M and A

M and A or Mergers and Acquisitions

in IFRS language Business Combinations.

1 Identifying a business combination

IFRS 3 refers to a ‘business combination’ rather than more commonly used phrases such as takeover, acquisition or merger because the objective is to encompass all the transactions in which an acquirer obtains control over an acquiree no matter how the transaction is structured. A business combination is defined as a transaction or other event in which an acquirer (an investor entity) obtains control of one or more businesses.

An entity’s purchase of a controlling interest in another unrelated operating entity will usually be a business combination (see Simple case – Straightforward business combination below). However, a business combination (M and A) may be structured, and an entity may obtain control of that structure, in a variety of ways.

Examples of business combinations structurings

Examples of ways an entity may obtain control

A business becomes the subsidiary of an acquirer

The entity transfers cash, cash equivalents or other assets(including net assets that constitute a business)

Net assets of one or more businesses are legally merged with an acquirer

The entity incurs liabilities

One combining entity transfers its net assets, or its owners transfer their equity interests, to another combining entity or its owners

The entity issues shares

The entity transfers more than one type of consideration, or

Two or more entities transfer their net assets, or the owners of those entities transfer their equity interests to a newly created entity, which in exchange issues shares, or

The entity does not transfer consideration and obtains control for example by contract alone Some examples of this:

  • ‘dual listed companies’ or ‘stapled entity structures’
  • acquiree repurchases a sufficient number of its own shares for an existing shareholder to obtain control
  • a condition in the shareholder agreement that prevents the majority shareholder exercising control of the entity has expired, or
  • a call option over a controlling interest that becomes exercisable.

A group of former owners of one of the combining entities obtains control of the combined entity, i.e. former owners, as a group, retain control of the entity they previously owned.

Therefore, identifying a business combination transaction requires the determination of whether:

  • what is acquired constitutes a ‘business’ as defined in IFRS3, and
  • control has been obtained.

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Disclosure capital management

Disclosure capital management

Get the requirements for properly disclosing capital management procedures applied by your company to provide the users of your financial statements with useful financial data, in the common language prescribed in the world’s most widely used  standards for financial reporting, the IFRS Standards. First there is a section providing guidance on what the requirements are, followed by a comprehensive example, easy to tailor to the specific needs of your company.

Disclosure capital management guidance

Capital risk management

1. Capital is not defined in any of the IFRSs. Entities must describe what they manage as capital, based on the type of information that is provided internally to the key management personnel. It therefore depends on the individual entity as to whether capital includes interest-bearing debt or not.

If such debt is included, however, and the loan agreements include capital requirements such as financial covenants that must be satisfied, then these need to be disclosed under paragraph 135(d) of IAS 1 Presentation of Financial Statements. [IAS 1.134, IAS 1.135]

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Disclosure financial assets and liabilities

Disclosure financial assets and liabilities

– provides a narrative providing guidance on users of financial statements’ needs to present financial disclosures in the notes to the financial statements grouped in more logical orders. But there is and never will be a one-size fits all.

Here it has been decided to separately disclose financial assets and liabilities and non-financial assets and liabilities, because of the distinct different nature of these classes of assets and liabilities and the resulting different types of disclosures, risks and tabulations.

Disclosure financial assets and liabilities guidance

Disclosing financial assets and liabilities (financial instruments) in one note

Users of financial reports have indicated that they would like to be able to quickly access all of the information about the entity’s financial assets and liabilities in one location in the financial report. The notes are therefore structured such that financial items and non-financial items are discussed separately. However, this is not a mandatory requirement in the accounting standards.

Accounting policies, estimates and judgements

For readers of Financial Statements it is helpful if information about accounting policies that are specific to the entityDisclosure financial assets and liabilitiesand about significant estimates and judgements is disclosed with the relevant line items, rather than in separate notes. However, this format is also not mandatory. For general commentary regarding the disclosures of accounting policies refer to note 25. Commentary about the disclosure of significant estimates and judgements is provided in note 11.

Scope of accounting standard for disclosure of financial instruments

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IFRS 7 does not apply to the following items as they are not financial instruments as defined in paragraph 11 of IAS 32:

  1. prepayments made (right to receive future good or service, not cash or a financial asset)
  2. tax receivables and payables and similar items (statutory rights or obligations, not contractual), or
  3. contract liabilities (obligation to deliver good or service, not cash or financial asset).

While contract assets are also not financial assets, they are explicitly included in the scope of IFRS 7 for the purpose of the credit risk disclosures. Liabilities for sales returns and volume discounts (see note 7(f)) may be considered financial liabilities on the basis that they require payments to the customer. However, they should be excluded from financial liabilities if the arrangement is executory. the Reporting entity Plc determined this to be the case. [IFRS 7.5A]

Classification of preference shares

Preference shares must be analysed carefully to determine if they contain features that cause the instrument not to meet the definition of an equity instrument. If such shares meet the definition of equity, the entity may elect to carry them at FVOCI without recycling to profit or loss if not held for trading.

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Best complete read IAS 24 Disclosure Related party transactions

– Learn how to do it –

Disclosure Related party transactions provides a summary of IFRS reporting requirements regarding IAS 24 Related party transactions and a possible disclosure schedule. However, as this publication is a reference tool, no disclosures have been removed based on materiality. Instead, illustrative disclosures for as many common scenarios as possible have been included. Please note that the amounts disclosed in this publication are purely for illustrative purposes and may not be consistent throughout the example disclosure related party transactions.

