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19.1.1 Extracts from FRS102-Sections 19.2
19.2 Business combinations defined
19.2.1 Extracts from FRS 102 – Section 19.3
19.2.2.1 Definition of a business combination
19.2.2.1.1 Definition of a business
19.3 Structure of a business combination
19.3.1 Extracts from FRS 102 – Section 19.4–19.5A
19.4.1 Extracts from FRS102 – Section 19.6-19.7
19.5 Purchase method – Identifying the acquirer
19.5.1 Extracts from FRS102 – Section 19.8 – 19.10 and 19.17
19.5.2.3 New entity formed to effect a business combination where equity issued.
19.5.2.3.1 Control obtained but little or no substance to it
19.5.2.3.2 Identifying the acquirer – where substance to it.
19.5.2.4 Determining the acquistition date for the purpose of Section 19
19.6 Purchase method – Cost of a business combination
19.6.1 Extracts from FRS102 – Section 19.11-19.11A
19.6.2.2.1 Purchase on deferred payment terms
19.6.2.3 Liabilities incurred or assumed
19.6.2.4 Costs directly attributable to the acquisition/ business combination
19.6.2.4.1 Examples of directly attributable cost
19.6.2.4.2 Example of costs not directly attributable
19.6.2.5 Equity issued as consideration for the acquisition
19.6.2.6 Cost where control achieved in stages
19.7 Adjustments to the cost of a business combination contingent on future events
19.7.1 Extracts from FRS102 – Section 19.12-19.13
19.7.2.1 Contingent consideration and change in estimate
19.7.2.1.1 Contingent consideration – probable at the date of acquisition.
19.7.2.1.3 Changes in contingent consideration – change in estimate
19.7.2.1.4 Contingent consideration – No provision booked in year 1
19.7.2.2 Contingency payments relating to further services
19.8 Allocating of the cost of a business combination to the asset acquire and liabilities assured.
19.8.1.1 Extracts from FRS102 – Section 19.14-19.15, 19.18 and 19.20-19.21
19.8.1.2.2 Definition of assets and liabilities
19.8.1.2.2 Determining fair value
19.8.1.2.2.1 Fair value – intentions of acquirer ignored
19.8.1.2.2.1.1 Restructuring provisions
19.8.1.2.2.2 Measurement of contingent liabilities
19.8.1.2.2.2.1 Contingent liability – right of reimbursement
19.8.1.2.2.2.2 Fair valuing contingent consideration
19.8.1.2.2.3 Future losses – non-recognition of liabilities in determining allocation of cost
19.8.1.2.2.5 Determining fair value of intangible assets
19.8.1.2.2.6 Determining fair value of inventory
19.8.1.2.2.8 Determining fair value of investment in associate and joint ventures
19.8.1.2.2.9 Determining fair value of deferred revenue
19.9 Measurement of deferred tax, employee benefit and share based payments
19.9.1 Extracts from FRS102 – Section 19.15A-19.15C
19.10 Purchases method – Subsequent adjustment to fair value and accounting for Goodwill
19.10.1 Extracts from FRS102 – Section 19.16-19.17 and 19.22-19.23
19.10.2.1 Adjustments to fair value of identified assets and liabilities
19.10.2.2 Accounting for calculating goodwill including a journal to reflect business combination.
19.10.2.2.1 Initial recognition of goodwill
19.10.2.2.2 Subsequent recognitions of goodwill
19.10.2.2.3 Journals to reflect the business combination
19.10.2.2.4 Useful life of goodwill
19.10.2.2.4.1 Change in useful economic life
19.11 Business combination achieved in stages
19.11.1 Extracts from FRS102 – Section 19.11A
19.11.2.1.1 Acquiring a further controlling interest
19.11.2.1.2 Disposing of controlling interest but controlling interest retained
19.12.1 Extracts from FRS102 – Section 19.24
19.13.1 Extracts from FRS 102 section 19.27-19.32
19.13.2.1 Group reconstruction defined
19.13.2.4 Group reorganisations and merger accounting
19.14.1 Extracts from FRS 102 section 19.25 – 19.26A
19.14.2.1 Accounting policies positive goodwill – Consolidated financial statements.
19.14.2.2 Example from the notes to the accounts
19.14.2.2.1 Contingent consideration note
19.14.2.3 Parent entity accounting policies
19.14.2.3.1 Extract from notes to the financial statements
19.14.2.5 Profit and Loss Account for parent entity
19.14.2.6 – Negative Goodwill for the financial year
19.15 Disclosures – Group reconstructions
19.15.1 Extracts from FRS 102-Section 19.33
19.15.2.2 Extract from notes to the financial statements
