1. Business Combinations David Cairns

2. © 2006 David Cairns www.cairns.co.uk IFRS 3 Business Combinations  Requires  use of purchase method  annual impairment test for goodwill  Prohibits  pooling of interests method  amortisation of goodwill  deferral of negative goodwill

3. © 2006 David Cairns www.cairns.co.uk Accounting for Subsidiaries  Parent’s legal entity financial statements  cost or  financial assets (IAS 39)  Consolidated financial statements  consolidate  no exceptions

4. © 2006 David Cairns www.cairns.co.uk Business Combinations Parent’s legal entity financial statements Assets  Investment in acquiree (subsidiary)

5. © 2006 David Cairns www.cairns.co.uk Business Combinations Parent’s legal entity financial statements Assets  Investment in acquiree (subsidiary) Consolidated financial statements Assets  Acquired, identifiable assets of acquiree  Goodwill Liabilities  Acquired, identifiable liabilities and contingent liabilities of acquiree Equity  Minority interest in acquiree

6. © 2006 David Cairns www.cairns.co.uk Business Combinations Parent’s legal entity financial statements  Investment in acquiree (subsidiary)  amount of cash or cash equivalents paid or  fair value of the other consideration given Consolidated financial statements  Acquired assets, liabilities and contingent liabilities  fair value  Goodwill  residual item

7. © 2006 David Cairns www.cairns.co.uk Purchase Method  Identify acquirer  Determine date of acquisition  Measure cost of acquisition  Measure acquired assets, liabilities and contingent liabilities at fair value  Determine minority interests  Recognise goodwill as asset  Recognise ‘negative goodwill’

8. © 2006 David Cairns www.cairns.co.uk Acquirer  Usually  entity with greater fair value  entity issuing shares unless reverse acquisition  entity giving up cash or other assets  entity whose management dominates selection of the management of combined entity

9. © 2006 David Cairns www.cairns.co.uk Date of Acquisition  Date on which acquirer obtains control of net assets and operations of acquiree  may differ from date of exchange of purchase consideration  Include acquisition in (consolidated) financial statements from this date

10. © 2006 David Cairns www.cairns.co.uk Cost of Acquisition  Cash and cash equivalents paid plus  Fair value of other consideration  other assets  liabilities incurred  equity instruments issued plus  Directly attributable (transaction) costs  fees of lawyers, bankers, accountants, etc  Measure at the date of exchange

11. © 2006 David Cairns www.cairns.co.uk Business Combinations Parent’s legal entity financial statements Assets  Investment in acquiree (subsidiary) Consolidated financial statements Assets  Acquired, identifiable assets of acquiree  Goodwill Liabilities  Acquired, identifiable liabilities and contingent liabilities of acquiree Equity  Minority interest in acquiree

12. © 2006 David Cairns www.cairns.co.uk Acquired Assets and Liabilities (except intangible assets and contingent liabilities)  Recognise as assets and liabilities if  probable that economic benefits will flow to/from the acquirer and  fair value can be measured reliably  Measure at fair value

13. © 2006 David Cairns www.cairns.co.uk Fair Values of Acquired Assets  Marketable securities  market value  Receivables  present value of amounts to be received  Inventories  selling price less costs to complete and reasonable profit  Property  market value  Plant & equipment  market value/depreciated replacement cost

14. © 2006 David Cairns www.cairns.co.uk Fair Values of Acquired Liabilities  Payables, debt etc.  present value of amounts to be paid  Onerous contracts  present value of amounts to be paid  Defined benefit plans  Present value of obligation less fair value of plan assets  Income taxes  taxes payable assessed from perspective of combined entity

15. Business Combinations David Cairns