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Consolidation and Business CombinationsChanges to IFRS 3, IAS 27, IAS 37
ASEM IFRS SEMINARShanghai, 25-26 March 2006
Reinhard Biebel, EFRAG Deputy Technical Director
©EFRAG 2006 2 AISAM SEMINAR 25-26 March 2006
Consolidation - Combination
Acquisition
Common Control
Joint Venture
Hostile take-over
Merger
Need for consolidated information
De facto Control
©EFRAG 2006 3 AISAM SEMINAR 25-26 March 2006
Racing ahead …
IAS 22(revised 1993)minor changesSIC 9, 22 & 28
31 March IFRS 3minor changes 2004-2005
30 June ED IFRS 3
? common control fresh-start (true
mergers)
1993
1996-1999
2004
2005
????
©EFRAG 2006 4 AISAM SEMINAR 25-26 March 2006
ED IFRS 3 – Phase II
Issued 30 June 2005
Joint project with US standard setter FASB Objective = improvement and convergence IASB/FASB
Consequential amendments to IAS 27, 37 and 19
Completely new method of treating: Business combinations
Minority interests (now: non-controlling interests)
Contingent assets and liabilities
©EFRAG 2006 5 AISAM SEMINAR 25-26 March 2006
ED IFRS 3: Changes to terminology
Minority-interests
Non-controlling interest (NCI)
©EFRAG 2006 6 AISAM SEMINAR 25-26 March 2006
ED IFRS 3: Changes to definitions
Business combination [IFRS 3]
The bringing together of separate entities or businesses into one reporting entity
Business combination [ED IFRS 3]
A business combination is a transaction or other event in which an acquirer obtains control of one or more
businesses
©EFRAG 2006 7 AISAM SEMINAR 25-26 March 2006
Control under IAS 27
IASB Statement, IASB Update October 2005:
“IAS 27 contemplates that there are circumstances in which one entity can control another entity without owning more than half the voting power.”
©EFRAG 2006 8 AISAM SEMINAR 25-26 March 2006
Acquisition method
Amendment: Purchase Method Acquisition Method
1. Identify acquirer
2. Determine the acquisition date
3. Measure the fair value of the acquiree
4. Recognise and measure identifiable assets acquired and liabilities assumed at fair value
1+2 similar to current IFRS 3
3+4 amended to reflect the transition to full fair value
©EFRAG 2006 9 AISAM SEMINAR 25-26 March 2006
ED IFRS 3: Significant changes
IFRS 3 ED IFRS 3
Business combination recognised and measured at the acquiror’s accumulated cost at the acquisition date (aggregate of the fair values of assets given, liabilities assumed, and equity instruments issued)
Business combination recognised and measured at fair value of the acquiree at the acquisition date
Even if achieved in stages or if less than 100% of the equity interests are owned
Direct costs of acquisition recognised in the cost of the business combination
Direct costs of acquisition recognised separately, i.e. typically in profit or loss
©EFRAG 2006 10 AISAM SEMINAR 25-26 March 2006
IFRS 3 ED IFRS 3
Contingent consideration only recognised in the cost of acquisition at the acquisition date, if payment is probable and can be measured reliably
Contingent consideration measured at fair value at the date of acquisition
Subsequent changes in contingent consideration affect goodwill (+/÷)
Subsequent changes in contingent consideration classified as liabilities are recognised in accordance with IAS 39, IAS 37 or other relevant IFRS and typically affect profit or loss
Large number of disclosures required
More new disclosure requirements
ED IFRS 3: Significant changes
©EFRAG 2006 11 AISAM SEMINAR 25-26 March 2006
ED IFRS 3: Significant changes - goodwill gross up
Acquired business measured at fair value as a whole
100% goodwill recognised Consistent with treatment of other assets
Goodwill allocated between acquirer and non-controlling interest (was minority interest)
Allocation of goodwill to acquirer based on: Fair value of acquirer’s equity interest LESS
Fair value of share of net assets acquired
Balance to NCI
©EFRAG 2006 12 AISAM SEMINAR 25-26 March 2006
ED IFRS 3: Goodwill example
P acquires 75% (750 000 shares) of S for CU7.5m
Shares in S trading about A$8 per share Expectation of synergies
Independent valuation value of S = CU9.7m
Fair value of net assets acquired = CU8m
