IFRS 3 Complete disclosures Business Combinations

IFRS 3 Complete disclosures Business Combinations covers IFRS 3’s disclosure requirements. An illustrative disclosure is provided at the end of this Section, including insights on certain disclosure areas. IFRS 3 Complete disclosures Business Combinations

General objectives of the disclosure requirements

The acquirer discloses information that enables users of its financial statements to evaluate: IFRS 3 Complete disclosures Business Combinations

  • the nature and financial effect of a business combination (IFRS 3 59)
  • the financial effects of adjustments recognised in the current reporting period that relate to business combinations that occurred in the period or previous reporting periods (IFRS 3 61).

A business combination often results in a fundamental change to a company’s operations. The nature and extent of the financial statement disclosures have a significant bearing on a user’s ability to assess the effects of the acquisition on the consolidated financial statements. Accordingly, the disclosure requirements for business combinations under IFRS 3 are quite extensive.

Business combinations that require disclosures

IFRS 3’s disclosures are required for: IFRS 3 Complete disclosures Business Combinations

  • each material business combination that occurred during the current reporting period IFRS 3 Complete disclosures Business Combinations
  • individually immaterial business combinations that occurred during the reporting period that are collectively material (disclosures are made on an aggregate basis)
  • business combinations occurring after the reporting period but before the financial statements are authorised for issue1. Note reference IFRS 3 B66.

Minimum disclosure requirements

This Section summarises IFRS 3’s disclosure requirements. It is helpful to divide these requirements into:

  • disclosures applicable to most business combinations (see below) IFRS 3 Complete disclosures Business Combinations
  • specific disclosures for contingent consideration, indemnification assets and contingent liabilities arising from a business combination (see below)
  • disclosures applicable only to certain business combinations (see below). IFRS 3 Complete disclosures Business Combinations

Although IFRS 3 specifies the minimum disclosure requirements, management should use judgement to determine the adequacy of the disclosures and should not be limited by those specified by IFRS 3.

Additional information should be provided if it will help the users of the financial statements better understand the effects of the business combination (IFRS 3 63).

THE DETAILS – Required disclosures applicable to most business combinations

Presented below is a summary of the required disclosures applicable to most business combinations. The parent is required to disclose this information in the reporting period the business combination occurred or in certain cases, in the subsequent reporting period. IFRS 3 Complete disclosures Business Combinations

Disclosure topic

Disclosure requirements

Details of the business combination

(IFRS 3.B64(a)-(d))

Details of goodwill

(IFRS 3.B64(e))

(IFRS 3.B64(k))

  • 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
  • total amount of goodwill that is expected to be deductible for tax purposes

Fair value of consideration transferred

(IFRS 3.B64(f))

Acquisition-date fair value of the total and each major class of consideration, such as:

Details of assets acquired and liabilities assumed

(IFRS 3.B64(i))

(IFRS 3.B64(h))

  • amounts recognised at the acquisition date for each major class of assets acquired and liabilities assumed
  • additional disclosures for each major class of acquired receivables:

Details of transactions recognised separately from the business combination

(IFRS 3.B64(l))

  • description of each transaction and how it was accounted for
  • amounts recognised for each transaction and the line item in the financial statements in which each amount is recognised
  • if the transaction is the effective settlement of a pre-existing relationship, the method used to determine the settlement amount

Acquisition-related costs

(IFRS 3.B64(m))

Amount of acquisition-related costs, including the:

  • amount recognised as an expense and the line item or items in the statement of comprehensive income in which those expenses are recognised
  • amount of any issue costs not recognised as an expense and how they were recognised

Operating results of the new subsidiary included in the consolidated statement of comprehensive income for the reporting period

(IFRS 3.B64(q))

Reconciliation of the carrying amount of goodwill balance

(IFRS 3.B67(d))

The gross amount and accumulated impairment losses at the beginning and end of the reporting period with details of the movements in the reporting period:

Material gains or losses recognised in the reporting period

(IFRS 3.B67(e))

The amount and an explanation of any gain or loss recognised in the current reporting period that both:

  • relates to identifiable assets acquired or liabilities assumed in a business combination that was effected in the current or previous reporting period
  • is of such a size, nature or incidence that disclosure is relevant to understanding the combined entity’s financial statements.

