BUSINESS_COMBINATIONS and its detail.pptx

business resorts with various combinations details

1. BUSINESS COMBINATIONS

2. Presentation Agenda Objective Distinction between IFRS 3 & IFRS 10 Determining business combination Acquisition method : Overview Acquisition method : 4 Steps Illustration : Goodwill & Non- controlling Interest Additional guidance : Specific transactions

3. objective The objective of IFRS 3 Business combination is to improve the Relevance, reliability and comparability of the information that a reporting entity provides in its financial statements about a Business combination and its effects. More specifically, IFRS 3 establishes principles and requirements for how the acquirer Recognizes and measures the IDENTIFIABLE ASSETS acquired , the LIABILITIES assumed and ANY NON CONTROLLABLE INTEREST . 2. Recognizes and measures the GOODWILL acquired in the business combination, or a gain from a bargain purchase. 3. Determine what INFORMATION TO DISCLOSE about a business combination.

4. Distinction between IFRS 3 & IFRS 10 Both standards deals with Business Combinations and their Financial Statements. But while IFRS 10 DEFINES A CONTROL and prescribes specific CONSOLIDATION PROCEDURES, IFRS 3 IS MORE ABOUT THE MEASURMENT OF THE ITEMS in the consolidated financial statements such as Goodwill, Non controlling interest etc., NOTE If you need to deal with the consolidation, then YOU NEED TO APPLY BOTH STANDARDS not just one or the other

5. Determining Business Combination Any investor who acquires some investment needs to determine whether this transaction or event is a business combination or not. IFRS 3 requires that assets and liabilities acquired NEED TO CONSTITUTE A BUSINESS, otherwise its not a business combination and an investor needs to account for the transaction in line with other IFRS. A business consists of 3 elements : INPUT: Any economic resource that creates or can create outputs when one or more processes are applied to it ( E.g. non current assets etc.,) PROCESS: Any system, standard, protocol, convention or rule that when applied to an input(s), creates outputs ( E.g. management process, workforce etc.,) OUTPUT: The results of inputs and processes applied to those inputs that provide or can provide a return in the form of dividends, lower costs or other economic benefits directly to investors or other owners.

6. Acquisition method: Overview Once the investor acquires a subsidiary, it has to account for each combination by applying THE ACQUISITION METHOD ISSUE Now you may ask what is the difference between the acquisition method and consolidation procedures? SOLUTION The acquisition method is simply a part of all consolidation procedures one need to perform When u prepare your consolidated financial statements, you must start with the correct application of the acquisition method, and then continue with eliminating mutual intra- group transactions etc.,

7. Acquisition method: 4 Steps

8. STEP 1: IDENTIFYING THE ACQUIRER Most of the time, it’s straight forward – the acquirer is usually INVESTOR WHO ACQUIRES an investment or subsidiary. Sometimes, it is not so clear. The most common example is a merger. When two companies merge together and create just 1 company, the acquirer is usually the bigger one- with the larger fair value. However, IFRS 3 provides the application guidance in its appendix.

9. Step 2 : DETERMINING THE ACQUIRING DATE The ACQUISITION DATE is the date on which the acquirer obtains control of the acquiree. It is generally the date on which the acquirer legally transfers the consideration (= The payment for the investment), acquires the assets and assumes the liabilities of the acquiree – THE CLOSING DATE. However, it can be earlier or later than the closing date, too. It depends on the contractual agreement, if something like that exists.

10. STEP 3 : Recognizing and measuring measures the IDENTIFIABLE ASSETS acquired , the LIABILITIES assumed and ANY NON CONTROLLABLE INTEREST in the acquiree. 3.1 ACQUIRED ASSETS AND LIABILITIES An investor OR acquirer shall recognize all identifiable assets acquired, liabilities assumed and Non controlling interests in the acquiree separately from Goodwill. Care should be taken, because sometimes, There’s some unrecognized asset in an acquiree, and an investor needs to recognize this asset  if it meets the criteria for the recognition. For example, a subsidiary can have some unrecognized internally generated intangible assets meeting separability criterion. In such a case, an acquirer needs to recognize these assets, too

11. All assets and liabilities are MEASURED AT ACQUISITION-DATE FAIR VALUE. Often, investors need to perform “FAIR VALUE ADJUSTMENTS” at acquisition date, because assets and liabilities are often valued in a different way – either at cost less accumulated depreciation, at amortized cost, etc.