Current requirements IFRS 3
Consideration 7,5
Share of identifiable A+L (75% 8m)
(6,0)
Goodwill as per IFRS 3 1,5
Current requirements IFRS 3
Goodwill 1,5
Net assets 8,0
Minority interest 2,0
©EFRAG 2006 13 AISAM SEMINAR 25-26 March 2006
ED IFRS 3: Goodwill example
Current requirements IFRS 3
Goodwill 1,5
Net assets 8,0
Minority interest (MI) 2,0
ED IFRS 3
Fair value of S 9,7
Fair value of net assets (8,0)
Goodwill 1,7
ED IFRS 3 - allocate to P
Consideration 7,5
Share of identifiable A+L (75% 8m)
(6,0)
GW allocated to P 1,5
=> Balance to NCI 0,2ED IFRS 3
Goodwill 1,7
Net assets 8,0
Non-controlling interest (NCI)
2,2
©EFRAG 2006 14 AISAM SEMINAR 25-26 March 2006
Step acquisitions
Change in accounting for step acquisitions
A owns an investment in B
B = associated comp to A (i.e. A doesn’t control B)
If A increase its stake & gains control over B it must Determine fair value of associate
Recognise profit/loss in income statement
Follow the provisions of IFRS 3• Cost would include fair value of B
©EFRAG 2006 15 AISAM SEMINAR 25-26 March 2006
Step acquisition – illustration
A owns 35% stake in B at 31 Dec 2007 Book value at 31 Dec 2007 = CU2,500 Buying additional 40% on 31 Dec 2007 at
CU4,000 Fair value (FV) of total B = CU10,000
31 Dec 2007 A recognise gain of CU1,000 [(35%*CU10,000)-
CU2,500] A accounts for 40% purchase under ED IFRS 3
FV of all of B = CU10,000 and FV of 75% of B = CU7,500 Subsequent purchases = equity transaction
©EFRAG 2006 16 AISAM SEMINAR 25-26 March 2006
ED IFRS 3: Acquisition costs
Direct acquisition
costs
•Recognised in profit or loss
•Represent payment for services (e.g. legal costs. auditor, bank)
•Do not represent assets of acquirer
•Impact on goodwill
©EFRAG 2006 17 AISAM SEMINAR 25-26 March 2006
Contingent consideration
Fair value of consideration paid includes fair value of contingent consideration at acquisition date Classify as debt or equity per IAS 32
Examples Financial or non-financial hurdles
Share-based payment
©EFRAG 2006 18 AISAM SEMINAR 25-26 March 2006
Contingent consideration
Measurement period* adjustments 12 months from date of acquisition (no change)
New information about facts existing at acquisition date
Post measurement period Equity not remeasured
Otherwise re-measure No impact on business combination
* Measurement period = reasonable time to obtain information about facts and circumstances existing at acquisition date. Limited to on year.
©EFRAG 2006 19 AISAM SEMINAR 25-26 March 2006
Contingent consideration - example
Contingent consideration of CU6m payable if certain profit targets met
Fair value on acquisition date is CU4m
Subsequent changes reported in I/S As likelihood of meeting target increases, so does liability
When target met, liability is recorded at CU6m CU2m will have been recorded in I/S
No impact to accounting for business combination
©EFRAG 2006 20 AISAM SEMINAR 25-26 March 2006
Other changes
Date of acquisition
Recognition of intangibles – probability and reliability criterion!
Treatment of negative goodwill
…
©EFRAG 2006 21 AISAM SEMINAR 25-26 March 2006
Board members view on ED IFRS 3
Proposed effective date 1 January 2007
Quite a few IASB Board Members have
dissenting opinions (alternative views) Recognise goodwill at 100% 5 dissenters
Increase/decrease in stake after control3 dissenters
Definition of ‘business combination’ 2 dissenters
Widening of scope 1 dissenter
Direct cost to be recognised in I/S 2 dissenters
Removal of ’reliable measurement’-criteria re. intangible assets in Business Combinations 1 dissenter
Important joint project with FASB
©EFRAG 2006 22 AISAM SEMINAR 25-26 March 2006
EFRAG position on ED IFRS 3
Reasons for not supporting the EDs:
introduction of radical new and untested concepts,
the reasons for issuing the proposals and the assumed benefits,
the increased use of fair value without a conceptual debate,
the accounting for business combinations at fair value,
the application of an economic entity view,
the proposed full goodwill method,
the proposed treatment of acquisitions in steps,
the extended scope without providing a solution for true
mergers.
