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Scope

Definition of a business combination. A business combination is a transaction or event in which an acquirer obtains control of one or more businesses. A business is defined as an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return directly to investors or other owners, members or participants. Acquirer must be identified. Under IFRS , an acquirer must be identified for all business combinations. Scope changes from IFRS 3(2004 . IFRS !"##$% applies to combinations of mutual entities and combinations without consideration !dual listed shares%. &hese are e'cluded from IFRS !"##(%. Scope e!c"usions. IFRS does not apply to the formation of a )oint venture, combinations of entities or businesses under common control. &he IAS* added to its agenda a separate agenda pro)ect on +ommon +ontrol &ransactions in ,ecember "##-. Also, IFRS does not apply to the acquisition of an asset or a group of assets that do not constitute a business.

Method of Accounting for Business Combinations


Acquisition method. &he acquisition method !called the .purchase method. in the "##( version of IFRS % is used for all business combinations. Steps in applying the acquisition method are/ 0. ". . (. 0. Identification of the .acquirer. 1 the combining entity that obtains control of the acquiree. ". ,etermination of the .acquisition date. 1 the date on which the acquirer obtains control of the acquiree. . Recognition and measurement of the identifiable assets acquired, the liabilities assumed and any non1 controlling interest !2+I, formerly called minority interest% in the acquiree. (. Recognition and measurement of goodwill or a gain from a bargain purchase option.

#easurement of acquired assets and "iabi"ities. Assets and liabilities are measured at their acquisition1date fair value !with a limited number of specified e'ceptions%. #easurement of $%I. IFRS measure 2+I either at/ allows an accounting policy choice, available on a transaction by transaction basis, to

fair value !sometimes called the full goodwill method%, or the 2+I.s proportionate share of net assets of the acquiree !option is available on a transaction by transaction basis%.

&!amp"e' 3 pays $## to purchase $#4 of the shares of S. Fair value of 0##4 of S.s identifiable net assets is 5##. If 3 elects to measure non1controlling interests as their proportionate interest in the net assets of S of 0"# !"#4 ' 5##%, the consolidated financial statements show goodwill of "# !$## 60"# 1 5##%. If 3 elects to measure non1controlling interests at fair value and determines that fair value to be 0$7, then goodwill of $7 is recogni8ed !$## 6 0$7 1 5##%. &he fair value of the "#4 non1controlling interest in S will not necessarily be proportionate to the price paid by 3 for its $#4, primarily due to control premium or discount as e'plained in paragraph *(7 of IFRS . Acquired intangib"e assets. 9ust always be recogni8ed and measured. &here is no .reliable measurement. e'ception.

Goodwill
:oodwill is measured as the difference between/

the aggregate of !i% the acquisition1date fair value of the consideration transferred, !ii% the amount of any 2+I, and !iii% in a business combination achieved in stages !see *elow%, the acquisition1date fair value of the acquirer.s previously1held equity interest in the acquiree; and the net of the acquisition1date amounts of the identifiable assets acquired and the liabilities assumed !measured in accordance with IFRS %.

If the difference above is negative, the resulting gain is recogni8ed as a bargain purchase in profit or loss.

Business Combination Achieved in Stages (Step Acquisitions)


3rior to control being obtained, the investment is accounted for under IAS "$, IAS 0, or IAS <, as appropriate. =n the date that control is obtained, the fair values of the acquired entity.s assets and liabilities, including goodwill, are

measured !with the option to measure full goodwill or only the acquirer.s percentage of goodwill%. Any resulting ad)ustments to previously recogni8ed assets and liabilities are recogni8ed in profit or loss. &hus, attaining control triggers remeasurement.

Provisional Accounting
If the initial accounting for a business combination can be determined only provisionally by the end of the first reporting period, account for the combination using provisional values. Ad)ustments to provisional values within one year relating to facts and circumstances that e'isted at the acquisition date. 2o ad)ustments after one year e'cept to correct an error in accordance with IAS $.

Cost of an Acquisition
#easurement. +onsideration for the acquisition includes the acquisition1date fair value of contingent consideration. +hanges to contingent consideration resulting from events after the acquisition date must be recogni8ed in profit or loss. Acquisition costs. +osts of issuing debt instruments are accounted for under IAS <, and costs of issuing equity instruments are accounted for under IAS ". All other costs associated with the acquisition must be e'pensed, including reimbursements to the acquiree for bearing some of the acquisition costs. >'amples of costs to be e'pensed include finder.s fees; advisory, legal, accounting, valuation, and other professional or consulting fees; and general administrative costs, including the costs of maintaining an internal acquisitions department. %ontingent consideration. +ontingent consideration must be measured at fair value at the time of the business combination. If the amount of contingent consideration changes as a result of a post1acquisition event !such as meeting an earnings target%, accounting for the change in consideration depends on whether the additional consideration is an equity instrument or cash or other assets paid or owed. If it is equity, the original amount is not remeasured. If the additional consideration is cash or other assets paid or owed, the changed amount is recogni8ed in profit or loss. If the amount of consideration changes because of new information about the fair value of the amount of consideration at acquisition date !rather than because of a post1acquisition event% then retrospective restatement is required.

