IAS 36 How Impairment test

IAS 36 How Impairment test is all about this – When looking at the step-by-step IAS 36 impairment approach it comes down to the following broadly organised steps: IAS 36 How Impairment test

  • What?? – Determining the scope and structure of the impairment review, explained here,
  • If and when? – Determining if and when a quantitative impairment test is necessary, explained here,
  • IAS 36 How Impairment test or understanding the mechanics of the impairment test and how to recognise or reverse any impairment loss, if necessary. Which is explained in this section…

The objective of IAS 36 Impairment of assets is to outline the procedures that an entity applies to ensure that its assets’ carrying values are not … Read more

Ultimate guide to IFRS 3 Business combinations

Ultimate guide to IFRS 3 Business combinations outlines the accounting when an acquirer obtains control of a business (e.g. an acquisition or merger). Such business combinations are accounted for using the ‘acquisition method’, which generally requires assets acquired and liabilities assumed to be measured at their fair values at the acquisition date. Ultimate guide to IFRS 3 Business combinations

Definitions:

IFRS 3 Definition Acquiree: The business or businesses that the acquirer obtains control of in a business combination. Ultimate guide to IFRS 3 Business combinations

IFRS 3 Definition Acquirer: The entity that obtains control of the acquiree.

Business combination

When a buyer (acquirer) takes control of another business (the acquiree) with a transaction, it is called a business combination. There are three important considerations in this … Read more

Case value intangibles in business combinations

Case value intangibles in business combinations provides a comprehensive business case of valuation of an acquisition of a regional provider of professional services, ProfServCo. The following intangible assets were identified as of the date of the combination:

  1. Trade name Case value intangibles in business combinations
  2. Service concession number Case value intangibles in business combinations
  3. Customer relationships Case value intangibles in business combinations
  4. Non-competition agreements. Case value intangibles in business combinations

ProfServCo was acquired as part of a business combination under IFRS 3 by AcquiCo on 30 September 20×2.

1. Trade name

ProfServCo operates in a region of the United States and has been a leading provider in its service market since it was founded in the 1970’s. The Company’s trade … Read more

Complete detection of all IFRS 3 intangibles

Complete detection of all IFRS 3 intangibles explains it all, because detecting intangible assets can be a complex and challenging matter. Strategies to detect identifiable intangible assets vary depending on the facts and circumstances of the business combination and usually require a full review of the transaction. It is important to understand the business of the acquiree, what intangible resources it depends on and how these may translate into identifiable intangible assets. It should be possible to explain the acquired business in terms of the resources it uses to generate profits and how these are reflected in the acquiree’s assets and liabilities. In other words ask the question: what has been paid for?

Use the business case and transaction case Read more

Calculating the value of an acquisition

Calculating the value of an acquisition – This is a detailed example of calculating the fair value of an acquisition, using a logical step by step approach and realistic assumptions and determinations based on transaction and market data. Identifying and valuing intangible asset(s) is a broad endeavor and requires careful consideration of; factors specific to each business, the transaction structure, identifying the primary income generating asset, determining the discount rates, estimating the useful lives for identified intangibles. Examples of such intangibles include customer contracts, trademarks, brands, etc.

 

The Deal Fortune, Inc. acquired M&P Company on January 1, 2017. Consideration was $30 million cash plus additional contingent consideration, as follows:

EBITDA

  • Below 1 million: Nil Calculating the value of an
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Fair Value of Tangible Assets

Fair Value of Tangible Assets – In the event of Business Combinations tangible assets (current – non-current) are best valued with the market or income approaches. If adequate data are not available to derive an indication of value through these methods, an appraiser may use the replacement cost method, which adjusts the original cost for changes in the price level to determine its current replacement cost. The current replacement cost is then adjusted due to physical use or functional obsolescence. Cash-generating unit (CGU) Cash-generating unit (CGU)

Property, Plant and Equipment (PP&E) must be recognized at fair value for current capacity. Accumulated depreciation is not carried forward. An appraiser may use the cost approach, in which a market participant would pay no more for an asset … Read more

Adjusted net asset method

Adjusted net asset method The adjusted net asset method is used to value a business based on the difference between the fair market value of the business assets and its liabilities. Depending on the particular purpose or circumstances underlying the valuation, this method sometimes uses the replacement or liquidation value of the company assets less the liabilities.

Under this method, the analyst adjusts the book value of the assets to fair market value (generally measured as replacement value or liquidation value) and then reduces the total adjusted value of assets by the fair market value of all recorded and unrecorded liabilities. Both tangible and identifiable intangible assets are valued in determining total adjusted net assets.

If the analyst will be relying on other professional Read more

Recognising operating leases and intangible assets

Recognising operating leases and intangible assets – As part of using the acquisition method for each Business Combination the acquirer has to recognise operating leases and intangible assets.

Operating leases Recognising operating leases and intangible assets

The acquirer shall recognise no assets or liabilities related to an operating lease in which the acquiree is the lessee except as required by the following two captions:

  • The acquirer shall determine whether the terms of each operating lease in which the acquiree is the lessee are favourable or unfavourable. The acquirer shall recognise an intangible asset if the terms of an operating lease are favourable relative to market terms and a liability if the terms are unfavourable relative to market terms. Fair value
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IFRS 3 Identify a business

IFRS 3 Identify a business – An entity shall determine whether a transaction or other event is a business combination by applying the definition in IFRS 3, which requires that the assets acquired and liabilities assumed constitute a business. If the assets acquired are not a business, the reporting entity shall account for the transaction or other event as an asset acquisition. See also the accounting treatment acquisition of a business or asset(s) 

Guidance on identifying a business combination and the definition of a business are as follows:

The definition of a business: An integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing goods or services to customers, generating investment income (such as dividends or interest) or generating other income from ordinary activities.

Identifying a business combination [IFRS 3 B5 – B6] IFRS 3 Identify a business

IFRS 3 defines a business combination as a transaction or other event in which an acquirer obtains control of one or more businesses. An acquirer might obtain control of an acquiree in a variety IFRS 3 Identify a business of ways, for example:

  1. by transferring cash, cash equivalents or other assets (including net assets that constitute a business);
  2. by incurring liabilities; IFRS 3 Identify a business
  3. by issuing equity interests; IFRS 3 Identify a business
  4. by providing more than one type of consideration; or
  5. without transferring consideration, including by contract alone.

A business combination may be structured in a variety of ways for legal, taxation or other reasons, which include but are not limited to:

  1. one or more businesses become subsidiaries of an acquirer or the net assets of one or more businesses are legally merged into the acquirer;
  2. one combining entity transfers its net assets, or its owners transfer their equity interests, to another combining entity or its owners;
  3. all of the combining entities transfer their net assets, or the owners of those entities transfer their equity interests, to a newly formed entity (sometimes referred to as a roll-up or put-together transaction); or
  4. a group of former owners of one of the combining entities obtains control of the combined entity.

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IFRS 13 Adjusted net asset method

IFRS 13 Adjusted net asset method and the asset accumulation method are both generally accepted business valuation methods of the asset-based business valuation approach.

First, the valuation expert typically starts with the subject company’s GAAP-based balance sheet. The valuation expert will use the balance sheet dated closest to the analysis valuation date. Preferably, the valuation expert will use the company’s balance sheet that was prepared just before the analysis valuation date. IFRS 13 Adjusted net asset method

Second, the valuation expert identifies and separates (for further analysis) any non-operating or excess assets reported on the balance sheet. Such assets may include vacant land or other assets held for investment purposes. Such assets may also include those assets that are … Read more