Business Combinations

Business combinations.
A-IFRS Workshop
Objectives
This module is designed to:
develop an understanding of:
AASB AASB AASB AASB 3 Business Combinations 127 Consolidated and Separate Financial Statements 128 Investments in Associates 131 Interests in Joint Ventures
communicate major changes from current practice outline transitional adjustments
Business combinations
2004 Deloitte Touche Tohmatsu
1. Overview
Objectives
key pronouncements major impact areas
Overview
AASB 3 Business Combinations

Supersedes AASB 1013 Accounting for Goodwill AASB 1015 Acquisitions of Assets
AASB 127 Consolidated and Separate Financial Statements

Supersedes AASB 1024 Consolidated Accounts
AASB 128 Investments in Associates

Supersedes AASB 1016 Accounting for Investments in Associates
AASB 131 Interests in Joint Ventures

Supersedes AASB 1006 Interests in Joint Ventures
4 Business combinations 2004 Deloitte Touche Tohmatsu
2. Business Combinations - Scope

Objectives
scope of AASB 3 concept of a business identifying an acquirer
What is a business combination?
the bringing together of separate entities or businesses into one reporting entity AASB 3 - business combinations only
look to other A-IFRSs for acquisitions of assets
AASB 1015 covered acquisitions of all assets (and businesses)
Business combinations - scope
AASB 3/IFRS 3 scope differences

forming a joint venture involving entities under common control involving two or more mutual entities in which separate entities or businesses are brought together by contract alone
7 Business combinations - scope
AASB 3
excluded included excluded excluded
IFRS 3
excluded excluded excluded
(ED - include)
excluded
(ED - include)
AASB 3/IFRS 3 scope differences

involving entities under common control
AASB 3
included
IFRS 3
excluded
must apply requirements of AASB 3 exemption for non-Corps Act entities, can elect to use existing book values in some limited circumstances
Non-Corps Act scope exclusion

Is the transaction a reconstruction within an economic entity?
No Yes
Yes
Is the entity reporting under the Corporations Act 2001?

No
Apply the purchase method of accounting
No
Has the entity elected to account for the combination at book values?
Yes
Measure net assets at their carrying amounts immediately prior to the reconstruction
Reconstruction within a reporting entity

Business transferred from one entity to another entity in the same reporting entity OR Ownership interest in the ultimate parent entity of a reporting entity transferred to a newly formed reporting entity AND Acquirer only issues its own equity instruments as purchase consideration and relative ownership interests remain unchanged.
Business combinations - scope 2004 Deloitte Touche Tohmatsu
10
Reconstruction within a reporting entity

Following the June 2005 revision of AASB 3, DTF and HoTARAC will review its policy on reconstruction/transfers within the reporting entity.
Preliminary View: Account for reconstructions within a reporting entity at book value
11 Business combinations - scope 2004 Deloitte Touche Tohmatsu
Concept of a business
Key concepts:
integrated set of activities and assets managed for a return or other economic benefits generally consists of inputs, processes and resulting outputs goodwill present presumed to be a business an entity is not always a business
Exercise 2.1
identifying businesses, implications Page 14
12 Business combinations - scope 2004 Deloitte Touche Tohmatsu
Answers
1. Bs service operation 2. Ds net assets, excluding systems and management 3. Computers & telephone systems 4. M, single investment property 5. Q, gas pipeline Depends

13
Exercise 2.2
Do your recent acquisitions represent businesses?
Page 15
Exercise 2.3
What are the consequences of an acquisition representing a businesses?
Page 15
14
Identifying an acquirer
Key concepts:
acquirer must be identified for all acquisitions the combining entity that obtains control of the other combining entities or businesses if difficult, consider:
relative fair values of combining entities entity giving up cash might be the acquirer domination of management team
15
The acquirer under AASB 3 can be different to the legal acquirer
Exercise 2.4
identifying the acquirer Page 17
16
Answers
1. CD acquires AB 2. Group restructure Entity AB NO ACQUIRER
17
Exercise 2.5
Could any of you recent acquisitions be regarded as a reverse acquisition?
Page 18
18
3. Business CombinationsAccounting requirements

Objectives
understand the key requirements
Accounting for business combinations

Key concepts:
must use purchase method acquirer must be identified for all acquisitions measure the cost of the combination allocate cost to net assets and contingent liabilities cost > fair values goodwill cost < fair values income*
* contribution by owners if involving entities under common control and conditions met
20
Business combinations accounting requirements
Cost of a business combination

Cost of = combination Fair values + Costs attributable
Must be directly attributable Excludes general admin costs Excludes costs of issuing equity instruments, financial instruments
At date of exchange Assets given Liabilities incurred or assumed Equity instruments issued by acquirer
21

