IFRS Course IFRS 3 Business Combinations Università degli Studi di Bergamo

Transcription

1 IFRS Course IFRS 3 Business Combinations Università degli Studi di Bergamo Livio Ferrini Bergamo, 13 April 2015

2 What will you learn? By completing this module, you will be able to: 1) Explain the definition of a business combination 2) Describe the steps in the acquisition accounting process 3) Explain how IFRS 3 applies after the business combination 4) Evaluate the quality of disclosures IFRS Course 2015 Business Combinations 2

3 Agenda Scope and definitions The acquisition accounting process After the business combination Know your journals Disclosure The closing IFRS Course 2015 Business Combinations 3

4 What is a business combination? A business combination is a transaction or other event in which an acquirer obtains control of one or more businesses IFRS Course 2015 Business Combinations 4

5 When does IFRS 3 apply? IFRS 3 applies to all business combinations IFRS 3 does not apply to: Formation of a joint venture Common control transactions Acquisition of asset / group of assets that is not a business Cost allocated to identifiable assets / liabilities on basis of relative fair values IFRS Course 2015 Business Combinations 5

6 What is a business? A business is an integrated set of activities and assets capable of being managed to provide a return to investors via dividends, lower costs or other economic benefits Inputs Processes Ability to create outputs Rebuttable presumption that a group of assets in which goodwill is present is a business IFRS Course 2015 Business Combinations 6

7 What is a business? In certain transactions, it may be difficult to conclude whether the definition of a business has been met. Indicators to be considered include, but are not limited to, the following: Integration: A collection of assets without connecting activities is unlikely to be a business Taking over contracts with employees: If employment contracts are transferred to acquirer, this may be an indicator that a business has been acquired Outsourcing: Taking over outsourced revenue-generating activities of the acquiree could indicate that the processes and activities necessary to generate revenues are in place and that the group of assets acquired is a business Exclusion of some components of a business: Generally, exclusion of some components of a business does not preclude classification of an acquisition as a business combination. However, judgment is required IFRS Course 2015 Business Combinations 7

8 A question for you: Definition Lila-Production acquires a production plant (machines and tools) and some inventory from a third party Lila-Production integrates its existing production line into the production plant but does not take over employees, operational processes and distribution networks Is this transaction a business combination? IFRS Course 2015 Business Combinations 8

9 A question for you: Solution Lila-Production acquires a production plant (machines and tools) and some inventory from a third party Lila-Production integrates its existing production line into the production plant but does not take over employees, operational processes and distribution networks Is this transaction a business combination? Lila-Production acquires some inputs (machines, tools, inventory) but does not take over any other element that would make the acquired set a business. Some key inputs such as a distribution network or employees are missing. There are no processes. As a consequence, the transaction is not a business combination. IFRS Course 2015 Business Combinations 9

10 Agenda Scope and definitions The acquisition accounting process After the business combination Know your journals Disclosure The closing IFRS Course 2015 Business Combinations 10

11 Steps to acquisition accounting Step 1: Identify the acquirer Step 2: Determine the acquisition date Step 3: Identify and measure consideration transferred Step 4: Identify and measure identifiable net assets Step 5: Measure NCI Step 6: Determine goodwill or gain on a bargain purchase Step 7: Recognise any measurement period adjustments NCI = non-controlling interests IFRS Course 2015 Business Combinations 11

12 Overview of the acquisition method Goodwill Consideration transferred NCI Fair value of net identifiable assets Option to measure NCI at acquisition date IFRS Course 2015 Business Combinations 12

13 Step 1: Identify the acquirer The acquirer is the entity that obtains control of the business 100% Interest % 50% Control Joint control Significant influence 20% 0% No influence IFRS Course 2015 Business Combinations 13

14 Step 1: Identify the acquirer The acquirer is the entity that obtains control of the business Use IAS 27 to determine who has control Consider additional factors identified in IFRS 3 Relative voting rights in combined entity Existence of large minority voting interest in combined entity Composition of governing body and senior management of combined entity Terms of exchange of equity instruments Relative size of entities IFRS Course 2015 Business Combinations 14

15 Step 2: Determine the acquisition date The acquisition date is the date on which acquirer obtains control of acquiree Date on which fair values of identifiable assets acquired and liabilities assumed determined and goodwill is measured Date from which comprehensive income of is included in consolidated financial statements of acquirer IFRS Course 2015 Business Combinations 15

