Business Combinations and consolidation

Transcription

1 Business Combinations and consolidation Madhu Sudan Kankani June 2017 KPMG.com/in

2 Agenda 1 Introduction 2 Ind AS 103: Business combinations 3 Ind AS 110: Consolidated financial statements 4 Practical perspectives 2017 KPMG, an Indian Registered Partnership 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. 2

3 Introduction 2017 KPMG, an Indian Registered Partnership 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. 3

4 Introduction A set of standards that require fair value measurements on initial recognition and significant judgment Fair value measurements on acquisition of a business: Goodwill as a residual, not amortised but tested for impairment A new control model for consolidation: Consider all facts and circumstances 2017 KPMG, an Indian Registered Partnership 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. 4

5 Ind AS 103: Business combinations 2017 KPMG, an Indian Registered Partnership 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. 5

6 Definition Business An integrated set of activities, capable of being conducted and managed for the purpose of providing a return directly to investors or other owners, members or participants. Consists of inputs, processes and the ability to create outputs Outputs are not required to qualify as a business Rebuttable presumption that a group of assets in which goodwill is present is a business Determination from the view of a market participant, rather than the specific acquirer Development stage Business Points to Consider: Have planned principal activities begun? Does it have employees, intellectual property, and other inputs and processes that could be applied to those inputs? Is it pursuing a plan to produce outputs? Will it be able to obtain access to customers that will purchase the outputs? Not all of these factors need to be present 2017 KPMG, an Indian Registered Partnership 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. 6

7 Steps to acquisition accounting Steps 1. Identify the acquirer 2. Determine the acquisition date 3. Identify and measure consideration transferred 4. Identify and measure identifiable assets 5. Measure non-controlling interests (NCI) 6. Determine goodwill or gain on a bargain purchase 7. Recognise any measurement period adjustments 2017 KPMG, an Indian Registered Partnership 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. 7

8 Identifying the acquirer and acquisition date Identifying the acquirer Entity that obtains control of the acquiree Identified in the following steps: Apply guidance in Ind AS 110 to determine who has control Otherwise, additional factors identified in Ind AS 103 Additional factors in Ind AS 103: Acquirer is usually the entity that transfers cash/ assets or incurs liabilities Entity that issues equity interests Relative voting rights of combined entity Composition of governing body / senior management of combined entity Relative size of entities May result in a reverse acquisition Acquisition date Date on which the acquirer obtains control of the acquiree 2017 KPMG, an Indian Registered Partnership 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. 8

9 Consideration Transferred and Contingent Consideration Consideration transferred may include: Assets transferred Liabilities incurred to previous owners Equity instruments issued Consideration Transferred Measure at fair value at the acquisition date Required to identify any items that are not part of the business combination and account for such items separately from business combination Recognised at fair value at the acquisition date Obligation by the acquirer to transfer additional assets or equity interest to the former owners of acquiree as part of the exchange for control if specified future events occur or conditions are met A financial instrument is classified as equity or a liability in accordance with Ind AS 32. May even be an asset Contingent Consideration 2017 KPMG, an Indian Registered Partnership 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. 9

10 Payments to employees who are former owners of acquiree Automatic forfeiture of payments when employment is terminated? yes Remuneration for future services Additional factors to consider: no Duration of continuing employment Level of remuneration Linkage valuation to Incremental payments to employees Formula for determining consideration Number shares owned of Other agreements and issues 2017 KPMG, an Indian Registered Partnership 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. 10

11 Acquisition - related costs Expensed as incurred Except for those costs related to the issues of debt or equity instruments Those costs are recognised in accordance with Ind AS 32 and Ind AS KPMG, an Indian Registered Partnership 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. 11

12 Identifiable assets acquired and liabilities assumed General recognition principle Must meet definition of assets or liabilities at acquisition date Must be exchanged as part of acquisition General measurement principle Must be measured at fair value at acquisition date 2017 KPMG, an Indian Registered Partnership 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. 12

13 Intangible assets (1/2) 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 2017 KPMG, an Indian Registered Partnership 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. 13

14 Intangible assets (2/2) Marketing related In-process research and development Customer-related Technology-based Artistic-related Contract-based 2017 KPMG, an Indian Registered Partnership 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. 14

15 Goodwill calculation Goodwill Consideration transferred NCI Fair value of net identifiable assets Not amortised impairment testing Include other assets transferred and equity instruments issued Measured at fair value Acquisitionrelated costs Option to measure at fair value or proportionate interest Transactions with NCI are equity transactions May include assets and liabilities not previously recognised - e.g. certain intangible assets and contingent liabilities 2017 KPMG, an Indian Registered Partnership 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. 15

