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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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19.6 Purchase method – Cost of a business combination
19.11 The acquirer shall measure the cost of a business combination as the aggregate of:
(a) the fair values, at the acquisition date, of assets given, liabilities incurred or assumed, and equity instruments issued by the acquirer, in exchange for control of the acquiree; plus
(b) any costs directly attributable to the business combination.
19.11A Where control is achieved following a series of transactions, the cost of the business combination is the aggregate of the fair values of the assets given, liabilities assumed and equity instruments issued by the acquirer at the date of each transaction in the series.
19.6.2 OmniPro Comment
19.6.2.1 Overview
As per Section 29.11 of FRS 102 the cost at the date of acquisition is recognised at the fair value of the cash given up (see 19.6.2.2), equity instruments issued (see 19.6.2.5) by the acquirer or liabilities incurred or assumed see (19.6.2.3) . Plus any costs directly attributable to the business combination (See 19.6.2.4)
19.6.2.2 Cash given up
Where cash is paid for the business, the cost of the business combination is effectively the cash price paid being its fair value.
19.6.2.2.1 Purchase on deferred payment terms
Where payment is deferred, and it is for greater than one year the present value of the amount to be paid is the cost of the business combination.
The calculation of deferred consideration is considered further at 19.7.2
19.6.2.3 Liabilities incurred or assumed
Consideration paid could also include group loans or borrowings taken over in the acquired entity. Future losses expected to be incurred are not considered to be liabilities incurred.
19.6.2.4 Costs directly attributable to the acquisition/ business combination
19.6.2.4.1 Examples of directly attributable cost
Cost that would be considered to be directly attributable to the business combination (costs that have to be incurred to effect the business) would include:
- professional fees paid to accountants, legal advisors, valuers and other consultants to effect the combination
- Cost of paying a third party to investigate or assist in identifying a potential target but only if the fee is payable on condition that the combination takes place.
- Cost for auditing the completion accounts and undertaking due diligence work
19.6.2.4.2 Example of costs not directly attributable
Example of costs which would not be considered to be directly attributable to the business combination are:
- Incremental costs that are attributable towards the cost of obtaining finance to purchase the combination e.g. costs directly attributable to financial liabilities or cost associated with the issue of equity instruments.
- Costs charged by professional advisors in order to allow the entity to obtain finance or issue shares
- General administrative costs e.g. staff costs of the acquirer’s regardless of their position and regardless of how long they have worked on it
- Overhead costs
19.6.2.5 Equity issued as consideration for the acquisition
Where equity instruments issued by the acquirer are given as consideration for the business combination, then the equity instruments have to be fair valued.
The fair value exercise should follow the requirement of Section 11 when determining fair value i.e. in reality a listed share price will not be available so a discounted cash flow or option pricing model will have to be used. These discounted cash flows should use market information when determining the valuation and very little internal information. Where the variability of various valuation techniques is not significant, or the probabilities of the various estimates within the range can be reasonably assessed and used in estimating fair value, the valuation of the equity instrument is likely to be reliable.
19.6.2.6 Cost where control achieved in stages
Section 19.11A of FRS 102 requires the cost where control is achieved following a series of transactions to be equal to the fair value of the assets given up, liabilities incurred or assumed and equity instruments issued by the acquirer at the date of each transaction in the series.
Where a Company initially acquires an investment, which gives a significant interest or just a partial interest and subsequently acquires a further interest such that control is obtained, the cost of the combination will be the total cost i.e. the cost of the transaction which resulted in the control being obtained plus the previous cost.
Example 5: Determining cost where control achieved in stages
In year 1 Company A acquired a 10% interest in Company B for CU10,000. In year 2 Company A acquired a further 50% interest for the of equity share sin Company A which were fair valued at CU70,000 at which point it obtains control and therefore is a business combination.
The cost of the combination in this instance would be CU80,000 (CU70,000+CU10,000).
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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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