5/28/2010
PFRS 3 Business Combinations (Revised) To be applied prospectivel y for business combinations where the acquisition date is on or after the beginning of annual periods starting on or after 1 July 2009.
Objective of the Standard ü improve the relevance, reliability and comparability of
the information that a reporting entity provides in its financial statement about a business combination and its effects. To accomplish that, this PFRS establishes principles principles and requirements for how the acquirer: recognizes and measures measures in its financial financial statements statements ü (a) recognizes the identi identifi fiabl ablee assets assets acqui acquired, red, the liabil liabiliti ities es assum assumed and any non-controlling interest in the acquiree; recogn recogniz izes es and measu measures res the goodwi goodwill ll acqui acquired red in in ü (b) the the busin usines esss combi combina nati tion on or a gain gain from a barga argain in purchase; and determ determin ines es wha whatt info informa rmation tion to dis disclo close se to enable enable ü (c) users users of the finan financial cial statem statements ents to eval evaluate uate the nature nature and financial effects of the business combination.
1
5/28/2010
Scope of the Standard The standard does not apply to: (a) the formation of a joint venture; (b) the acquisition of an asset or a group of assets that does not constitute a business; (c) a combination of entities or businesses under common control.
Definitions Acquiree The business or businesses that the acquirer obtains control of in a business combination. Acquirer The entity that obtains control of the acquiree. Acquisition Date The date on which the acquirer obtains control of the acquiree.
2
5/28/2010
Definitions Business An integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs or other economic benefits directly to investors or other owners, members or participants. Business Combination A transaction or other event in which an acquirer obtains control of one or more businesses. Control The power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.
Definitions Contingent consideration
Usually, an obligation of the acquirer to transfer additional assets or equity interests to the former owners of an acquiree as part of the exchange for control of the acquiree if specified future events occur or conditions are met. However, contingent consideration also may give the acquirer the right to the return of previously transferred consideration if specified conditions are met.
3
5/28/2010
Definitions Equity interests For the purposes of this PFRS, equity interests is used broadly to mean ownership interests of investor-owned entities and owner, member or participant interests of mutual entities. Fair value The amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction.
Definitions Identifiable An asset is identifiable if it either:
(a) is separable, ie capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, identifiable asset or liability, regardless of whether the entity intends to do so; or (b) arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations.
4
5/28/2010
Definitions Goodwill An asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Non-controlling interest The equity in a subsidiary not attributable, directly or indirectly, to a parent.
Definitions Mutual Entity An entity, other than an investor-owned entity, that provides dividends, lower costs or other economic benefits directly to its owners, members or participants. For example, a mutual insurance company, a credit union and a co-operative entity are all mutual entities. Parent An entity that has one or more subsidiaries. Subsidiary An entity, including an unincorporated entity such as a partnership, that is controlled by another entity (known as the parent).
5
5/28/2010
Key Changes - Scope Scope of PFRS 3 has been broadened such that the acquisition method of accounting applies to (a) combinations involving only mutual entities (e.g. mutual insurance companies, credit unions, cooperatives, etc.) and (b) combinations in which separate entities are brought together by contract alone (e.g. dual listed corporations and stapled entity structures).
Key Changes v
PFRS 3 requires any non-controlling interest in an acquiree to be recognized, but provides a choice of two methods in measuring non-controlling interests arising in a business combination: qOption
1: to measure the non-controlling interest at its acquisition-date fair value (consistent with the measurement principle for other components of the business combination qOption
2: to measure the non-controlling interest at the proportionate share of the value of net identifiable assets acquired
6
5/28/2010
Key Changes v
Step acquisitions qIf
the acquirer holds a non-controlling equity investment in the acquiree immediately before obtaining control, the acquirer remeasures that previously held equity investment at its acquisition-date fair value and recognizes any resulting gain or loss in profit or loss. qIn
prior reporting periods, the acquirer may have recognized changes in the value of its equity interest in the acquiree in other comprehensive income (for example, because the investment was classified as available for sale). If so, the amount that was recognized in other comprehensive income shall be recognized on the same basis as would be required if the acquirer had disposed directly of the previously held equity interest.
