Sei sulla pagina 1di 41

Topics in International Financial Accounting A

Summary

Chapters of the Book 20112012

Topics in International Financial Accounting A Summary Chapters of the Book 2011 ‐ 2012
Topics in International Financial Accounting A Summary Chapters of the Book 2011 ‐ 2012

Content

Leasing

IAS17

Chapter 13

p. 3

Impairment Testing

IAS36

Chapter 12

p. 8

Business Combinations

IFRS3

Chapter 11

p. 16

Group Reporting

IFRS3 / IAS27

Chapter 21

p. 20

Associates

IAS28

Chapter 27

p. 26

Joint Ventures

IAS31

Chapter 28

p. 31

Deferred Tax

IAS12

Chapter 7

p. 37

- 2 -

Leasing

IAS17

Chapter 13

Agreement for the right to use an asset for a period of time.

Specific asset Exclusive right at the asset or Asset is implicitly specified by the transaction A specific asset exists if fulfilment of the arrangement is economically feasible or practicable for the supplier only through the use of this asset!

Right of use = right to control

purchaser controls the operation of the asset

o

Purchaser operates the asset with its own personnel

o

Purchaser has the right to direct others to operate the asset

o

Purchaser determines the manner of operation

purchaser controls the physical access to the asset

o

Asset is located at company premises

o

Supplier has no right of unrestricted access to the asset

purchaser controls the whole/substantially all output (Economic Control)

Exception: If the customer takes 100% of the output, but has to pay either a fixed price per output during the contract period or the current market price per unit of output at the time of delivery it is no lease

Different types of leases

Finance lease: All, or practically all, advantages and disadvantages related to the ownership of the asset are transferred. (Legal) ownership could be transferred, but transfer is not necessary.

Operating lease: All lease agreements which are not finance leases.

Steps in classification

1

Determine the business rationale behind the lease and the economic impact of the

2

lease, together with economic issues at the end of the lease agreement. Determine the lease term (including prolongations which are expected to take place).

3

Determine the net present value (NPV) of the minimal lease payments (including

4

payments which are expected to take place). Determine whether or not a significant part of the rights and obligations are transferred from lessor to lessee.

- 3 -

In gen eral there w ill be a fina n ce lease in t he followin g cases:

1

At the end of the lease ownership is transferr e d to the le s see; or

2

The lessee has the righ t to buy th e lease obje c t for an am ount signifi c antly lower than

3

the expect ed fair valu e ; or The lease p eriod cove r s the main p art of the e conomic lif e of the leas e object; or

4

At incepti o n the disco u nted lease payments a re equal to, or practical l y equal to, t he

5

fair value o f the lease object; or The lease object is so s pecific that it cannot b e used by a n other party without

6

significant modificatio n . The Lease is non canc e llable

Bala n ce sheet & P&L

modificatio n . The Lease is non ‐ canc e llable Bala n ce sheet &

Chan g es in Lea s ing

modificatio n . The Lease is non ‐ canc e llable Bala n ce sheet &

- 4 -

Sale and Leaseback Transactions

For a sale and leaseback transaction that results in a finance lease, any excess of proceeds over the carrying amount is deferred and amortized over the lease term. For a transaction that results in an operating lease:

if the transaction is clearly carried out at fair value the profit or loss should be recognized immediately

if the sale price is below fair value profit or loss should be recognized immediately, except if a loss is compensated for by future rentals at below market price, the loss it should be amortized over the period of use

if the sale price is above fair value the excess over fair value should be deferred and amortized over the period of use

if the fair value at the time of the transaction is less than the carrying amount a loss equal to the difference should be recognized immediately