16 A question for you: Acquisition date Star-Search and Lila-NewPlanet are the dominant traders in the Outer Regions On 1 June Lila-NewPlanet makes a bid for Star-Search and agrees the terms of the acquisition and purchase price Immediately thereafter, the Planet Lila Council announces that the proposed transaction is to be scrutinised as it may violate intergalactic competition laws The finalisation of the acquisition is subject to Planet Lila Council s approval What is the acquisition date? IFRS Course 2015 Business Combinations 16

17 A question for you: Acquisition date Star-Search and Lila-NewPlanet are the dominant traders in the Outer Regions On 1 June Lila-NewPlanet makes a bid for Star-Search and agrees the terms of the acquisition and purchase price Immediately thereafter, the Planet Lila Council announces that the proposed transaction is to be scrutinised as it may violate intergalactic competition laws The finalisation of the acquisition is subject to Planet Lila Council s approval What is the acquisition date? The acquisition date cannot be earlier than the date that approval is obtained from the competition authority, as this is a substantive hurdle to be overcome before Lila- NewPlanet controls Star-Search IFRS Course 2015 Business Combinations 17

18 Step 3: Identify and measure consideration transferred Consideration transferred is measured at fair value at the acquisition date, and includes: Assets transferred Liabilities incurred to previous owners Equity instruments issued Acquisition-related costs excluded from consideration transferred, and expensed as incurred Costs related to issue of equity or debt recognised in accordance with financial instruments standards IFRS Course 2015 Business Combinations 18

19 Contingent consideration Contingent consideration is obligation of acquirer to transfer additional assets / equity interests to former owners as part of exchange for control if specified future events occur/conditions are met Recognised at fair value at acquisition date Classified as liability or equity according to IAS 32 or relevant IFRSs May be an asset IFRS Course 2015 Business Combinations 19

20 A question for you: Contingent consideration When obtaining control of Lila-Domestic, Lila-Droid pays consideration of L$ 120,000 Lila-Droid also agrees to pay an additional amount equal to 5% of the following year s profit in excess of L$ 30,000 Lila-Domestic historically has made profits of L$ 20,000 L$ 30,000 each year Fair value of contingent consideration at acquisition date is L$ 100, but it is not considered probable that Lila-Domestic will meet the post-acquisition threshold What amount should Lila-Droid recognise at the acquisition date as part of consideration transferred? IFRS Course 2015 Business Combinations 20

21 A question for you: Contingent consideration When obtaining control of Lila-Domestic, Lila-Droid pays consideration of L$ 120,000 Lila-Droid also agrees to pay an additional amount equal to 5% of the following year s profit in excess of L$ 30,000 Lila-Domestic historically has made profits of L$ 20,000 L$ 30,000 each year Fair value of contingent consideration at acquisition date is L$ 100, but it is not considered probable that Lila-Domestic will meet the post-acquisition threshold Lila-Droid should recognise 100 as part of consideration transferred at the acquisition date. This is irrespective of whether the payment is probable. In this example, it does not seem as though payment of contingent consideration is probable given that Lila-Domestic has historically made profits of 20,000 30,000, and the contingent consideration is for payments in excess of L$ 30,000. Irrespective of that fact, Lila-Droid recognises the fair value of contingent consideration, which reflects the scenario-weighted measure of such payments. IFRS Course 2015 Business Combinations 21

22 Determining what is part of the business combination Transactions that are separate from the business combination Transaction entered into primarily for benefit of acquiree / former owner Likely to be part of the business combination Transaction entered into primarily for benefit of combined entity Likely to be separate from the business combination Settlement of pre-existing relationships Remuneration of employees or former owners of the acquiree for future services Reimbursement of the acquiree or its previous owners for paying the acquirer s acquisition related costs IFRS Course 2015 Business Combinations 22

23 Payments to employees who are former owners of acquiree Automatic forfeiture of payments when employment is terminated? yes no Remuneration for future services Additional factors to consider Duration of continuing employment Incremental payments to employees Level of remuneration Formula for determining consideration Linkage to valuation Number of shares owned Other agreements and issues IFRS Course 2015 Business Combinations 23

24 A question for you: Contingent payment to employees In connection with the acquisition of Lila-Domestic, Lila-Droid offers cash bonus to certain senior-level employees of Lila-Domestic who also previously were shareholders of Lila-Domestic Payment is contingent on them remaining employed by the group for 2 years after the acquisition The amount of the bonus is determined based on a multiple of earnings Is this contingent payment part of the consideration transferred? IFRS Course 2015 Business Combinations 24