Supplementary Case study 3.1
cost of a business combination
Page 22
22
Answers
a) 3,000,000 shares x $10.75 = $32,250,000 b) as follows: 1. Finders fee of $20,000 2. Lawyers fees of $80,000 3. Costs incurred by DEF 4. Accountants fees 5. Valuers fees 6. Costs of issuing shares 7. Costs of arranging finance NO YES NO YES YES NO NO
23
Answers, continued
d) total cost:
Cost of shares issued Cash consideration paid Other costs TOTAL $32,250,000 3,000,000 145,000 $35,395,000
e) journal entry:
DR Investment CR Equity CR Borrowings CR Cash/payables DR Expense
24 Business combinations accounting requirements
35,395,000 32,225,000 2,990,000 200,000 20,000

Determining fair values

Item
Assets other than intangibles Intangibles Non-current assets held for sale Liabilities Restructuring liabilities Contingent liabilities Goodwill
25 Business combinations accounting requirements
Measurement
Fair value Fair value Fair value less costs to sell Fair value Fair value Fair value Cost
Recognition criteria
Probable, reliably measurable Identifiable, reliably measurable As above Probable, reliably measurable Acquiree has existing liability under AASB 137 Reliably measurable None

AASB 3, Appendix B has guidance on fair values for various items
see table on page 26
26

Provisionally determined fair values
12 month window to restate acquisition entry subsequent changes to estimates impact profit recalculate everything from acquisition date restate comparative information, if applicable
12 month limit does not apply to:

errors, can always be corrected (as above) contingent consideration, adjust cost of combination deferred tax assets, special requirements
27
Accounting after initial recognition

Key requirements after initial recognition:
no goodwill amortisation, impairment test contingent liabilities measured higher of:
amount that would be recognised under AASB 137 original amount, less any amortisation under AASB 118
adjust provisional items, within 12 months errors, contingent consideration adjusted
28
4. Impairment of goodwill
Objectives
understand approach to impairment testing of goodwill
Goodwill basic principles

Must test annually Allocate goodwill to individual CGUs or groups of CGUs Take allocated goodwill into account when measuring disposals Impairment losses cannot be reversed
30
Goodwill allocation to CGUs

Goodwill allocated:
lowest level of CGUs at which goodwill is monitored look to management structure cannot be larger than a segment completed before end of reporting period when acquired, extend to next period with disclosure cannot change allocation, unless restructured goodwill is grossed up for minorities
Exercise 4.1
allocating goodwill to CGUs page 35
Goodwill impairment test

Annual impairment test
same time each year for each CGU where acquired during the year, test by the end of the year first test any assets or CGUs, then test CGUs with goodwill can use prior year calculation in some cases
Discussion 4.1 and 4.2

testing other assets first
32
5. Business Combinations First-time adoption

Objectives
initial adjustments under AASB 1
Transitional adjustments under AASB 1

Transitional requirements in AASB 3 overridden by AASB 1
comparative information restated retrospectively apply standard at date of transition, subject to voluntary exceptions
34
First-time adoption
Transitional adjustments under AASB 1

Points to note business combinations:
identify an acquirer full recognition of intangibles non amortisation of goodwill and intangibles will indefinite useful lives deferred taxes on fair value adjustments, investments, intangibles recognition of contingent liabilities fair value guidance, 12 month limit on adjustments restructuring provisions determination of minority interests
35
First-time adoption
Business combination options under AASB 1

AASB 1 allows
full restatement of past business combinations no restatement before date of transition restatement from a particular date
FRD 113 Investments in Subsidiaries, Jointly Controlled Entities and Associates: Do not restate business combinations
36
First-time adoption
Business combination exception

Where a business combination is not restated:
do not revisit classification, eg. reverse acqns assets/liabilities acquired still recognised, adjust against opening retained earnings
some exceptions, including intangibles in goodwill even if not recognised as part of the combination only to the extent would be recognised by the acquiree, e.g. intangibles
derecognise assets/liabilities that fail under Australian equivalents IFRS:

intangibles that fail adjust goodwill everything else opening retained earnings
37
First-time adoption
Business combination exception

Where a business combination is not restated (continued):
other assets/liabs deemed to be cost no adjustments to goodwill, except:
intangibles that fail recognition criteria contingent amounts payable resolved prior to transition impairment losses
38
First-time adoption
6. Business Combinations Disclosure

Objectives
be aware of disclosure requirements
Disclosure
Checklist on page 45
40
Disclosure
7. Consolidations, Joint Ventures and Associates