EXTRA

IAS 17 applies to all leases other than lease agreements for minerals, oil, natural gas, and similar regenerative resources and licensing agreements for films, videos, plays, manuscripts, patents, copyrights, and similar items. [IAS 17.2] Disclosure: Lessees Finance Lease [IAS 17.31]

carrying amount of asset

reconciliation between total minimum lease payments and their present value

amounts of minimum lease payments at balance sheet date and the present value thereof, for:

o

the next year

o

years 2 through 5 combined

o

beyond five years

contingent rent recognised as an expense

total future minimum sublease income under noncancellable subleases

general description of significant leasing arrangements, including contingent rent provisions, renewal or purchase options, and restrictions imposed on dividends, borrowings, or further leasing

- 5 -

Disclosure: Lessees Operating Lease [IAS 17.35]

amounts of minimum lease payments at balance sheet date under noncancellable operating leases for:

o

the next year

o

years 2 through 5 combined

o

beyond five years

total future minimum sublease income under noncancellable subleases

lease and sublease payments recognised in income for the period

contingent rent recognised as an expense

general description of significant leasing arrangements, including contingent rent provisions, renewal or purchase options, and restrictions imposed on dividends, borrowings, or further leasing

Disclosure: Lessors Finance Lease [IAS 17.47]

reconciliation between gross investment in the lease and the present value of minimum lease payments;

gross investment and present value of minimum lease payments receivable for:

o

the next year

o

years 2 through 5 combined

o

beyond five years

unearned finance income

unguaranteed residual values

accumulated allowance for uncollectible lease payments receivable

contingent rent recognised in income

general description of significant leasing arrangements

Disclosure: Lessors Operating Lease [IAS 17.56]

amounts of minimum lease payments at balance sheet date under noncancellable operating leases in the aggregate and for:

o

the next year

o

years 2 through 5 combined

o

beyond five years

contingent rent recognised as in income

general description of significant leasing arrangements

- 6 -

Is the lease noncancellable ?

No

Yes Yes Yes Yes Yes
Yes
Yes
Yes
Yes
Yes

Is ownership expected to be transferred at the end of the lease term?

Is there a bargain purchase option?

Are the leased assets of a sp ecialized nature?

No

Is the lease term a major part of the economic life of the leased asset?

No

Is the present value of the minimum lease payments substantially all of the fair value of the leased asset?

Do gains/losses relating to FV changes accrue to the lessee?

Is ther an option to continue the lease at a rent lower than market?

No

Is the substance of the leasing arrangement and any related arrangements such that substantially all the risks and rewards incident to ownership are transferred to the lessee?

No

Operating lease

Finance lease

- 7 -

Impa irment T esting

IAS36

Ch apter 12

What a re the obj e ctives of IA S 36:

The c arrying val u es of non f i nancial ass e ts do not e x ceed their r ecoverable amount

Imp irment loss es are recog nised and m easured on a consiste n t basis

Disc l osures are iven conce r ning the im pact of imp a irment on a n entity’s fi nancial perfor mance

12.1 I n troduction to IAS 36 An im p airment los s is the am o unt by whi c h the carryi ng amount of an asset or a cash gener a ting unit e x ceeds its re c overable a m ount.

The p rpose of th e impairme n t test is to e nsure that assets are n ot carried a t amounts t h at excee d their recov erable am o unts or, mo re simply, t h at assets a r e not overs t ated.

Not al l assets are subject to i m pairment t e sting. (Refe r to p. 464)

Where assets are recorded at fair value, t here is no n e ed to test f or recovera bility of the carryi n g amount o f the asset.

12.2 W hen to und ertake an i m pairment test The o ly assets th at need to b e tested at t he end of t he reportin g g period are those wher e there i s any indic a tion that an asset may b e impaired .

The n e xt assets m ust be unde rtaken an i m pairment t e st every ye ar:

inta n gable asset s with indefi nite useful l ives

inta n gible assets not yet ava ilable for us e

good will acquire d in a busin e ss combina tion

On w h at level sho uld an impa irment test be perform e d?

The starti n g point for d etermining the recove rable amou n t in impairme n t testing is a t the level of individual a ssets.