THE DETAILS – Specific disclosures for contingent consideration, indemnification assets and contingent liabilities arising from a business combination

IFRS 3 requires disclosure of specific items recognised as part of the business combination, as follows: IFRS 3 Complete disclosures Business Combinations

Disclosure topic

Disclosure requirements

Contingent consideration arrangements (asset or liability) and indemnification assets:

In reporting period when the business combination occurred

(IFRS 3.B64(g))

  • amount recognised as of the acquisition date
  • description of the arrangement and the basis for determining the amount of the payment estimate of the range of outcomes (undiscounted)
  • if it cannot be estimated, disclose that fact and the underlying reason
  • if amount of the payment is unlimited, disclose that fact

Continuing disclosures

(IFRS 3.B67(b))

The following disclosures are required until the parent collects, sells or otherwise loses the right to a contingent consideration asset, or until a contingent consideration liability is settled, cancelled or expires:

  • any changes in the recognised amounts, including any differences arising upon settlement
  • any changes in the range of outcomes (undiscounted) and the reasons for those changes
  • the valuation techniques and key model inputs used to measure contingent consideration

Contingent liability:

In reporting period when the business combination occurred

(IFRS 3.B64(j))

The information required by IAS 37 85 for each contingent liability recognised, such as:

  • nature of the obligation and the expected timing of outflows of economic benefits
  • indication of the uncertainties about the amount or timing of those outflows
  • amount of any expected reimbursement and any related asset that has been recognised

If a contingent liability is not recognised because its fair value cannot be measured reliably, disclose the underlying reason and the information required by IAS 37 86, as follows:

  • nature of the contingent liability
  • where practicable, an estimate of the financial effect and indication of the uncertainties relating to the amount or timing of any outflow
  • the possibility of any reimbursement

Continuing disclosure of the details of the contingent liability and reconciliation of the balance of contingent liability

(IFRS 3.B67(c))

The following disclosures are required until contingent liability is settled, cancelled or expires:

  • information required by IAS 37 85 (as discussed above)
  • the information required by IAS 37 84 as follows:
    • the carrying amount at the beginning and end of the period
    • additional contingent liabilities recognised in the period, including increases to existing contingent liabilities
    • amounts used (ie incurred and charged against the contingent liability) during the period
    • unused amounts reversed in the period
    • the increase during the period in the discounted amount arising from the passage of time and the effect of any change in the discount rate.

THE DETAILS – Disclosures applicable only to certain business combinations

In certain situations, IFRS 3 requires specific additional disclosures: IFRS 3 Complete disclosures Business Combinations

Disclosure topic

Disclosure requirements

Business combinations accounted using provisional amounts:

Details of provisional amounts used

(IFRS 3.B67(a))

  • the reasons why the initial accounting for the business combination is incomplete
  • the particular assets, liabilities, equity interests or items of consideration for which the initial accounting is incomplete
  • the nature and amount of any measurement period adjustments recognised during the reporting period

Business combinations resulting in a gain from a bargain purchase:

Details of a bargain purchase

(IFRS 3.B64(n))

  • the amount of any gain recognised and the line item in the statement of comprehensive income in which the gain is recognised
  • a description of the reasons why the transaction resulted in a gain

Business combinations where less than 100% interest is acquired:

Details of NCI

(IFRS 3.B64(o))

Business combinations achieved in stages:

Details of business combination achieved in stages

(IFRS 3.B64(p))

Illustrative disclosure

This Section provides an example of the type of disclosures required by IFRS 3. It is not intended to illustrate all of the required disclosures in all circumstances. The form and content of the disclosures will depend on the specifics of each business combination. Accordingly, these illustrative disclosures should be amended, amplified or abbreviated to reflect such specific circumstances. IFRS 3 Complete disclosures Business Combinations

The illustrative disclosures presented below are excerpts from the 31 December 2011 consolidated financial statements of a fictional company, ABC Corporation Group (the Group). The Group is a manufacturer and distributor of household appliances and has two reportable segments, retail and wholesale segments.