25 A question for you: Contingent payment to employees In connection with the acquisition of Lila-Domestic, Lila-Droid offers cash bonus to certain senior-level employees of Lila-Domestic who also previously were shareholders of Lila-Domestic Payment is contingent on them remaining employed by the group for 2 years after the acquisition The amount of the bonus is determined based on a multiple of earnings Is this contingent payment part of the consideration transferred? The bonuses represent compensation for postcombination services, as the right to a bonus is forfeited if an employee leaves. An evaluation of the other factors would not overcome this conclusion IFRS Course 2015 Business Combinations 25

26 Step 4: Measure identifiable net assets Recognition Must meet definition of asset / liability at acquisition date Must be exchanged as part of acquisition Classification and designation Made at acquisition date, irrespective of classification made by acquiree Exception for leases and insurance contracts acquired Measurement Measured at fair value at acquisition date IFRS Course 2015 Business Combinations 26

27 Which of the following liabilities will be recognised in the acquisition accounting? Cost of a contemplated restructuring of the acquiree Upgrade of the acquiree s plant or store locations to meet specifications of the acquirer Cost of consultants engaged to identify combined entity goals Payment due to CEO of acquiree resulting from a change in a control clause in his employment contract IFRS Course 2015 Business Combinations 27

28 Fair value measurement in a business combination Fair value is amount for which an asset could be exchanged or liability settled between knowledgeable, willing parties in an arm s length transaction Market approach Income approach Cost approach i.e. from the perspective of an hypothetical market participant IFRS Course 2015 Business Combinations 28

29 Intangible assets (1) All identifiable intangible assets recognised separately from goodwill Separable or Arises from contractual or other legal rights Measured at fair value without consideration of intended use IFRS Course 2015 Business Combinations 29

30 Intangible assets (2) Marketing related In-process research and development Customer-related Technology-based Artistic-related Contract-based IFRS Course 2015 Business Combinations 30

31 Fair value of other assets and liabilities Property plant and equipment Inventories Deferred revenue Lands and buildings: Usually by reference to market-based evidence Plant and equipment: Usually by appraisal Finished goods and work in progress: Estimated selling price less costs to complete and dispose of with reasonable profit allowance Raw materials: Usually by reference to market-based evidence Incremental cost, including a normal profit margin, of fulfilling contract IFRS Course 2015 Business Combinations 31

32 Exceptions to recognition and measurement principles Exception to recognition principle Exception to recognition and measurement principle Exception to measurement principle Contingent liabilities Deferred taxes and tax uncertainties Reacquired rights Indemnification assets Share-based payment awards Employee benefits Assets held for sale or distribution IFRS Course 2015 Business Combinations 32

33 Exception to recognition principle Contingent liability recognised if: Present obligation from past event & Fair value can be measured reliably Contingent liability that is a possible obligation is not recognised IFRS Course 2015 Business Combinations 33

34 Exceptions to recognition and measurement principle Deferred taxes and tax uncertainties Indemnification assets Employee benefits Recognise and measure in accordance with IAS 12 Recognise and measure on same basis as related liability Recognise and measure in accordance with IAS 19 IFRS Course 2015 Business Combinations 34

35 A question for you: Indemnification asset The sellers of Lila-Domestic agree to indemnify Lila-Droid for the outcome of an existing lawsuit There are no expected collectibility issues in respect of this indemnification The lawsuit is considered a present obligation at the acquisition date, the fair value of which is L$ 1,250 How should Lila-Droid account for the liability and the related indemnification asset? IFRS Course 2015 Business Combinations 35

36 A question for you: Indemnification asset The sellers of Lila-Domestic agree to indemnify Lila-Droid for the outcome of an existing lawsuit There are no expected collectibility issues in respect of this indemnification The lawsuit is considered a present obligation at the acquisition date, the fair value of which is L$ 1,250 How should Lila-Droid account for the liability and the related indemnification asset? As there is a present obligation, Lila-Droid should recognise the fair value of the contingent liability of L$ 1,250 as part of the acquisition accounting. Further, Lila- Droid also should recognise an indemnification asset of L$ 1,250 as part of the acquisition accounting. IFRS Course 2015 Business Combinations 36

37 Exceptions to measurement principle Reacquired rights Share-based payments Assets held for sale or distribution Fair value based on remaining contractual periods Measure in accordance with IFRS 2 Measure in accordance with IFRS 5 IFRS Course 2015 Business Combinations 37

38 Step 5: Measure NCI NCI are measured either at: Their proportionate interests in fair value of identifiable net assets Fair value Election made on a transaction-bytransaction basis IFRS Course 2015 Business Combinations 38