Pre e!isting "elationships and "eacquired "ights


If the acquirer and acquiree were parties to a pre1e'isting relationship !for instance, the acquirer had granted the acquiree a right to use its intellectual property%, this must must be accounted for separately from the business combination. In most cases, this will lead to the recognition of a gain or loss for the amount of the consideration transferred to the vendor which effectively represents a .settlement. of the pre1e'isting relationship. &he amount of the gain or loss is measured as follows/

for pre1e'isting non1contractual relationships !for e'ample, a lawsuit%/ by reference to fair value for pre1e'isting contractual relationships/ at the lesser of !a% the favourable?unfavourable contract position and !b% any stated settlement provisions in the contract available to the counterparty to whom the contract is unfavorable.

@owever, where the transaction effectively represents a reacquired right, an intangible asset is recogni8ed and measured on the basis of the remaining contractual term of the related contract e'cluding any renewals. &he asset is then subsequently amorti8ed over the remaining contractual term, again e'cluding any renewals.

#ther $ssues
In addition, IFRS provides guidance on some specific aspects of business combinations including/

business combinations achieved without the transfer of consideration; reverse acquisitions; identifying intangible assets acquired; the reassessment of the acquiree.s contractual arrangements at the acquisition date.

Parent%s &isposal of $nvestment or Acquisition of Additional $nvestment in Subsidiar'


(artia" disposa" of an in)estment in a subsidiar* +hi"e contro" is retained. &his is accounted for as an equity transaction with owners, and gain or loss is not recogni8ed. (artia" disposa" of an in)estment in a subsidiar* that resu"ts in "oss of contro". Aoss of control triggers remeasurement of the residual holding to fair value. Any difference between fair value and carrying amount is a gain or loss on the disposal, recogni8ed in profit or loss. &hereafter, apply IAS "$, IAS 0, or IAS <, as appropriate, to the remaining holding.

Acquiring additiona" shares in the subsidiar* after contro" +as obtained. &his is accounted for as an equity transaction with owners !liBe acquisition of .treasury shares.%. :oodwill is not remeasured.

&isclosure
Disc"osure of information about current business combinations &he acquirer shall disclose information that enables users of its financial statements to evaluate the nature and financial effect of a business combination that occurs either during the current reporting period or after the end of the period but before the financial statements are authori8ed for issue. Among the disclosures required to meet the foregoing ob)ective are the following/

name and a description of the acquiree. acquisition date. percentage of voting equity interests acquired. primary reasons for the business combination and a description of how the acquirer obtained control of the acquiree. description of the factors that maBe up the goodwill recogni8ed acquisition1date fair value of the total consideration transferred and the acquisition1date fair value of each ma)or class of consideration details of contingent consideration arrangements and indemnification assets details of acquired receivables the amounts recogni8ed as of the acquisition date for each ma)or class of assets acquired and liabilities assumed. details of contingent liabilities recogni8ed total amount of goodwill that is e'pected to be deductible for ta' purposes details of any transactions that are recogni8ed separately from the acquisition of assets and assumption of liabilities in the business combination information about a bargain purchase !.negative :oodwill.% for each business combination in which the acquirer holds less than 0## per cent of the equity interests in the acquiree at the acquisition date, various disclosures are required details about a business combination achieved in stages information about the acquiree.s revenue and profit or loss information about a business combination whose acquisition date is after the end of the reporting period but before the financial statements are authori8ed for issue

Disc"osure of information about ad,ustments of past business combinations &he acquirer shall disclose information that enables users of its financial statements to evaluate the financial effects of ad)ustments recogni8ed in the current reporting period that relate to business combinations that occurred in the period or previous reporting periods. Among the disclosures required to meet the foregoing ob)ective are the following/

,etails when the initial accounting for a business combination is incomplete for particular assets, liabilities, non1controlling interests or items of consideration !and the amounts recogni8ed in the financial statements for the business combination thus have been determined only provisionally% Follow1up information on contingent consideration Follow1up information about contingent liabilities recogni8ed in a business combination A reconciliation of the carrying amount of goodwill at the beginning and end of the reporting period, with various details shown separately the amount and an e'planation of any gain or loss recogni8ed in the current reporting period that both/ o !i% relates to the identifiable assets acquired or liabilities assumed in a business combination that was effected in the current or previous reporting period; and o !ii% is of such a si8e, nature or incidence that disclosure is relevant to understanding the combined entity.s financial statements.