4.1 Significant accounting policy disclosures

Business combinations

The Group applies the acquisition method in accounting for business combinations. The consideration transferred by the Group to obtain control of a subsidiary is calculated as the sum of the acquisition-date fair values of assets transferred, liabilities incurred and the equity interests issued by the Group, which includes the fair value of any asset or liability arising from a contingent consideration arrangement. Acquisition costs are expensed as incurred. IFRS 3 Complete disclosures Business Combinations

The Group recognises identifiable assets acquired and liabilities assumed in a business combination regardless of whether they have been previously recognised in the acquiree’s financial statements prior to the acquisition. Assets acquired and liabilities assumed are generally measured at their acquisition-date fair values. IFRS 3 Complete disclosures Business Combinations

Goodwill is stated after separate recognition of identifiable intangible assets. It is calculated as the excess of the sum of a) fair value of consideration transferred, b) the recognised amount of any non-controlling interest in the acquiree and c) acquisition-date fair value of any existing equity interest in the acquiree, over the acquisition-date fair values of identifiable net assets.

If the fair values of identifiable net assets exceed the sum calculated above, the excess amount (ie gain on a bargain purchase) is recognised in profit or loss immediately.

IFRS 3

Narratives

CU’000

B64 (a)-(d)

The Group held a 10% interest in XYZ, a manufacturer of household appliances based in Euroland. On (a)-(d) 31 March 2011, the Group obtained majority control of XYZ by acquiring an additional 70% of XYZ’s share capital thereby increasing its ownership interest to 80%.

With this acquisition, the Group expects to increase its market share in Euroland’s wholesale market. Details of the business combination are as follows:

B64 (f)(i)

Amount settled in cash

9,500

B64 (f)(iv)

Fair value of equity shares issued

7,500

B64 (f)(iii)

Fair value of contingent consideration

600

Total

17,600

B64 (l)(iii)

Effect of the settlement of pre-existing relationship

-1,000

Fair value of consideration transferred

16,600

B64 (p)(i)

Fair value of previously held investment in XYZ

2,000

B64 (o)(i)

Fair value of non-controlling interest in XYZ

3,800

22,400

B64 (i)

Recognised amounts of identifiable net assets:

Property plant and equipment

7,800

Intangible assets (provisional amounts)

3,500

Inventories

9,500

Trade and other receivables

5,400

Cash and cash equivalents

300

Borrowings

-2,500

Deferred tax liabilities

-300

Other liabilities

-2,600

Trade and other payables

-4,200

Net identifiable assets and liabilities

16,900

Goodwill

5,500

Consideration transferred IFRS 3 Complete disclosures Business Combinations

B64 (f) (i), (iv)

The acquisition was settled in cash of CU9,500,000 and by issuing 500,000 shares of ABC Corporation. The fair value of the equity shares issued was based on the market value of ABC Corporation’s traded shares on the acquisition date. IFRS 3 Complete disclosures Business Combinations

B64 (g) (iii)

The purchase agreement included an additional consideration of CU1,500,000, payable only if the average profits of XYZ for 2011 and 2012 exceed a target level agreed by both parties. The additional consideration is payable on 1 April 2013. IFRS 3 Complete disclosures Business Combinations

The CU600,000 fair value2 of the contingent consideration liability recognised on the acquisition date represents the present value of the Group’s estimate of the probability-weighted cash outflow.

It reflects management’s estimate of a 50% probability that the targets will be achieved and a discount rate of 4.4%. As at 31 December 2011, there have been no changes in the estimate of the probable cash flow but the liability has increased to CU620,000 due to the unwinding of the discount.