Where an a sset does n ot generate such inde p endent cas h flows recoverabl e amount is determine d for the cas h generatin g unit (CGU) to which t h e asset bel ongs.

h generatin g unit (CGU) to which t h e asset bel ongs. The i m

The i m pairment t e st relates t o the assess m ent of rec overability o f the asset i n the futur e , which is not a fea t ure of the d epreciation allocation p rocess. De p reciation is viewed as a proce s of allocati on rather t h an as a val u ation proce ss, even wh e n an asset is measure d at a revalu ed amount.

- 8 -

Identifying indicators for impairment testing:

External: Decline in asset's market value, entity's environment/market, increases in interest rates, The carrying amount of the entity's net assets exceeds the entity's market capitalization Internal: Obsolescence or physical damage, changed use within the entity, economic performance of the asset, management's own forecasts

12.3 Impairment test for an individual asset

1. The recoverable amount of an asset or a cash generating unit is the higher of its fair value less costs to sell and its value in use.

2. Fair value less costs to sell is the amount obtainable from the sale of an asset or cash generating unit in an arm's length transaction between knowledgeable, willing parties, less the costts of disposal.

3. Costs of disposal are incremental costs directly attributable to the disposal of an asset

or cash generating unit, excluding finance costs and income tax expense.

4. Value in use is the present value of the future cash flows expected to be derived from an asset or cash generating unit.

1. From the definition of recoverable amount, there are two possible amounts against which

the carrying amount can be tested for impairment: 1) fair value in use less costs to sell 2) value

in use. If either one of these amounts is greater than carrying amoun, the asset is not impaired.

2. Fair value less costs to sell, part 1 = fair value, part 2 = cost of disposal.

Where there is an active market, fair value is the market price. If the market is not active, a fair value may be determined by observing evidence such as amounts paid in recent sales transactions.

When can the fair value les cost to sell be determined?

1. Binding sale agreement

2. Traded in an active market:

• The items traded on the market are homogeneous.

Willing buyers and sellers can normally be found at any time.

• Prices are available to the public.

3. If an asset's fair value is equal to its market value, the difference between fair value and fair

value less costs to sell is the disposal costs of the asset.

4. Value in use is the present value of future cash flows relating to the asset being measured,

in other words the present value of the future cash flows expected to be derived from an asset or cash generating unit.

- 9 -

Calcul a ting value i n use invol v es the follo w ing proces ses:

i n use invol v es the follo w ing proces ses: The o b ject

The o b ject is to d e termine th e cash flows and apply a discount ra te. (Fig. 12. 3, page 468)

Meas uring the re c overable a m ount Deter mining cash flows The c a sh flows sh ould include :

Projection s of cashflo w should be based on m anagement ' s best esti m ate of the r a nge of econom ic condition s that will e x ist over th e remaining useful life o f the asset

Projection s of cash ou t flows nece s sarily to us e of the asse t/CGU

Projection s of indirect y attributa b le cash flow s that can b e allocated on a reason able and consis t ent basis

Projection s of cash inf l ows from t h e continuin g use of th e asset/CGU

• Net cash fl ows related to the disp osal of CGU/ asset

• Maintena n ce Cash ou t flows

Prese nt Value (PV ) Two a p proaches f or calculati n g PV:

Tradit ional appro a ch adju st for expec t ations abo u t possible v ariations in cash flow Expec ted Cash flo w approac h risk adj u sted expec ted cash flo w s, based o n considera t ion of all pos sible cash fl ows rather t han just th e most likely cash flow

Deter m ining disc o unt rate Discou nt rate sho u ld reflect:

1) tim e value of m oney to the end of the a sset's usef u l life 2) risk s specific to the asset f o r which the future cash flow estim a tes have n o t been adju sted. 3) The price for b e aring the ri sk inherent i n the asset. 4) Oth er factors t h at market p articipants w ould refle c c t in the rat e such as illi q uidity. The rate may b e determine d by viewin g rates use d for: 1) asse ts in the m a rket, 2) WA CC, 3) asset s in portf o lio.