39 Step 6: Determine goodwill or gain on bargain purchase Option 1: NCI measured at fair value Goodwill Consideration transferred NCI at FV Fair value of net identifiable assets Option 2: NCI measured at their proportionate interest in identifiable net assets Goodwill Consideration transferred 1 proportion of NCI Fair value of net identifiable assets IFRS Course 2015 Business Combinations 39

40 A question for you: Goodwill Lila-Tech acquires 60% of New-Lila for cash consideration of L$ 1,000. This business combination occurs after the end of the reporting period The fair value of New-Lila s net identifiable assets is L$ 1,500 The fair value of New Lila s NCI is L$ 650 What is the difference in goodwill if NCI is measured at fair value vs at its proportionate interest IFRS Course 2015 Business Combinations 40

41 Solution: Goodwill NCI at fair value NCI at proportionate interest Goodwill 150 NCI at FV Goodwill 100 NCI Fair value of net identifiable assets 650 Considera -tion transferred Fair value of net identifiable assets 600 Consideration transferred 1,500 1,000 1,500 1,000 IFRS Course 2015 Business Combinations 41

42 Gain on bargain purchase The acquisition equation results in a gain on bargain purchase Reassess identification and measurement Recognise gain in profit or loss IFRS Course 2015 Business Combinations 42

43 Step 7: Recognise any measurement period adjustments Measurement period is period after acquisition date when entity can adjust preliminary business combination accounting If new information obtained about facts and circumstances that existed at acquisition date Ends when information obtained or determined not available Cannot exceed one year IFRS Course 2015 Business Combinations 43

44 Agenda Scope and definitions The acquisition accounting process After the business combination Know your journals Disclosure The closing IFRS Course 2015 Business Combinations 44

45 Follow other IFRSs except for: Contingent liabilities Measure at greater of amount under IAS 37 and amount recognised originally in acquisition accounting Indemnification assets Measure on same basis as related liability Reacquired rights Amortise over remaining contractual term; no consideration of renewals Contingent consideration Profit / loss if classified as a liability / asset; no remeasurement if classified as equity IFRS Course 2015 Business Combinations 45

46 A question for you: Subsequent measurement of contingent consideration Fair value of contingent consideration in a previous A question for you was determined to be L$ 100 and recognised as a liability at the acquisition date Six months later, Lila-Domestic s earnings are far off the expected forecast of reaching L$ 30,000. The fair value of the contingent consideration has fallen to nil How should Lila-Droid record the change in the fair value of the contingent consideration? IFRS Course 2015 Business Combinations 46

47 A question for you: Subsequent measurement of contingent consideration Fair value of contingent consideration in a previous A question for you was determined to be L$ 100 and recognised as a liability at the acquisition date Six months later, Lila-Domestic s earnings are far off the expected forecast of reaching L$ 30,000. The fair value of the contingent consideration has fallen to nil How should Lila-Droid record the change in the fair value of the contingent consideration? As the contingent consideration resulted in recognition of a liability, the liability is remeasured to fair value with the remeasurement effect recognised in profit or loss at each reporting date IFRS Course 2015 Business Combinations 47

48 Agenda Scope and definitions The acquisition accounting process After the business combination Know your journals Disclosure The closing IFRS Course 2015 Business Combinations 48

49 Agenda Scope and definitions The acquisition accounting process After the business combination Know your journals Disclosure The closing IFRS Course 2015 Business Combinations 49

50 Know your journals Acquisition accounting IFRS Course 2015 Business Combinations 50

51 Know your journals Case A Lila-Group acquires 60% of Lila-Stars for a cash consideration of L$ 600 NCI accounted for at proportionate interest At the date of acquisition Lila Stars is subject to legal action by a customer who is claiming L$ 500 for rectification costs resulting from faulty goods. Lila-Stars accepts the amount of costs claimed, but believes that the probability of being considered liable to be only 10 percent. If not liable, then Lila-Stars will incur no costs. At the date of acquisition Lila-Group concurs with such assessment and recognizes the contingent liability measured at (500 x 10 percent) + (0 x 90 percent) as part of the purchase accounting, even though Lila-Stars had not recognized a provision for this contingent liability IFRS Course 2015 Business Combinations 51

52 Know your journals Lila-Stars Statement of Financial Position before acquisition is as follows: Assets Liabilities Fixed assets 400 Accounts Payable 550 Accounts Receivable 400 Equity 400 Inventory 100 Cash Funds 50 Total Assets 950 Total Liabilities 950 IFRS Course 2015 Business Combinations 52