Key Changes v
Contingent consideration qContingent
consideration is defined in PFRS 3 as 'Usually, an obligation of the acquirer to transfer additional assets or equity interests to the former owners of an acquiree as part of the exchange for control of the acquiree if specified future events occur or conditions are met. ‘ qThe
acquirer recognizes the acquisition-date fair value of any contingent consideration as part of the consideration transferred in exchange for the acquiree. üThis
is a significant change from the practice under the previous version of PFRS 3 of recognizing contingent consideration obligations only when the contingency was probable and could be measured reliably.
7
5/28/2010
Key Changes v
Acquisition-related costs qwith
the exception of the costs of registering and issuing debt and securities that are recognized in accordance with PAS 32 and PAS 39, i.e. as a reduction of the proceeds of the debt or securities issued, PFRS 3 requires that acquisition-related costs are to be accounted for as expenses in the periods in which the costs are incurred and the related services are received.
Key Changes v
Contingent liabilities qPAS 37 defines a contingent liability as: ü(a) a possible obligation that arises from past events and
whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity; or ü(b) a present obligation that arises from past events but is
not recognized because: Ø(i) it is not probable that an outflow of resources
embodying economic benefits will be required to settle the obligation; or Ø(ii) the amount of the obligation cannot be measured
with sufficient reliability.
8
5/28/2010
Key Changes v
Contingent liabilities qPFRS 3 requires that for contingent liabilities assumed in a
business combination, the acquirer recognizes a liability at its fair value if there is a present obligation arising from a past event that can be reliably measured, even if it is not probable that an outflow of resources will be required to settle the obligation. qHowever, for a contingent liability that only represents a possible
obligation that arises from a past event, whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity, no liability is to be recognized under PFRS 3. qSimilarly, no liability is recognized in respect of a contingent
liability that represents a present obligation arising from a past event but whose acquisition-date fair value cannot be measured reliably.
Key Changes PFRS 3 requires that at the acquisition date, the acquirer must classify or designate the identifiable assets and liabilities assumed as necessary in order to apply other PFRSs subsequently. v
vSuch
classifications and designations made by the acquirer are to be based on the contractual terms, economic conditions, the operating and accounting policies of the acquirer, and any other pertinent conditions as they exist at the acquisition date. vThe
standard provides two exceptions to this principle: qclassification of leases in accordance with PAS 17; qclassification of a contract as an insurance contract in accordance with PFRS 4.
9
5/28/2010
Key Changes v
If the assets of the acquiree include a right previously granted to it allowing use of the acquirer's assets (a reacquired right), PFRS 3 requires it to be recognized as an identifiable intangible asset. v All
consideration transferred will need to be analyzed to determine whether it is part of the exchange transaction or for another transaction, such as remuneration for the provision of future services or settlement of existing relationships.
Key Changes v
Indemnification assets the acquirer recognizes an indemnification asset at the same time that it recognizes the indemnified item measured on the same basis as the indemnified item, subject to the need for a valuation allowance for uncollectible amounts. -
10
5/28/2010
Key Changes v
PFRS 3 requires the acquirer to recognize and measure a deferred tax asset or liability arising from the assets acquired and liabilities assumed in a business combination in accordance with PAS 12, Income Taxes. The acquirer is also required to account for the potential tax effects of temporary differences and carryforwards of an acquiree that exist at the acquisition date or arise as a result of the acquisition in accordance with PAS 12.
Transition PFRS 3 must be applied prospectively to business combinations occurring after the effective date. If the standard is applied before the effective date, the amendments to PAS 27, Consolidated and Separate Financial Statements must also be applied at the same date. This standard includes consequential amendments to other standards and interpretations.
11