12. However, there are some exceptions from fair value measurement rule: Contingent liabilities (IAS 37); Income taxes (IAS 12); Employee benefits (IAS 19); Indemnification assets; Reacquired rights; Share-based payment transactions (IFRS 2); Assets held for sale (IFRS 5)

13. 3.2 NON-CONTROLLING INTEREST Non-controlling interest is the equity in a subsidiary not attributable, directly or indirectly, to a parent. For example, when an investor acquires 100% share in a company, then there’s no non- controlling interest, because the investor owns subsidiary’s equity in full. However, when an investor acquires less than 100%, let’s say 80%, then there’s non- controlling interest of 20%, as the 20% of subsidiary’s net assets belong to someone else. IFRS 3 permits 2 METHODS OF MEASURING NON-CONTROLLING INTEREST: 1.FAIR VALUE, or 2. The PROPORTIONATE SHARE in the recognized acquiree’s net assets.

14. STEP 4 : Recognizing and measuring GOODWILL or A GAIN FROM A BARGAIN PURCHASE.   GOODWILL is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized.  It is calculated as a difference between: The aggregate of: The fair value of the consideration transferred; The amount of any non-controlling interest; In a business combination achieved in stages: the acquisition-date fair value of the acquirer’s previously- held equity interest in the acquiree; AND The acquisition-date amounts of net assets in an Acquiree.

15. GOODWILL V/S NEGATIVE GOODWILL Particulars Amount (INR) Fair value of consideration transferred XXXXXXXXXXX Non-controlling Interest XXXXXXXXXXX Fair value of previous equity Interest XXXXXXXXXXX Fair value of assets acquired (XXXXXXXXXXX) Goodwill (OR) Negative Goodwill XXXXXXXXXXX

16. The goodwill can be both positive and negative: If the goodwill is POSITIVE, then you shall recognize it as an intangible asset and perform annual impairment test; If the goodwill is NEGATIVE, then it is a gain on a bargain purchase. You should: Review the procedures for recognizing assets and liabilities, non-controlling interest, previously held interest and consideration transferred (i.e. check whether they are error-free); Recognize a gain on bargain purchase in profit or loss.  

17. The above mentioned formula changes from one company to other because of their accounting policies The MICROFOCUS accounting policy changes the Goodwill calculation as follows: Particulars Amount Amount Consideration paid XXXXX Net assets acquired at book values XXXXXX Fair value of adjustments to net assets, including intangible assets recognized XXXXXX Fair value of net assets acquired (XXXXXX) Goodwill (if consideration paid <fair value of net assets acquired) XXXXXX

18. WHAT IS CONSIDERATION PAID? The consideration transferred in exchange for the acquiree includes any asset or liability resulting from resulting from a contingent consideration agreement. An obligation to pay contingent consideration or a contingent right to the return of previously transferred consideration if specified conditions are met should be recognized at fair value determined as at the acquisition date .

19. FAIR VALUE OF ASSETS The Micro Focus methodology adopted in historical acquisitions is the top down approach, which determines the fair value of the deferred revenue by calculating the return required by the seller of the liability to compensate them for the costs incurred to date in generating the deferred revenue, plus an assumed profit on these costs, as applicable. The Technical Accounting Team is to agree upfront with the valuation expert the methodology to be used and basis for assumptions made.

20. Other points to consider : Write off of any historic Goodwill/purchased Intangibles. Other Intangible write off (e.g. Development costs, Software not being used going forward) Deferred tax liability on new purchased intangibles (Group tax to provide). Any deferred rent free periods should not be recognised on acquisition date, because it does not meet the definition of a liability. Instead, as required by IFRS 3(2008). B29, the Group should recognise an intangible asset if the terms of the opening lease are favorable relative to market terms and a liability if the terms are unfavorable relative to market terms.

21. Problem on Goodwill Mommy Corp. acquires 80% share in Baby Ltd. for the cash payment of GBP 100 000. On the acquisition date, the aggregate value of Baby’s identifiable assets and liabilities in line with IFRS 3 is GBP 110,000. The fair value of non-controlling interest (the remaining 20% share) is GBP 25 000. This amount was determined with the reference of market price of Baby’s ordinary shares before the acquisition date. 

22.  Goodwill and non-controlling interest have been calculated using both methods mentioned in Step 3 and the results are in the following table. FAIR VALUE (GBP) PROPORTIONATE SHARE ON BABY’S NET ASSETS (GBP) Consideration transferred 1,00,000 1,00,000 Non- controlling Interest 25,000 (FV, reference to market value of B’s shares) 22,000 (20% of BABY’S net assets of GBP 1,10,000) BABY’s net assets (1,10,000) (1,10,000) Goodwill 15,000 12,000