant activities of that
investee.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Quiz: Business combinations
19
Question 6 continued:
In accordance with IFRS 12, there are a number of
disclosures that Investor A would have to make to help
users understand and evaluate the nature of its
relationship with Investee C. Those disclosures would
include:
(i) disclosures about non-controlling interests in Investee
C; and
(ii) significant judgements it has made in determining that
it controls Investee C, including the terms and
conditions of the potential voting rights that Investor B
holds.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Quiz: Business combinations
20
Question 6 continued:
In addition, Investor B must make disclosures about its
interests in Investee C. Investor B must also make
disclosures that would help users to understand the
nature and extent of its interest in Investee C and the risks
associated with that interest. For example, Investor B
would disclose the reasons why it concluded that it does
not control Investee C, which may mean disclosing
information about the terms and conditions of the potential
voting rights it holds.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Quiz: Business combinations
21
Question 7:
On 1/1/20X1 A has 100 issued voting shares. On
2/1/20X1 A acquires 100% of B from B’s shareholders
in exchange for 150 A voting shares.
Who is the acquirer in this business combination?
a. A?
b. B?
c. Neither A nor B?
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Quiz: Business combinations
22
Question 7:
On 1/1/20X1 A has 100 issued voting shares. On
2/1/20X1 A acquires 100% of B from B’s shareholders
in exchange for 150 A voting shares.
Who is the acquirer in this business combination?
a. A?
b. B? B’s shareholders now own 60% of the combined
entity. A’s shareholders own 40% of the combined entity
c. Neither A nor B?
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Quiz: Business combinations
23
Question 8:
A & B transfer their businesses to Z. In return A & B
each receive 50% of the voting shares in Z. A & B
each appoint 3 members to Z’s 6 member board of
directors. A also appoints the chairman of Z. The
chairman has a casting vote.
Who is the acquirer?
a. A?
b. B?
c. Neither A nor B?
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Quiz: Business combinations
24
Question 8:
A & B transfer their businesses to Z. In return A & B
each receive 50% of the voting shares in Z. A & B
each appoint 3 members to Z’s 6 member board of
directors. A also appoints the chairman of Z. The
chairman has a casting vote.
Who is the acquirer?
a. A? The casting vote means that A will ultimately control
the assets of Z
b. B?
c. Neither A nor B?
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Questions or comments?
Expressions of individual views
by members of the IASB and its
staff are encouraged.
The views expressed in this
presentation are those of the
presenter.
Official positions of the IASB on
accounting matters are
determined only after extensive
due process and deliberation.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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The requirements are set out in International Financial
Reporting Standards (IFRSs), as issued by the IASB at
1 January 2012 with an effective date after 1 January
2012 but not the IFRSs they will replace.
The IFRS Foundation, the authors, the presenters and
the publishers do not accept responsibility for loss
caused to any person who acts or refrains from acting
in reliance on the material in this PowerPoint
presentation, whether such loss is caused by
negligence or otherwise.
© 2011
IFRS Foundation
| 30 Cannon
| London
6XH | EC4M
UK. www.ifrs.org
©
IFRS Foundation
| 30Street
Cannon
StreetEC4M
| London
6XH | UK | www.ifrs.org