- 10 -

12.4 C ash Genera ting Units E xcluding G o odwill Some assets do n o t individual ly generate cash flows b ecause the cash flows generated a r e the result of a combin ation of sev eral assets.

Identi fiying a cas h generating unit Defini tion of CGU :

The s mallest ident ifiable grou p of assets t hat generate s cash inflo ws that are l argely indepe ndent of the cash inflow s from othe r assets or g roups of ass ets.

cash inflo w s from oth e r assets or g roups of as s ets.

One o f the proble m s with usi n g a cash ge nerating un i t is that th e identificati on of a part i cular unit w ithin an ent i ty is arbitra ry bacause i t needs jud g gement on t he part of t h e manage m ent and t h e factors us ed in the d e termination will vary fr om entity t o entity.

Impai r ment loss f o r a cash g e nerating un it Excludi n g goodwill An im p airment los s occurs w h en the carr y ing amoun t of the asse ts of a CGU exceed thei r recove rable amou nt. In det e rmining th e carrying a m ount of th e assets, all t hose asset s that are di r ectly attrib u table to the CGU and th at contribu t e to genera ting the cas h flows use d in measuri n g recovera ble amou n t, must be ncluded.

The r e duction in e ach carryin g amount re lates to eac h specific as set and sho u ld be treat e d as an iim pairment of each asset, even thoug h the impai r ment loss w as based o n an analysi s of a CGU. he loss is a c counted fo r in the sam e way as th a t for an ind ividual asse t as describ e d in sectio n 12.3, with losses relat i ng to an ass et measure d at cost be ing recogni s ed immedi a tely in profit or loss.

- 11 -

Corporate assets Corporate assets, such as the headquarters building, are integral to all CGU generating cash flows but do not by themselves independently generate cash flows. How to be dealt with in determining impairment losses:

Step 1) If any corporate assets can be allocated on a reasonable and consistent basis to CGU, then this should be done. Each unit is then tested for an impairment loss. Where a loss occurs

in a CGU, the loss is allocated prorata across the asstes including the portion of the corporate asset allocated to the unit. Step 2) If some corporate assets cannot be allocated across the cash generating units, the entity:

Compares the carrying amount of each unit being tested with its recoverable amount and recognises any impairment loss by allocating the loss the assets of the unit

Identifies the smallest CGU that includes the unit under review and to which a portion of the unallocated corporate asset can be allocated on a reasonable and consistent basis

Compars the carrying amount of the larger CGU, inclusing the portion of the corporate asset, with its allocated amount. Any impairment loss is then allocated across the assets of the larger CGU.

Determining the carrying amount The element of the carrying amount:

Assets that are directly and exclusively attributable to the CGU.

• An allocation of assets that are indirectly attributable on a reasonable and consistent basis to the CGU including: corporate assets and capitalised goodwill

Recognised liabilities, but only to the extent that the recoverable amount of the CGU cannot be determined without consideration of those liabilities

GOLDEN RULES

1. Make sure you are comparing “apples” with “apples”

2. Do not allocate financing liabilities or tax (as they are excluded from VIU cashflows)

3. If allocate central assets exclude intra group charges for the assets

12.5 CashGenerating Units and Goodwill Goodwill is recognised only when it is acquired in a business combination. As discussed in chapter 10, IAS 38 Intangable Assets, does not allow the recognition of internally generated goodwill or the revaluation of any acquired goodwill. Further, it is not possible to determine a fair value less costs to sell for goodwill, or to identify a set of cash flows that relates specifically to goodwill. Goodwill is not subject to amortisation. Instead,the acquirer tests the carrying amount of goodwill annually in accordance with IAS 36.

Which units should have goodwill allocated to them? The goodwill should be allocated to the lowest level at which management monitors the goodwill.

- 12 -

Where the allocation of goodwill cannot be completed before the end of the annual period in which the business combination occurred, the initail allocation is to be completed before the end of the first annual period beginning after the acquisition date.