16 Measurement Period Period after acquisition date when entity can adjust preliminary business combination accounting If new information obtained about facts and circumstances that existed as of acquisition date Ends when information obtained or determined not available Cannot exceed one year Retrospective adjustment Report in the financial statements provisional amounts for the items for which the accounting is incomplete Once measurement period elapses any business combination accounting adjustment is correction of error (Ind AS 8) 2017 KPMG, an Indian Registered Partnership 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. 16

17 Common control transactions Additional guidance for common control transactions in Ind AS No guidance under IFRS for common control transactions Ind AS has included additional guidance Common control business combinations will include transactions such as transfer of subsidiaries or businesses, between entities within a group Pooling of interests method to be followed for accounting: Assets and liabilities are followed at carrying value No adjustment to recognize new assets or liabilities Restatement of prior period information The difference should be recognized as capital reserves KPMG, an Indian Registered Partnership 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. 17

18 Disclosures Specific Disclosure requirement business combinations occurring during the reporting period; business combinations occurring after the reporting date but before the financial statements are authorized for issue; and adjustments recognized in the reporting period that relate to business combinations that occurred in the current or previous reporting periods. Additional Disclosure requirement general information on the business combination; consideration transferred; assets acquired and liabilities assumed; goodwill (or a gain on a bargain purchase); transactions that are not part of the business combination; business combinations in which the acquirer holds less than 100 percent of the acquiree; step acquisitions; pro forma information about revenue and profit or loss; and adjustments, including measurement period adjustments and contingent consideration adjustments. Disclosures are required for each material business combination, or in aggregate for individually immaterial business combinations that are material collectively KPMG, an Indian Registered Partnership 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. 18

19 Ind AS 103: Key impact areas & challenges Substance v. legal form Defining a business Determining consideration - contingent consideration & compensatory arrangements Identifying intangible assets Fair value measurements on initial recognition Annual impairment testing of goodwill Accounting for past approved court schemes - Transition Common control transactions 2017 KPMG, an Indian Registered Partnership 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. 19

20 Ind AS 110: Consolidated financial statements 2017 KPMG, an Indian Registered Partnership 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. 20

21 A control model Control Understand the investee Power Variability of returns Link between power and variability De facto model Rights exercisable when needed Broad concept of returns Agent vs principal 2017 KPMG, an Indian Registered Partnership 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. 21

22 How decisions are made Are voting rights relevant in assessing whether investor has power over investee? Investee controlled by means of voting rights (e.g. a conventional operating company) Structured entities - investees designed so that voting rights not relevant (e.g. a ESOP vehicle) 2017 KPMG, an Indian Registered Partnership 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. 22

23 Ind AS 110: Key impact areas & challenges Consider all rights of the parties veto rights with minority shareholders De facto power scenarios can it have power with less than 50 per cent? Structured entities what are the relevant activities? Impact of call and put options 2017 KPMG, an Indian Registered Partnership 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. 23

24 Practical perspectives 2017 KPMG, an Indian Registered Partnership 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. 24

25 Practical perspectives sector wise impact Sector Companies covered Sector Companies covered Automotive and ancillaries (AA) 10 Other manufacturing (OM) 7 Cement and cement products (CC) 1 Packaged food (PF) 1 Energy (EN) 11 Personal products (PP) 6 Infrastructure (IN 7 Pharmaceuticals (PH) 8 IT Consulting and software 5 Telecom and telecom services (TT) 4 Metals (ME) 7 Others (OT) KPMG, an Indian Registered Partnership 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. 25

26 Practical perspectives nature of adjustments Acquisition date when control is transferred (not just a date mandated by court or an agreement) Mandatory use of purchase method of accounting fair valuation of net assets Fair value of consideration transferred (earn out, contingent consideration, etc) Transaction cost charged to statement of profit and loss Goodwill amortization not permitted Demerger at fair value, in certain instances Participative rights held by NCI may result in classification of investee as joint venture Recognition of liability for put options written in favour of NCI Equity method accounting for JVs Transition date policy choice on business combination Definition of control is different. Subsidiaries may be classified as associate or JV, and vice versa Cases where scheme of business combination is filed before transition and approval received subsequently 2017 KPMG, an Indian Registered Partnership 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. 26

27 Thank You Madhu Sudan Kankani Partner Accounting Advisory Services KPMG in India Mobile: The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation KPMG, an Indian Registered Partnership 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. The KPMG name and logo are registered trademarks or trademarks of KPMG International KPMG, an Indian Registered Partnership 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. 27