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The below extracts and guidance is applicable for periods beginning before 1 January 2019 and are based on the September 2015 version of FRS 102. For periods beginning on or after 1 January 2019, the March 2018 version of FRS 102 applies which incorporates the changes made by the Triennial review of FRS 102. Note the March 2018 version of FRS 102 can be voluntarily applies for periods beginning before 1 January 2019. For the extracts from the March 2018 version of FRS 102 and the related guidance please click on the following link. For details of a summary of the main changes as a result of the triennial review please see the following link.
19.5 Purchase Method – Identifying the |Acquirer
19.5.1 Extracts from FRS102 – Section 19.8 – 19.10 and 19.17
19.8 An acquirer shall be identified for all business combinations accounted for by applying the purchase method. The acquirer is the combining entity that obtains control of the other combining entities or businesses.
19.9 Control is the power to govern the financial and operating policies of an entity or business so as to obtain benefits from its activities. Control of one entity by another is described in Section 9 Consolidated and Separate Financial Statements.
19.10 Although it may sometimes be difficult to identify an acquirer, there are usually indications that one exists. For example:
(a) If the fair value of one of the combining entities is significantly greater than that of the other combining entity, the entity with the greater fair value is likely to be the acquirer.
(b) If the business combination is effected through an exchange of voting ordinary equity instruments for cash or other assets, the entity giving up cash or other assets is likely to be the acquirer.
(c) If the business combination results in the management of one of the combining entities being able to dominate the selection of the management team of the resulting combined entity, the entity whose management is able so to dominate is likely to be the acquirer.
19.17 Application of the purchase method starts from the acquisition date, which is the date on which the acquirer obtains control of the acquiree. Because control is the power to govern the financial and operating policies of an entity or business so as to obtain benefits from its activities, it is not necessary for a transaction to be closed or finalized at law before the acquirer obtains control. All pertinent facts and circumstances surrounding a business combination shall be considered in assessing when the acquirer has obtained control.
19.5.2 OmniPro comment
19.5.2.1 Overview
As per Section 19.8 of FRS 102 the acquirer is the combining entity that obtains control of the other combining entities or businesses. 19.10 Although it may sometimes be difficult to identify an acquirer, there are usually indications that one exists. For example:
(a) If the fair value of one of the combining entities is significantly greater than that of the other combining entity, the entity with the greater fair value is likely to be the acquirer.
(b) If the business combination is effected through an exchange of voting ordinary equity instruments for cash or other assets, the entity giving up cash or other assets is likely to be the acquirer.
(c) If the business combination results in the management of one of the combining entities being able to dominate the selection of the management team of the resulting combined entity, the entity whose management is able so to dominate is likely to be the acquirer.
19.5.2.2 Control
As stated above control is presumed where greater than 50% of the voting power is held by an entity. However control can also exist as detailed in Section 9.5 of FRS 102 when the parent owns 50% or less of the voting power but it has:
- power over more than half of the voting rights by virture of an agreement with other investors; or
- power to govern the financial and operating policies of the entity under a statute or an agreement; or
- power to appoint or remove the majority of members of the board of directors or equivalent; or
- power to cast the majority of votes at meetings of the board of directors.
- having options or convertible instruments which are exercisable at the date of acquisition.
See further details of the assessment of control at 9.3.2.
Section 19.9 of FRS 102 defines control as the power to govern the financial and operating policies of and entity so as to obtain a benefit.