Impairment testing of goodwill

A CGU that has goodwill allocated to it must be tested for impairment annually or more

frequently if there is an indication the unit may be impaired (IAS36). This involves comparing the carrying amount of the unit's assets, including goodwill, with the recoverable amount amount of the unit's assets.

Recognition of impairment loss Write off first:

Goodwill write off completely before impairing other assets Fixed assets / Intangibles

Write down pro rata after goodwill

No asset write down below recoverable value

• Revalued assets impairment against revaluation reserve

Recoverable amount exceeds carrying amount

If the recoverable amount exceeds the carrying amount, there is no impairment loss. Under the test, the goodwill is protected against impairment by:

Internally generated goodwill

Unrecognised identifiable net assets

Excess value over carrying amount of recognised assets

Carrying amount exceeds recoverable amount

If the carrying amount exceeds the recoverable amount, there is an impairment loss. Par. 104

of IAS36 states that the impairment loss must be allocated to reduce the carrying amount of the assets of the unit, or group of units, in the following order: 1) Reduce the carrying amount

of any goodwill allocated to the CGU 2) reduce the other asstes of the unit prorata on the basis of the carrying amount of each asset in the unit.

Restrictions:

In allocating an impairment loss, an entity shall not reduce the carrying amount of an asset below the highest of: a) its fair value less costs to sell b) it value in use c) zero. The amount of the impairment loss that would otherwise have been allocated to the asset shall be allocated prorata to the other assets of the unit (group of units) (fig. 12.11, page 482).

Timing of impairment tests The test may be performed at any time during the year, provided it is performed at the same time every year. It is also not necessary for all CGU's to be tested for impairment at the same time. If sizes of the CGU's differ, it is necessary to test the smallest unit first. It must also be remembered that annual testing is not a substitute for management being aware of events or changing circumstances that may indicate possible impairment and the need for additional testing.

- 13 -

12.6 Reversal of an impairment loss Subsequent to an impairment loss occurring because of doubts about the performance of asstes, it is possible for circumstances to change such that, then the recoverable amount of the assets increases, consideration can be given to a reversal of a past impairment loss.

It is possible that a review of the evidence will not result in a reversal of a previous impairment loss, but instead may lead to changes in the depreciation/amortisation measure of an asset. The review may lead to changes in expectations of useful life, residual value, and the pattern of benefits to be received. If the evidence is such that there is a change in the estimates in relation to an asset, a reversal of impairment loss can be recognised. The reversal process requires the recognition of an increase in the carrying amount of the asset to its recoverable amount.

Can impairments be reversed?

Yes. for assets other than goodwill reverse when there is a change in assumptions underlying the cashflows, such as a change in economic conditions

Practically, looking for significant changes only

Should not exceed what the amortised cost would have been.

Goodwill impairments can never be reversed!

Reversal of an impairment loss individual asset Where the recoverable amount is greater than the carrying amount of an individual asset (other than goodwill), the reversal of a previous impairment loss requires adjusting the carrying amount of the asset to recoverable amount. One limitation is that the carrying amount cannot be increased to an amount in excess of the carrying amount that would have been determined had no imapirment loss been recognised.

Reversal of an impairment loss CGU The reversal of the impairment loss is allocated pro rata to the assets of the unit, except for goodwill, with the carrying amount of those assets. The carrying amount of an asset cannot be increased above the lower of its recoverable amount and the carrying amount that would have been determined had no impairment loss been recognised for the asset in the previous periods. If the latter occurs, then the amount of impairment loss reversal that cannot be allocated to an individual asset is then allocated on a prorata basis to the other asstes of the CGU, except for goodwill.

Reversal of an impairment loss Goodwill Impairment loss recognised for goodwill is not to be reversed in a leter period. Becasue of the nature of goodwill, it is not possible to determine how much of any goodwill existing in an entity is remaining acquired goodwill or goodwill internally generated since the acquisition. If there is an excess of recoverable amount over carrying amount and the excess has been allocated to all asset's, however there is still an amount to be allocated, this amount will recognised immediately in P&L as income.