53 Know your journals At acquisition date, Fair value of assets and liabilities of Lila-Stars compared to Accounting values are as follows: Accounting value Fair value Assets Fixed assets Intangible Accounts Receivable Inventory Cash Equivalents Total Assets Liabilities Accounts Payable Contingent Liabilities - 50 Total Liabilities IFRS Course 2015 Business Combinations 53

54 Know your journals At acquisition date, Fair value of assets and liabilities of Lila-Stars are as follows: Assets Liabilities (600) Net Assets 700 Note: deferred taxation is not considered for the purposes of this example IFRS Course 2015 Business Combinations 54

55 Know your journals NCIs are accounted for as 40% of L$700 = L$280 Group goodwill is calculated by comparing the Acquisition Cost with the fair value of net assets acquired by Lila-Group: Acquisition Cost 600 Group Net Assets (420) ( ) Group Goodwill 180 IFRS Course 2015 Business Combinations 55

56 Know your journals Statement of Financial Position recap: Group Goodwill 180 Controlling Interest 600 Net Assets 700 NCI 280 IFRS Course 2015 Business Combinations 56

57 Know your journals Case B Lila-Group acquires 60% of Lila-Star for a cash consideration of L$ 600 NCI accounted for at fair value (=L$ 350) IFRS Course 2015 Business Combinations 57

58 Know your journals Caso B Statement of Financial Position recap: Net Assets 700 Controlling Interest 600 Goodwill 250 NCI 350 IFRS Course 2015 Business Combinations 58

59 Agenda Scope and definitions The acquisition accounting process After the business combination Know your journals Disclosure The closing IFRS Course 2015 Business Combinations 59

60 Disclosure Extensive disclosures IFRS Course 2015 Business Combinations 60

61 Disclosure An acquirer shall disclose information that enables users of such financial statements to evaluate the nature and financial effects of business combinations that occurred: - during the current reporting period - after the end of the reporting period but before the financial statements are authorised for issue An acquirer shall disclose information that enables users of its financial statements to evaluate the financial effects of adjustments recognised in the current reporting period that relate to business combinations that occurred in the period or in previous periods IFRS Course 2015 Business Combinations 61

62 Disclosure Further disclosures the name and a description of the acquiree the acquisition date the percentage of voting equity instruments acquired the primary reasons for the business combination and a description of how the acquirer obtained control of the acquiree a qualitative description of the factors that make up the goodwill recognised, such as expected synergies from combining operations of the acquiree and the acquirer, intangible assets that do not qualify for separate recognition or other factors if applicable, the reasons why the initial accounting for the business combination is incomplete IFRS Course 2015 Business Combinations 62

63 Disclosure Further disclosures The acquisition-date fair value of the total consideration transferred and the acquisition-date fair value of each major class of consideration, such as: - cash - other tangible or intangible assets, including a business or subsidiary of the acquirer - liabilities incurred, for example, a liability for contingent consideration - equity interests of the acquirer, including the number of instruments or interests issued or issuable and the method of determining the fair value of those instruments or interests and further, extensive disclosure is required! IFRS Course 2015 Business Combinations 63

64 Agenda Scope and definitions The acquisition accounting process After the business combination Know your journals Disclosure The closing IFRS Course 2015 Business Combinations 64

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66 Which statements are true of a business? A business must have inputs A business must have a process or processes A business must have outputs There is a rebuttable presumption that a group of assets in which goodwill is present is a business IFRS Course 2015 Business Combinations 66

67 Which of the following represents a business combination under IFRS 3? A business combination in which separate entities are brought together to form a joint venture Settlement of a pre-existing supplier contract The acquisition of an asset or a group of assets that constitutes a business Business combinations involving entities or business under common control IFRS Course 2015 Business Combinations 67

68 Which of the following items impact the calculation of goodwill? Consideration transferred Transaction costs Recognised amount of identifiable net assets NCI IFRS Course 2015 Business Combinations 68

69 Which statements are true in respect of NCI? NCI can be measured at their proportionate interest in the fair value of the acquiree s identifiable net assets NCI can be measured fair value An entity chooses an accounting policy, and measures all NCI in the same manner An entity elects an approach, on a transaction-by-transaction basis, to measuring NCI IFRS Course 2015 Business Combinations 69

70 1) A business combination occurs only when an acquirer obtains control over a business 2) The general measurement principle in the acquisition accounting is fair value 3) There are a number of exceptions to this general principle 4) NCI can be measured at fair value or its proportionate interest in the net identifiable assets acquired, on a transaction-by-transaction basis 5) Extensive disclosures required IFRS Course 2015 Business Combinations 70

71 2015 KPMG S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. Printed in Italy. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International. IFRS Course 2015 Business Combinations 71