19.5.2.3 New entity formed to effect a business combination where equity issued.
There are occasions where a new entity is formed to issue equity instruments to effect a business combination between two other entities. Although not specifically dealt with in Section 19, IFRS 3 requires that one of the combining entities that existed before the combination be identified as the acquirer. Therefore, the new parent would only account for this under merger accounting and one of the combining entities would account for the transaction as a business combination.
This approach would be appropriate under FRS 102. The basis for this is that the transaction has little or no substance and it was not at an arm’s length basis. See the example below which illustrates this.
19.5.2.3.1 Control obtained but little or no substance to it
Example 3: Identifying the Acquiring company
The shareholders of Company X and Y agree to join together under the same group. A new company, Company C is set up with Shareholder 1 and 2 as the owners. A transaction is entered into whereby Company A issues shares to each of its directors in proportion to the fair value of Company X & Y. Assume shares issued to Company X obtained 200 shares and Company Y was issued 100 shares. In this case Company C is not deemed to be the acquirer instead Company X is the acquirer as the fair value of Company X is well in excess of Company Y.
Company X would use the purchase accounting method to account for the acquisition. Company C would use merger accounting.
However where an entity sets up a 100% subsidiary and provides funds to this new company to invest in another entity/business combination and the transaction is performed on an arm’s length basis, the acquirer would be the new company. Here there was no issue of shares to the combining entities. In reality as it is an intermediate parent, it may be exempt from preparing consolidated financial statements.
19.5.2.3.2 Identifying the acquirer – where substance to it
Company A set up a new Company as a 100% subsidiary, Company B with the sole purpose to acquire a business/shares of another entity. Company A provides the funds to Company B to allow it to acquire the business and charges market interest. In this case the acquirer of the business is Company B and not Company A.
19.5.2.4 Determining the acquistition date for the purpose of Section 19
Although not mentioned in Section 19.7 of FRS 102 another key thing to identify when applying the purchase accounting method is to identify the acquisition date. The acquisition date is the date from which the acquired entities results are consolidated with the acquirers results and the date on which fair value of assets are determined. The acquisition date is the date when the acquirer obtains control over the acquiree. Section 19.9 of FRS 102 defines control as the power to govern the financial and operating policies of an entity or business so as to obtain benefits from its activities.
There is a presumption that control has been obtained where an entity owns greater than 50% of the voting rights of a company. However it is also possible to obtain control where less than this is owned, for example an entity might have the right to appoint and remove parties from the board of directors.
The key date when ascertaining when control is obtained is when the offer to purchase is unconditional and when the directors of the acquiring entity are appointed to the board. For example where a takeover is subject to competition authority approval date is unlikely to pass until the approval is obtained, hence the date of acquisition will be the control approval is obtained. The date on the purchase agreement is not the key date as this may not be that date control is transferred. The key date is the date the acquirer nominates its directors, it does not necessarily have to correspond to the date the shares are transferred.
Section 19.17 of FRS 102 makes it clear that the acquisition date does not necessarily coincide with when legal ownership transfers, it is when the financial and operating policies can be controlled so as to obtain benefits for the entity.
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Examples
Example 1: Determining a Business.
Example 2: Determining a Business.
Example 3: Identifying the Acquiring Company.
Example 4: Identifying the acquirer
Example 5: Determining cost where control achieved in stages.
Example 6: Changes in contingent consideration – change in estimate.
Example 7: Contingent consideration – No provision booked in year 1.
Example 8: Valuing work in progress.
Example 10: Favorable/unfavorable contract
Example 11: Deferred tax on business combinations
Example 13: Journals to reflect the business combination.
Example 14: Revising the useful life of goodwill
Example 15: Business combination achieved in stages.
Example 16: Acquiring a further controlling interest
Example 17: Acquiring a further controlling interest
Example 18: Disposing of controlling interest but controlling interest retained.
Example 20: Group reorganisations.
Example 23: Extract from notes to the financial statements – contingent consideration note.
Example 29: Extract from the consolidated Balance Sheet for negative goodwill
Example 30: Extract from the accounting policy notes – Group reconstruction and merger accounting.
Example 31: Extract from notes to the financial statements – Merger Method.
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