Presentation

All of the related party information required by IAS 24 that is relevant to the Reporting entity Plc has been presented, or referred to, in one note. This is considered to be a convenient and desirable method of presentation, but there is no requirement to present the information in this manner. Compliance with the standard could also be achieved by disclosing the information in relevant notes throughout the financial statements.

Materiality

The disclosures required by IAS 24 apply to the financial statements when the information is material. According to IAS 1 Presentation of Financial Statements, Disclosure Related party transactionsmateriality depends on the size and nature of an item. It may be necessary to treat an item or a group of items as material because of their nature, even if they would not be judged material on the basis of the amounts involved. This may apply when transactions occur between an entity and parties who have a fiduciary responsibility in relation to that entity, such as those transactions between the entity and its key management personnel. [IAS1.7]

Key management personnel compensation

While the disclosures under paragraph 17 of IAS 24 are subject to materiality, this must be determined based on both quantitative and qualitative factors. In general, it will not be appropriate to omit the aggregate compensation disclosures based on materiality. Whether it will be possible to satisfy the disclosure by reference to another document, such as a remuneration report, will depend on local regulation. IAS 24 itself does not specifically permit such cross-referencing.

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IAS 1 Common control transactions v Newco formation

Common control transactions v Newco formation

are two different events, that sometimes interactCommon control transactions v Newco formation

  • Common control transactions represent the transfer of assets or an exchange of equity interests among entities under the same parent’s control. “Control” can be established through a majority voting interest, as well as variable interests and contractual arrangements. Entities that are consolidated by the same parent—or that would be consolidated, if consolidated financial statements were required to be prepared by the parent or controlling party—are considered to be under common control.Determining whether common control exists requires judgment and could have broad implications for financial reporting, deals and tax. Just a few examples are:
    • A reporting entity charters a newly formed entity to effect a transaction.
    • A ‘Never-Neverland‘-domiciled company transfers assets to a subsidiary domiciled in a different jurisdiction.
    • Two companies under common control combine to form one legal entity.
    • Prior to spin-off of a subsidiary by a parent entity, another wholly owned subsidiary transfers net assets to the “SpinCo.”
    • As part of a reorganization, a parent entity merges with and into a wholly owned subsidiary.
  • Newco formations may be used in Business Combinations or businesses controlled by the same party (or parties). Just a few examples are: Common control transactions v Newco formation
    • A Newco can be formed by the controlling party (for example, to facilitate subsequent disposal of the newly created group through an initial public offering (IPO) or a spin-off or by a third-party acquirer (for example to raise funds to effect the acquisition); Common control transactions v Newco formation
    • A Newco can pay cash or shares to effect an acquisition; and
    • A Newco can be formed to acquire just one business or more than one business.

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The best 1 in overview – IFRS 9 Impairment requirements

IFRS 9 Impairment requirements

forward-looking information to recognise expected credit losses for all debt-type financial assets

 

Under IFRS 9 Impairment requirements, recognition of impairment no longer depends on a reporting entity first identifying a credit loss event.

IFRS 9 instead uses more forward-looking information to recognise expected credit losses for all debt-type financial assets that are not measured at fair value through profit or loss.

IFRS 9 requires an entity to recognise a loss allowance for expected credit losses on:

IFRS 9 requires an expected loss allowance to be estimated for each of these types of asset or exposure. However, the Standard specifies three different approaches depending on the type of asset or exposure:

IFRS 9 Impairment requirements

* optional application to trade receivables and contract assets with a significant financing component, and to lease receivables

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IFRS vs US GAAP Employee benefits

IFRS vs US GAAP Employee benefits

The following discussion captures a number of the more significant GAAP differences under both the impairment standards. It is important to note that the discussion is not inclusive of all GAAP differences in this area.

The significant differences and similarities between U.S. GAAP and IFRS related to accounting for investment property are summarized in the following tables.

Standards Reference

US GAAP1

IFRS2

715 Compensation – Retirement benefits

710-10 Compensation- General – Overall

712-10 Compensation – Nonretirement Postemployment Benefits – Overall

IAS 19 Employee Benefits

IFRIC 14 The limit on a defined benefit asset minimum funding requirements and their interaction

Introduction

The guidance under US GAAP and IFRS as it relates to employee benefits contains some significant differences with potentially far-reaching implications.

This narrative deals with employee benefits provided under formal plans and agreements between an entity and its employees, under legislation or through industry arrangements, including those provided under informal practices that give rise to constructive obligations.

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The relevant activities of an investee

The relevant activities of an investee – Don’t get fooled, relevant activities for financial reporting and consolidation purposes does not mean that the activities of an investee are the same as the activities of other entities (parent entity and subsidiary entities) consolidated into that one group. No…….. it is about whether the activities significantly affect the investee’s returns. In other words can the parent entity earn from the relevant activities.

Let that be clear!!

IFRS 10 introduces the concept of ‘relevant activities’. This is a critical part of the model. This concept clarifies which aspects of an investee’s activities must be under the direction of an investor for that investor to have control for consolidation purposes.The relevant activities of an investee

Examples of activities that, … Read more

Individual or collective assessment for impairment – Which 1 is best varies per case

Individual or collective assessment for impairment - An entity should normally identify significant increases in credit risk and recognise lifetime ECLs

Consolidated financial statements

The financial statements of a group in which the assets, liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries are presented as those of a single economic entity. The detailed ‘mechanics’ of the consolidation process vary from one group to another, depending on the group’s structure, history and financial reporting systems. IFRS 10 and much of the literature on consolidation are based on a traditional approach to consolidation under which the financial statements (or, more commonly in practice, group ‘reporting packs’) of group entities are aggregated and then adjusted on each reporting date.