- 14 -

12.7 Disclosure IAS 36 requires disclosures about the estimates used to measure the recoverable amount of a cash generating unit when goodwill or an intangible asset with an indefinite life is included in the carrying amount of the unit, and the carrying amount of goodwill or intangible assets with indefinite useful lives allocated to that unit is significant in comparison with the entity's total carrying amount of goodwill or intangible assets with indefinite useful lives. Where the carrying amount of goodwill or intangible assets is not significant for a unit, par. 135 requires that fact to be disclosed.

"Illustrative examples 12.2 and 12.3 (page 492) are comprehensive examples that demonstrate the accounting for impairment losses with and without corporate assets."

- 15 -

Business Combinations

IFRS3

Chapter 11

Scope/definitions 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 (no need for actual outputs from asset) of being conducted and managed for the purpose of providing a return directly to investors or other owners, members or participants. It also applies to combinations of mutual entities and combinations (not dual listed shares!)[IFRS 3.Appendix A] Acquirer must be identified Under IFRS 3, an acquirer must be identified for all business combinations. [IFRS 3.6] Scope exclusions IFRS 3 does not apply to the formation of a joint venture, combinations of entities or businesses under common control. Also, IFRS 3 does not apply to the acquisition of an asset or a group of assets that do not constitute a business (these are accounted at cost, fair value). [IFRS 3.2] Fair value amount on which an asset could be exchanged, between knowledgeable and willing parties in arm length transaction

Control

Power over greater than 50% of the voting control (which can be by contract)

Power to govern the financial and operating policies

Power to appoint or remove the majority of the directors

Power to cast the majority of votes at a meeting

The cost of the combination

Recognize at fair value of consideration (the cash, shares, earnout paid), measured at acquisition date.

Earn out > The acquiree will receive a portion of future revenues/profits from acquirer as consideration.

Transaction costs related to the deal for merger/acquisition is not recognized, but incurred as costs.

Acquisition method

1. Identification of the 'acquirer' the combining entity that obtains control of the acquiree [IFRS 3.7]

2. Determination of the 'acquisition date' the date on which the acquirer obtains control of the acquiree [IFRS 3.8]

3. Recognition and measurement of the identifiable assets acquired, the liabilities assumed and any non controlling interest (NCI, formerly called minority interest) in the acquiree

4. Recognition and measurement of goodwill or a gain from a bargain purchase

- 16 -

1.

Identification of the 'acquirer'

The company taking initiative and/or the one obtaining control. This is important because all assets and liabilities of acquiree most be valued at fair value.

2. Determining the acquisition date

The date on which the acquirer obtains control of the acquiree, this does not require a transaction. As the transaction can be spread over time in parts, the substance of the transaction determines the accounting, rather than the form of the transaction.

Other dates of importance:

Date the contract is signed

Date the contract is paid

Date nominated in the contract

Date on which assets are delivered

Date the offer become unconditional

3. Recognition of Acquiree by acquirer

Restate accounts (make sure the same accounting methods are used) All of the identifiable assets and liabilities and contingent liabilities are to be identified and valued at fair value (all at acquisition date!), even when these were not previously on the purchased company’s balance sheet. Examples: Inventory used to by recognized at cost, now fair value

Noncurrent assets meeting the requirements of IFRS 5, (assets held for resale) are recognised at fair value less selling costs.

Recognise:

Assets other then intangible assets recognise when future economic benefit will accrue to the acquirer and its fair value can be measured reliable;

Liabilities other then contingent liabilities – when it is probable that there will be an outflow of recourses to settle the obligation and its fair value can be measured reliable; and

Contingent liabilities and intangible assets – when their fair value can be measured.

The profit and loss account should include profits and expenses based on the fair value of the assets acquired (i.e. charge depreciation on the fair value not the value per the pre acquisition balance sheet). Minority share is stated at the minorities share of the net fair value of the assets acquired.

