PricewaterhouseCoopers LLP  Business Combinations - IFRS Update Training Puts, Calls and Forwards

PricewaterhouseCoopersSlide 2 Puts, Calls and Forwards Refresher Puts Contracts giving one party the right to sell shares to the other party at a specified exercise price at a future date or during a specified future time period Calls Contracts giving one party the right to buy shares from the other party at a specified exercise price at a future date or during a specified future time period Forwards Binding contracts for one party to buy or sell shares from/to the other party at a specified exercise price at a future date or during a specified future time period

PricewaterhouseCoopersSlide 3 Puts, Calls and Forwards The issues Contracts created at the time of acquisition or at a later date Issues are: -Is the written put a liability? -Should MI continue to be recognised? -Where is the debit posted? -What about a forward purchase? -What about a call option? WARNING – Very Complex Issues!

PricewaterhouseCoopersSlide 4 Puts, Calls and Forwards The issues This session covers: -Puts written in a business combination -Puts written outside a business combination -Policy choices -Calls and forwards Global ACS alert -Five minutes to read

PricewaterhouseCoopersSlide 5 Puts, Calls and Forwards Shake up ACCOUNTING FOR PUTS WRITTEN AS PART OF A BUSINESS COMBINATION FIXED PRICE

PricewaterhouseCoopersSlide 6 Puts, Calls and Forwards Recognition A written put is always a liability Obligation to pay cash to holder [IAS 32.23/IAS 32 AG.29] Can happen at any time during exercise period Measured at present value of redemption amount [IAS 32.23]

PricewaterhouseCoopersSlide 7 Puts, Calls and Forwards Recognition and Remeasurement Accounting depends on the substance of the transaction Minority interest is NOT recognised [IAS 27 IG.5] Liability at present value of expected redemption amount One credit approach – liability and no minority interest Put is contingent consideration Liability is recognised as part of cost of acquisition (GW) Liability remeasurements adjust cost of acquisition Transfer of Risks and Rewards MI purchased

PricewaterhouseCoopersSlide 8 Puts, Calls and Forwards Derecognition Derecognition of the liability Put is exercisedPut expires unexercised Liability remeasured to settlement amount – adjust goodwill Liability derecognised Minority recognised Goodwill derecognised for the percentage of interest sold Liability derecognised Depends on the substance of the transaction

PricewaterhouseCoopersSlide 9 Puts, Calls and Forwards Shake up ACCOUNTING FOR PUTS WRITTEN AS PART OF A BUSINESS COMBINATION VARIABLE PRICE

PricewaterhouseCoopersSlide 10 Puts, Calls and Forwards Recognition and Remeasurement Accounting depends on the substance of the transaction Liability at present value of expected redemption amount Liability recognised as a reclassification from equity [IAS 32.23] Two credits approach – MI and liability Put is not contingent consideration MI not acquired Liability remeasurements go to income statement [IAS 39 AG.8] No Transfer of Risks and Rewards MI recognised A written put is always a liability

PricewaterhouseCoopersSlide 11 Puts, Calls and Forwards Derecognition Derecognition of the liability Put is exercisedPut expires unexercised Minority derecognised Goodwill (parent company model) or equity (economic entity model) for purchase of MI Liability derecognised Reversal to equity Liability derecognised Depends on the substance of the transaction

PricewaterhouseCoopersSlide 12 Puts, Calls and Forwards Indicators of risks and rewards MI recognised if it can access to risks and rewards Price of put can be an indicator MI not recognised if put written when shares issued Exercise priceRisks and rewardsMinority interest Fair valueRetained by MIRecognised FixedTransfer to parentNot recognised Neither FV nor fixed To assess

PricewaterhouseCoopersSlide 13 Puts, Calls and Forwards Recap Two models based on substance: - One credit minority not recognised - Two credits minority recognised Key difference is treatment of remeasurements Consider employee/management compensation

PricewaterhouseCoopersSlide 14 Puts, Calls and Forwards Case studies 1 & 2 Vader Luke Net assets = % = €70 Written put 40% Vader acquires 60% of Luke for €70 and writes a put over the remaining 40% with an exercise price - Fixed plus earn out (case study 1) Based on EBITDA (case study 2) Handout 1 - table discussion in 15 minutes Complete the flowchart

PricewaterhouseCoopersSlide 15 Puts, Calls and Forwards Principles ACCOUNTING FOR PUTS WRITTEN OUTSIDE OF A BUSINESS COMBINATION

PricewaterhouseCoopersSlide 16 Puts, Calls and Forwards Principles Accounting depends on the substance of the transaction Minority interest is derecognised - One credit approach – liability and no minority interest Financial liability at present value of expected redemption amount [IAS 32.23] No business combination, so cannot be contingent consideration Liability remeasurements go to income statement [IAS 39 AG.8] Transfer of Risks and Rewards MI purchased A written put is always a liability

PricewaterhouseCoopersSlide 17 Puts, Calls and Forwards Principles Accounting depends on the substance of the transaction Two credits approach – MI and liability Financial liability at present value of expected redemption amount [IAS 32.23] Financial liability is recognised as a reclassification from equity Liability remeasurements go to income statement No Transfer of Risks and Rewards MI unchanged A written put is always a liability

PricewaterhouseCoopersSlide 18 Puts, Calls and Forwards Case studies 3 & 4 Vader Luke Net assets = % Vader has owned 60% of Luke for many years and written a put over 40% with an exercise price – Fixed plus earn out (case study 3) Based on EBITDA (case study 4) MI CV = 40 40% Handout 2 - table discussion in 15 minutes Complete the flowchart

PricewaterhouseCoopersSlide 19 Puts, Calls and Forwards Accounting policy choices Based on substance as above -One credit -Two credits Or Always use one credit approach and derecognise minority interest [IAS 32 AG.29]

PricewaterhouseCoopersSlide 20 Binding contracts Parent access to economic benefits of the shares No minority interest one credit approach Treat as contingent consideration in a business combination Overlapped puts and calls – treated as forwards, as always in the money for one of the parties Puts, Calls and Forwards Forward contracts

PricewaterhouseCoopersSlide 21 Purchased call option -If fixed number of shares exchanged for fixed amount of cash equity instrument Premium paid to equity -Other cases: Derivative, unless Exercise price is based on non-financial variable that is specific to a party to the contract Puts, Calls and Forwards Call only

PricewaterhouseCoopersSlide 22 Written put is complex Written put is always a liability Part of a business combination Accounting depends on substance Assessment for transfer of risks and rewards Recognition of MI two credits approach Derecognition of MI one credit approach Policy choice Forward contracts – binding contract Call only – equity, derivative or disclosure only Consult! Puts, Calls and Forwards Summary

PricewaterhouseCoopersSlide 23 Thank you