Objectives
Understand the key differences
Consolidations
AASB 127 Consolidated and Separate Financial Statements
Parent entity must present consolidated financial statements (consolidating all subsidiaries) Subsidiaries based on control
consistent with AASB 1024 concepts
Public sector:
control may be established by legislation or executive authority or by administrative arrangements
ministerial approval is required for budgets power of the minister to appoint remove members of the board ministerial power of direction
42
Consolidation
Consolidations
Key differences:
Subsidiaries financial statements used for consolidation purposes:
should be the same date as parent entity may differ by up to 3 months (but must adjust for significant transactions and events)
Losses attributable to minority interests

only if minority has a binding obligation to make good
Parent entitys increase or decrease in ownership (without impacting control)

treated as an equity transaction
43
Consolidation
Consolidations
Separate financial statements of the parent entity
measure investment in subsidiaries, jointly controlled entities and associates:
cost; or in accordance with AASB 139
FRD 113 Investments in Subsidiaries, Jointly Controlled Entities and Associates: - Measure at cost.
44
Consolidation
Investments in associates
AASB 128 Investments in Associates
Associates based on significant influence
consistent with AASB 1016 concepts
Investments in associates must be measured using the equity method in the consolidated financial statements Scope exclusions:
venture capital organisations mutual funds, unit trusts, etc investments designated as fair value through profit and loss under AASB 139
45
Associates
Other Exemptions:
Investment held for sale under AASB 5 If the following conditions are satisfied:
all owners agree that equity accounting not be applied investors debt/equity securities not traded accounts not filed for purpose of issuing securities parent entity prepares consolidated accounts, which adopt equity accounting, and accounts are publicly available
46
Associates
Reporting date of investee:
Investor uses the most recent available financial statements of associate (in order to apply equity accounting) If associate has a different reporting date:
associate prepares investor financial statements using the investors reporting date (unless impracticable) if associate prepares financial statements at a different reporting date, the investor must adjust for any significant transactions or events that occur between the two dates in any case, the reporting dates cannot differ by more than 3 months
47 Associates 2004 Deloitte Touche Tohmatsu
Key differences:
No amortisation of notional goodwill
consistent with AASB 3 Business Combinations
If entity ceases to be an associate, investment is treated as a financial asset under AASB 139
AASB 1016 required investment to be measured at cost
Investors net investment includes long-term loans and receivables

therefore, equity accounted losses may be applied against long-term loans and receivables if the investment is reduced to zero
48
Associates
First time adoption:
Same rules as business combinations
full restatement of past business combinations no restatement before date of transition restatement from a particular date
FRD 113 Investments in Subsidiaries, Jointly Controlled Entities and Associates: Do not restate prior acquisitions of associates
49
Associates
Joint ventures
AASB 131 Interests in Joint Ventures
Jointly AASB 131 controlled operations AASB 1006 Jointly controlled assets Jointly controlled entities Joint Joint venture operations venture entities
JV entities - equity method of accounting under AASB 128 Investments in Associates

same scope exclusions, first time adoption, etc,
50 Joint ventures 2004 Deloitte Touche Tohmatsu
Workshop summary
Summary
Points to note business combinations:

goodwill not amortised (impairment test) separate identification of intangible assets restructuring provisions more difficult contingent liabilities recognised IPR&D recognised based on probability discount on acquisition recognised as revenue limited timeframe to adjust acquisition entries Implementation
Refer implementation guidance typical tasks
Summary
Points to note Associates:
some scope exclusions no amortisation of notional goodwill rules for difference reporting dates definition of net investment in associate
Points to note Joint Ventures:

jointly controlled operations, jointly controlled assets, and jointly controlled entities JV entities equity accounting under AASB 128
53
Deloitte Touche Tohmatsu is an organization of member firms devoted to excellence in providing professional services and advice. We are focused on client service through a global strategy executed locally in nearly 150 countries. With access to the deep intellectual capital of 120,000 people worldwide, our member firms, including their affiliates, deliver services in four professional areas: audit, tax, consulting, and financial advisory. Our member firms serve more than one-half of the worlds largest companies, as well as large national enterprises, public institutions, locally important clients, and successful, fast-growing global companies. For regulatory and other reasons, certain member firms do not provide services in all four professional areas. This document has been prepared as a general guide to the matters covered. It is not possible to cover all the situations that may be encountered in practice and, in addition, readers may have alternative solutions to some of the questions raised and answers offered. Accordingly, this document should not be viewed as a substitute for detailed reading of the associated accounting pronouncements or professional advice on specific matters of concern. Whilst every effort has been made to ensure that the information contained in this document is accurate, neither Deloitte Touche Tohmatsu nor any of its partners, directors, principles, consultants or employees shall be liable to any party in respect of decisions or actions taken as a result of using the information in this document.
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Business combinations.

communicate major changes from current practice outline transitional adjustments

2004 Deloitte Touche Tohmatsu

AASB 3 Business Combinations

AASB 127 Consolidated and Separate Financial Statements

AASB 128 Investments in Associates

AASB 131 Interests in Joint Ventures

2. Business Combinations - Scope

What is a business combination?

AASB 1015 covered acquisitions of all assets (and businesses)