What Is a Business Combination

Intangible assets (ASC 350) and business combinations (ASC 805)The next article in our series focused on business combinations: Intangible assets (ASC 350) acquired as part of a business combination (ASC 805). The table below summarizes some of the key differences in the recognition of business combinations under IFRS 3 (2008) and IFRS 3 (2004). The table does not purport to be exhaustive. A business combination is a transaction or other event in which a purchaser takes control of one or more companies. Business combinations are accounted for in accordance with the CSA`s guidelines under 805 business combinations (ASC 805) and IFRS 3 (IFRS 3). While accounting for business combinations isn`t difficult on its own, it can be difficult when you go through the myriad of guides. In determining whether a particular item is part of the exchange for the acquired entity or is separate from the business combination, a acquirer shall consider the reason for the transaction, the initiator of the transaction and the timing of the transaction. [IFRS 3.B50] Note: Annual enhancements to the 2010-2012 IFRS cycle modify these requirements for business combinations with an acquisition date of July 1, 2014 or after that date. Under the amended requirements, contingent consideration classified as an asset or liability is measured at fair value at each balance sheet date and changes in fair value are recognised in profit or loss, both for the contingent consideration falling within the scope of IFRS 9/IAS 39 and elsewhere. Entity T is a clothing manufacturer and has been marketed for several years.

Entity T is considered a corporation. On January 1, 2020, Company A will pay CU 2,000 to acquire 100% of the voting common shares of Company T. No other type of shares were issued by Company T. On the same day, the three principal managing directors of Company A assume the same roles in Unit T. IFRS 3 applies to all business combinations identified as such under IFRS 3, with three exceptions: From entry into new geographic markets to expanding product offerings, mergers, acquisitions and other types of business combinations offer many benefits to stakeholders. However, the initial accounting of the business combination can be complicated and often requires a lot of time and effort. IFRS 3 provides additional guidance to determine whether a transaction meets the definition of a business combination and is therefore accounted for in accordance with its requirements. These guidelines include: In addition, IFRS 3 provides guidance on some specific aspects of business combinations, including: Needless to say, accounting for an acquisition of assets is much easier than accounting for a business combination. Therefore, many purchase contracts often provide that the transaction is a purchase of securities. But don`t be fooled by the wording! If what is acquired meets the definition of a business, then ASC 805 is applicable regardless of what these pesky lawyers and tax advisors say! “Of the three transactions with scope in IFRS 3, jointly controlled business combinations often occur. An acquirer is required to disclose information that allows users of its financial statements to assess the nature and financial impact 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 approved for publication. [IFRS 3.59] Under IFRS 3, contingent liabilities within the meaning of IAS 37 must be measured at fair value.

However, businesses are not allowed to recognise a contingent asset as part of a business combination. Transactions sometimes called “actual mergers” or “mergers of equals” are actually business combinations! In these situations, a purchaser should be identified using the overriding financial interest guidelines in the consolidated financial statements ASC 810 consolidation or IFRS 10. None of the 4 major companies specifically publish GUIDES OR MANUALS RELATED TO IFRS. However, all of them have websites dedicated to IFRS 3 business combinations. Here are the links to these web pages: The accounting treatment of a corporation`s interest in a corporation acquired prior to the consolidation is consistent with the view that the takeover is a material economic event that triggers a revaluation. Consistent with this view, all assets and liabilities of the acquired entity are fully revalued (generally at fair value) in accordance with the requirements of IFRS 3. Therefore, goodwill is only determined at the time of acquisition. This differs from the accounting for phased acquisitions in accordance with IFRS 3 (2004). According to ASC 805, to be considered an enterprise, the acquired set must have an input and at least one content process, which together contribute significantly to the ability to create outputs. The guidelines, originally set out in ASU 2017-01 and summarized in this post, provide a framework for assessing when an entry and content process is in place, as well as stricter criteria for sets without outputs to be considered a business.

We have written several blog posts on a variety of topics related to business combination accounting. Click on the links below to learn more. All assets and liabilities acquired as part of a business combination must be accounted for by the acquirer in its financial statements. This may result in the acquisition by the acquirer accounting for an asset or liability that was not previously recognized in the financial statements of the acquired entity. The acquirer must recognise 100% of the net assets of the acquired company, even if other parties retain a non-controlling interest. IFRS 3 requires the entity to determine whether the assets acquired and liabilities assumed constitute an enterprise. If the assets and liabilities are not considered a corporation, the transaction should be recorded as an acquisition of assets. 5 Problems related to the accounting of business combinations according to ASC 805According and auditing of business combinations according to ASC 805 is difficult! This article discusses the top five issues related to these transactions. Under U.S.

GAAP, a corporation is defined as a set of activities and assets that are both self-sustaining and provide a return to investors. A company typically has three elements: inputs, processes, and outputs, but it doesn`t need to contain outputs. ASU No. 2017-01 revises the definition of a corporation, which may change if a transaction is a business combination. A business combination is a transaction in which a purchaser takes control of a business. To determine whether a business combination has taken place, an acquirer must first assess whether it has acquired a corporation or group of assets. The distinction is crucial because the accounting treatment is very different depending on the determination. As part of a business combination, a purchaser may enter into agreements with selling shareholders or employees. In determining whether these agreements are part of the business combination or whether they are accounted for separately, the acquirer shall take into account a number of factors, including whether the agreement requires the continuation of employment (and, if so, its duration), the amount or remuneration in relation to other employees, whether payments to shareholders` employees are made progressively to non-employee shareholders; the relative number of shares held, the relationship to the valuation of the acquired company, the calculation of the consideration and other agreements and problems. [IFRS 3.B55] The guidance in IFRS 10 Consolidated Financial Statements is used to identify an acquirer in a business combination, that is, the entity that takes “control” of the acquired entity. [IFRS 3.7] Our separate article “Insights into IFRS 3 – Business Mergers under Common Control” provides more details on how to identify and account for these mergers. IFRS 3 (2008) aims to improve the relevance, reliability and comparability of information on business combinations (para.

B acquisitions and mergers) and their impact. It establishes the principles for the recognition and measurement of acquired assets and liabilities, the determination of goodwill and the required disclosures. Raising the Bar: New Definition of a Business according to ASC 805In the context of CSA 805, the definition of a business is changing. The FASB recently published ASU 2017-01 with a better framework for the application of this definition. CSA 805 and IFRS 3 require that business combinations be accounted for on an acquisition basis […].