Consideration transferred and Goodwill

Consideration transferred and Goodwill – I could not obtain a good understanding on ‘Consideration transferred’ from IFRS 3 Business combinations sub 32. So I started writing this piece of text. As per IFRS 3 Consideration transferred is as follows:

The acquirer shall recognise goodwill as of the acquisition date measured as the excess of (a) over (b) below:

1. the aggregate of:
   1. the consideration transferred measured in accordance with this IFRS, which generally requires acquisition-date fair value (see paragraph 37);
   2. the amount of any non-controlling interest in the acquiree measured in accordance with this IFRS; and
   3. in a business combination achieved in stages (see paragraphs 41 and 42), the acquisition-date fair value of the acquirer’s previously held equity interest in the acquiree.
2. the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed measured in accordance with this IFRS.

But it can also be simple, Consideration transferred is what is paid for the acquisition of the equity component.

So that is why I set up this very simple balance sheet of the company Acquiree Co. The acquirer purchases 90% of the shares in Acquiree Co. for a ‘consideration transferred’ of CU81. This means the value of 100% of the business is CU90 (CU81/90%). The acquirer has no stake in Acquiree before acquiring this 90% stake.

The amount of goodwill acquired is calculated, as per above picture, as follows: Consideration transferred and Goodwill

Consideration transferred (CT) +/+ Fair value Non-controlling interest (10% NCI)

+/+ Fair value at acquisition of acquirer’s previous held equity interest (PE)

-/- Fair value Net assets received (Assets¹ -/- Liabilities) (NA)

= Goodwill

Let’s check this: Consideration transferred and Goodwill

CU81 (CT) plus CU9 (NCI) plus CU0 (PE) minus CU70 (NA) = CU20 Goodwill

And one more check, Equity Pro forma FV of CU90, acquirer has acquired 90% is CU81, which is the consideration transferred!

But: in Net assets received at the acquisition may be included all types of intangible assets (other than goodwill), such as customer relationships, trade secrets, customer lists/databases, IP, production processes and many more.  Consideration transferred and Goodwill

Big numbers – make them bigger – playing with words

There are many words in press releases to provide an indication of the significance of a certain acquisition transaction. Rather than consideration transferred for the equity component (IFRS wording), acquiring entities use acquisition price (business) wording that includes long-term debt financing.

If you look at the above balance sheet, consideration transferred for 100% of the shares would be CU 90, however the transaction value could very well become CU 150 in a press release. This would be the value of the shares CU 90 plus the value of the LT Liabilities of CU 60. The presumption in such cases is that the LT liabilities are left with the selling entity or are redeemed and replaced by (cheaper) LT Liabilities negotiated by the acquiring entity.

If on the other hand an acquiring entity wants to size down a transaction (because they think the market will otherwise think they overpaid), the transaction value of CU 150 could be included in a press release as follows: ‘the total transaction value was CU 150 including cash acquired of CU 10’.

Conclusion is that it is like reading financial statements, it is NOT (and never will be) straight forward – you have to do your homework, not because businesses do not want you to know but because businesses are also blindsided, narrow minded or only doing their thing. Doing business is in itself already difficult enough and business opinions on performances of businesses or acquisition transactions can significantly differ from each other.

Consideration transferred and Goodwill

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