B64 (l) (i-iv)

Prior to the acquisition, XYZ had an existing lawsuit against the Group for infringement of a certain patent. The Group has previously recorded a related estimated liability of CU800,000. At the acquisition date, the estimated fair value of the expected settlement amount of the litigation is CU1,000,000.

The business combination effectively settled this litigation and accordingly, the Group recorded an additional loss of CU200,000 for such settlement, recognised as part of other expenses in the consolidated statement of comprehensive income. As the settlement of the lawsuit is accounted for separately from the business combination, the fair value of the settlement amount is deducted from consideration transferred. IFRS 3 Complete disclosures Business Combinations

B64 (m)

Acquisition-related costs amounting to CU300,000 have been recognised as an expense in the consolidated statement of comprehensive income, as part of other expenses IFRS 3 Complete disclosures Business Combinations

Previously held investment in XYZ IFRS 3 Complete disclosures Business Combinations

B64 (p) (i-ii)

On the acquisition date, the Group’s 10% investment in XYZ, previously accounted for as an available for sale financial asset, has been remeasured to fair value. On that date, a cumulative gain of CU100,000 arising from changes in the fair value of the investment and recognised in other comprehensive income was reclassified to profit and loss. IFRS 3 Complete disclosures Business Combinations

This is presented as a separate line item in the consolidated statement of comprehensive income. The previously held investment is considered part of what was given up by the Group to obtain control of XYZ. Accordingly, the fair value of the investment is included in the determination of goodwill.

Non-controlling interest in XYZ IFRS 3 Complete disclosures Business Combinations

B64 (o) (i-ii)

The non-controlling interest in XYZ is measured at fair value at the acquisition date. The Group determined the fair value by applying a combination of market and income approaches. The key assumptions are: a discount rate range of 15-20 percent, terminal value based on a range of terminal EBITDA multiples between 3 and 5 times, financial multiples of companies deemed similar to XYZ. IFRS 3 Complete disclosures Business Combinations

Identifiable net assets IFRS 3 Complete disclosures Business Combinations

B64 (i)

B67(a)

B64(h) (i-iii)

At 31 December 2011, the fair values of acquired patents and trademarks amounting to CU1,500,000 and CU1,000,000, respectively are provisional pending receipt of their final valuation. IFRS 3 Complete disclosures Business Combinations

The fair value of the trade and other receivables acquired as part of the business combination amounted to CU5,400,000, with a gross contractual amount of CU5,770,000. As of the acquisition date, the Group’s best estimate of the contractual cash flow not expected to be collected amounted to CU370,000.

Goodwill IFRS 3 Complete disclosures Business Combinations

B64 (e)

B64 (k)

Goodwill recognised on the acquisition relates to the expected growth, cost synergies and the value of XYZ’s workforce which cannot be separately recognised as an intangible asset. This goodwill has been allocated to the Group’s wholesale segment and is not expected to be deductible for tax purposes.

Changes in goodwill

The reconciliation of the carrying amount of goodwill is as follows (IFRS 3 B67(d)):

IFRS 3 Complete disclosures Business Combinations

XYZ’s contribution to the Group results

B64 (q) (i-ii)

XYZ has contributed CU12,232,000 and CU1,954,000 to the Group’s revenues and profit, respectively (q)(i-ii) from the acquisition date to 31 December 2011. Had the acquisition occurred on 1 January 2011, the Group’s revenue for the period to 31 December 2011 would have been CU128,386,000 and the Group’s profit for the period would have been CU15,755,000. IFRS 3 Complete disclosures Business Combinations

These amounts have been determined by applying the Group’s accounting policies and adjusting the results of XYZ to reflect additional depreciation and amortisation that would have been charged assuming the fair value adjustments to property, plant and equipment and intangible assets had been applied from 1 January 2011, together with their consequential tax effects. IFRS 3 Complete disclosures Business Combinations

IFRS 3 Complete disclosures Business Combinations

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Something else -   IFRS 3 Fair value of contingent consideration

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