- 17 -

Intangible assets Intangible assets are recognised only when it meets the requirements of IAS 38 Intangible

Assets, and its fair value can be reliable measured. To meet the requirements the intangible asset must:

Be separate (it can be sold or transferred separately)

Arises from contractual or legal rights

Examples: order portfolio, trademarks/tradenames (amount saved for not needing royalties), R&D (only when very likely R&D will yield money).

Contingent liabilities Contingent liabilities are measured at fair value if this can be reliable measured. If you can not measure it reliable then disclose information per IAS 37. After their initial recognition, contingencies should be measured at the higher of:

The amount that should be recognised under IAS 37

The initial amount less amortisation per IAS 18

This section excludes financial instruments per IAS 39 but includes loans.

Deferred taxes Should be calculated as tax authorities don’t accept the revaluation, a tax asset/liability should be recognized. Taxes carried forward or backward could be suddenly be recognized by acquisition.

Indemnification Legal claims that are uncertain and will be accounted for by the seller. These claims are specific, in contrary to warranties. Should be recognized as asset or liability.

Earnouts Recognize at fair value, this amount will not be amended in the balance sheet in the future. Subsequent changes should be recognized (as estimation) as an adjustment in P&L. With in a year the value of earnout of earnout at acquisition date should be determined. And earnouts are significant events that should be disclosed (when between closing date and reporting date).

Re acquired rights Example: bought back leasing rights. Only for the length of the existing contracts.

4. Recognition and measurement of goodwill

Goodwill > unrecognized intangible assets (synerchies + future costumers + assembled workforce)

At the acquisition date recognize goodwill as an asset Goodwill should be recognised at cost being the amount paid less the fair value of assets and liabilities acquired. Goodwill should be carried as an asset less any impairment. Goodwill should not be amortized (yearly impairment testing is used).

- 18 -

Negative goodwill

When it arises, reassess the identification and measurement of assets and liabilities and the measurement of cost. You then recognise negative goodwill immediately in the profit and loss account. IFRS 3 recognises that negative goodwill can arise in three circumstances:

Errors in calculation

The requirement of an accounting standard to measure an asset at other then fair value (for example undiscounted tax assets); or

A bargain purchase.

Other aspects

Only in the statements of the acquirer need the acquiree to be revalued. The statements of the acquiree will remain un amended.

of the acquiree will remain un ‐ amended. ‐ In the case of transaction A the
of the acquiree will remain un ‐ amended. ‐ In the case of transaction A the
‐
of the acquiree will remain un ‐ amended. ‐ In the case of transaction A the

In the case of transaction A the accounting method changes from the equity method to the fair value method. So everything accounted in the previous period is derecognized. And the everything in the new situation is recognized with the right method. This can (will usually) lead to a Holding gain.

Example: Buy 40% of shares for 40,of company you already own 30% (bought for 20,). Fair value of 70% is 70,then:

Subsidiary

70,

 

@ cash

 

40,

@ associate

 

20,

@ gain

 

10,

No goodwill is recognized when the acquirer goes from control to 100% control, the economisc entity method.

Post Deal implications are important to forecast in advance. Because of revaluation the depreciation and amortization will probably be higher, pressing profit margins. This should be communicated to stakeholders to prevent them getting false expectations of performance after acquisition.

- 19 -

Group Reporting

IFRS3 / IAS27

Chapter 21

IFRS 3: Business Combinations IAS 27: Consolidated and separate financial statements

The preparation of consolidated financial statements involves combining the financial statements of the individual entities so that they show the financial position and performance of the group of entities, presented if they were a single economic activity.

IFRS 3: Business combination = a transaction or other event in which an acquirer obtains control of one or more businesses: separate entities that together form a combined entity.

An entity may acquire all or part of the issued shares of another entity. When there is the ability to control, the entities operate as a combined entity and this results in a parent subsidiary relationship. Consolidated financial statements are then required.

Two entities could agree to the formation of a new entity, the new entity acquires all the shares of the other