Business Combination (IFRS 3) Chapter 4

Business Combinations

• A business combination is an event or transaction where two or more business enterprises or their net assets are brought under common control in a single accounting entity.

Types of Business Combinations

• Horizontal Combination: involves enterprises in the same industry
• Vertical Combination: involves an enterprise and its customers or suppliers, classified into Backward Vertical Combination (with supplier) and Forward Vertical Combination (with customers)
• Conglomerate Combination: involves companies in different industries

Definition of Business

• A business is an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to investors or other owners, members, or participants.
• A business consists of input, process, and output.

Identification of Business Combinations

• A transaction or other event is a business combination if the assets acquired and liabilities assumed constitute a business.
• If the assets acquired are not a business, it must be accounted for as an asset acquisition.

Date of Acquisition

• The date on which the acquirer obtains control of the acquiree is generally the date on which the acquirer legally transfers the consideration, acquires the assets, and assumes the liabilities of the acquiree - the closing date.
• However, control may be assumed on other dates (earlier or later than the closing date).

Identifying the Acquirer

• In a stock acquisition, the acquirer is usually the company transferring cash or other assets for a controlling interest in the voting common stock of the acquiree.
• In a business combination effected primarily by exchanging equity interests, the acquirer is usually the entity that issues its equity interests.
• Other facts and circumstances should also be considered, including:
  • Voting rights
  • Large minority interest
  • Governing body of the combined entity
  • Terms of exchange
  • Relative size
  • Initiator of the transaction
  • Roll-ups or put-together transactions

Contingent Consideration

• Contingent consideration is recorded at fair value.
• Acquisition cost = Amount of consideration + Contingent consideration

Errors and Changes in Estimates

• No liability is recognized if the acquisition-date fair value of a contingent liability cannot be measured reliably.
• Errors: Discovery of information on facts and circumstances existing as of the acquisition date.
• Change in estimate: Circumstances arising after the acquisition date.
• Retrospective change: Adjust goodwill, fair value of identifiable net assets, and fair value of NCI as if the accounting was completed on the acquisition date.
• Prospective change: No correction of goodwill, fair value of identifiable net assets, or fair value of NCI.

Other Costs

• Direct combination costs: Associated with completing the business combination (Legal, Accounting, Consulting, Appraisal, and Finder's fee).
• Stock issuance costs: When the parent issues stock in conjunction with a BC, any stock issuance costs, such as underwriter fees and exchange fees.

This quiz covers the definitions and motives of business combinations, methods of arranging business combinations, the acquisition method, and disclosure requirements according to IFRS 3.