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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Better IFRS 9 Retain control of the asset

IFRS 9 Retain control of the asset

IFRS 9 Retain control of the asset is the next step in the derecognition decision tree depicted below, after deciding in Step 5 that the entity has NOT transferred substantially all risk and rewards for the asset.

IFRS 9 Retain control of the asset IFRS 9 Retain control of the assetis part of a decision model for the derecognition of financial assets. The derecognition can be a full derecognition, a full continued recognition, a full derecognition with recognition of new assets or liabilities retained or a continued involvement. The model is starting here. Derecognition of financial assets. IFRS 9 Retain control of the asset IFRS 9 Retain control of the asset

The … Read more

IFRS 9 Continue to recognise the financial asset at best

IFRS 9 Continue to recognise the financial asset

IFRS 9 Continue to recognise the financial asset is the ending point after having gone through Step 4 part 1 and part 2 of the below decision tree. After deciding the entity has NOT transferred its rights to receive the cash flows from the assets and also deciding the entity has NOT assumed an obligation to pay the cash flows from the asset, the entity cintinues to recognise the asset.

IFRS 9 Continue to recognise the financial asset is part of a decision model for the derecognition of financial assets. The derecognition can be a full derecognition, a full continued recognition, a full derecognition with recognition of new assets or liabilities retained Read more

Restrictions on transferred assets

Restrictions on transferred assets - Stipulations that limit or direct the purposes for which a transferred asset may be used, but do not specify future benefit