This does not pre-empt an assessment regarding endorsement
©EFRAG 2006 23 AISAM SEMINAR 25-26 March 2006
Business Combinations II:Changes to other standards
©EFRAG 2006 24 AISAM SEMINAR 25-26 March 2006
Other standards affected
IAS 27 Consolidated and Separate Financial Statements
IAS 37 Provisions, Contingent Liabilities and Contingent Assets
IAS 19 Employee Benefits
Purpose of proposed changes: to align ongoing accounting with that required on a
business combination (e.g. re contingencies)
to align IFRS with US GAAP in certain areas (e.g. restructuring)
©EFRAG 2006 25 AISAM SEMINAR 25-26 March 2006
ED IAS 27: “non-controlling interest” (NCI)
‘ Minority interest’ ‘non-controlling interest’
Non-controlling interest classified as equity Transactions with NCI = equity transactions
Gains/losses recorded in P&L only on loss of control
Losses applicable to NCI are allocated to NCI - any guarantees/support arrangements accounted for separately currently, losses not allocated to minority unless binding
obligation on them to make good losses incurred which they are able to meet
©EFRAG 2006 26 AISAM SEMINAR 25-26 March 2006
Increase from 80% to 100% Transaction with EQ holders
=> No change to goodwill
(already at 100%) No gain/loss recorded Consideration paid/payable
debited to EQ Current position – no
detailed guidance Typically recognise additional
goodwill Different views
internationally how to measure additional GW what to do about fair value
changes re assets / liabilities
ED IAS 27: Increased stake in sub
ED IAS 27 D C
NCI (share of consolidated equity) 20
Equity* 10
Cash/creditors 30
A owns 80% of B Consolidated equity of B = 100 A’s share = 80, NCI = 20 A buys remaining 20% for 30
Debit of 10 = excess price
parent paid to acquire NCI*The draft doesn’t explain where these debits/credits should be recognised
©EFRAG 2006 27 AISAM SEMINAR 25-26 March 2006
Decrease from 80% to 60% Transaction with EQ holders
=> No change to goodwill
(already at 100%) No gain/loss recorded Consideration received /
receivable credited to EQ Current position – no
detailed guidance: Typically recognise gain or loss
on “part disposal” No real consensus on
reduction to goodwill?
ED IAS 27: Decreased stake in sub
ED IAS 27 D C
Cash/debtors 40
NCI (share of
consolidated equity)24
Equity 16
A owns 80% of B Consolidated equity of B = 120 A’s share = 96, NCI = 24 A sells 20% for 40 A retains control over B
Credit of 16 = gain from sale of NCI Currently gain/loss goes to P/L. Not
possible under the ED.
©EFRAG 2006 28 AISAM SEMINAR 25-26 March 2006
ED IAS 27: disposal of subsidiary
Disposal when loss of control Need not involve change in stake
On disposal, any continuing EQ interest to be remeasured to FV currently, typically roll forward
appropriate proportion of carrying amount
Gain/loss to income statement on disposal determined as FV of Proceeds + FV of any retained
investment MINUS Aggregate of parent’s interest in
carrying amount of net assets prior to disposal
ED IAS 27Cash/receivables 500
+ FV, remaining investment 400
Total 900
- Consolidated NA of B (800)
Gain on disposal 100
A owns 100% af B Consolidated equity of B = 800 A sells 60% and loses control Proceeds on sale of 60% = 500 FV of remaining 40% = 400
FV of remaining 40% (400) applied as cost of initial investment under IAS 28
©EFRAG 2006 29 AISAM SEMINAR 25-26 March 2006
‘ Contingent liabilities’ & ‘contingent assets’ cease to exist
If obligation exists = ‘non-financial liability’
If rights exist = asset
If obligation/rights don’t yet exist because conditional = ‘contingency’
ED IAS 37: change to terminology
©EFRAG 2006 30 AISAM SEMINAR 25-26 March 2006
ED IAS 37: New Recognition Criteria
100%
50%
0%
IAS
37
EDProbability
Example A has obligation to B 20% chance A will have to
pay CU1m 80% chance A will pay
nothing Currently: no provision
Proposed: recognise CU0,2m
liability (CU1m x 20%)
Similar applies to assets: if
rights exist, recognise asset
(IAS 38/IAS 37)
Result = more asset & liabilities on balance sheet
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©EFRAG 2006 31 AISAM SEMINAR 25-26 March 2006
ED IAS 37: Measurement
Measurement principle
Move away from concept of ‘best estimate’ to more fair value based ’exit
value’
Future eventsTake into consideration if sufficiently
objective evidence exits
ReimbursementsMove away from ’virtually certain’. Recognise if unconditional right to
receive.
RestructuringsRecognise only when definition of
liability is satisfied. Specific guidance deleted.
Single obligation‘Most likely outcome’ not necessarily
consistent with the ED’s measurement objective
©EFRAG 2006 32 AISAM SEMINAR 25-26 March 2006
Conclusion
New proposals for accounting for Business Combinations are seen critical because of:
Increased use of fair value New an untested concepts Practicability concerns Usefulness of information Scope
IASB indicated to re-deliberate most of new conceptsFinal standard in 2007
Will IASB and FASB come up with a practical solution?
©EFRAG 2006 33 AISAM SEMINAR 25-26 March 2006
“xiè xie”