International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
Page 132
combinations
665
less £2,000,000 (20% × £10,000,000). Therefore, Investor’s consolidated statement of financial position at
31 December 2018, before the acquisition of the additional 60 per cent ownership interest, is as follows:
Investor’s consolidated statement of financial position
£’000
at 31 December 2018
Cash
26,500
Investment in associate
4,700
31,200
Issued equity
30,000
Retained earnings
1,200
31,200
In its separate financial statements, Investor includes its investment in the associate at its cost of £3,500,000.
Accounting for the business combination
Although Investor has previously equity accounted for its 20% interest in Investee (and calculated goodwill
on that acquisition), the computation of goodwill in its consolidated financial statements as a result of
obtaining control over Investee is the same as that in Example 9.18 above:
£’000
Consideration transferred for 60% interest acquired
22,000
on 1 January 2019
Non-controlling interest – share of fair values of
3,800
identifiable net assets at that date (20% × £19,000,000)
Acquisition-date fair value of initial 20% interest
6,000
31,800
Acquisition-date fair values of identifiable net assets acquired
19,000
Goodwill 12,800
Investor recognises a gain of £1,300,000 in profit or loss as a result of remeasuring its existing interest from
its equity-accounted amount of £4,700,000 at the date of obtaining control to its acquisition-date fair value
of £6,000,000.
The following shows Investor’s consolidation worksheet immediately after the acquisition of the additional
60 per cent ownership interest in Investee, together with consolidation adjustments and associated explanations.
Investor
Investee
Consolidation
Consolidated
adjustments
Dr
Cr
£’000
£’000
£’000
£’000
£’000
Cash and receivables
4,500
8,000
12,500
Investment in investee
26,700
–
26,700
–
Land 6,000
5,000
11,000
(a)
Goodwill
12,800
12,800
(b)
31,200
14,000
36,300
Issued equity
30,000
5,000
5,000
30,000
(c)
Retained earnings
1,200
9,000
9,000
1,200
(d)
Profit for 2019
1,300
1,300
(e)
Non-controlling interest 3,800
3,800
(a)
31,200
14,000
36,300
666 Chapter
9
Notes
The above consolidation adjustments result in:
(a) Investee’s identifiable net assets being stated at their full fair values at the date Investor obtains control
of Investee, i.e. £19,000,000, including land of £11,000,000. The 20 per cent non-controlling interest in
Investee is also stated at the non-controlling interest’s 20 per cent share of the fair values of Investee’s
identifiable net assets, i.e. £3,800,000 (20% × £19,000,000).
(b) goodwill being recognised from the acquisition date based on the computation set out at 6 above, i.e.
£12,800,000.
(c) issued equity of £30,000,000 comprising the issued equity of Investor of £30,000,000.
(d) a retained earnings balance of £1,200,000 being Investor’s equity accounted share of Investee while it
was an associate.
(e) profit of £1,300,000 being the amount of gain on remeasurement of the previously existing interest in
Investee at its acquisition-date fair value (£6,000,000 – £4,700,000). As a result, total retained earnings
in the statement of financial position are £2,500,000.
Although the Examples above illustrate the requirements of IFRS 3 when the previously
held investment has been accounted for as an equity investment designated as FVOCI
(without recycling) or as an associate, the requirements in IFRS 3 for step acquisitions
apply to all previously held non-controlling equity investments in the acquiree,
including those that were accounted for as joint ventures under IFRS 11. IAS 28’s
requirements also apply to joint ventures. [IAS 28.2].
As a result of obtaining control over a former associate or joint venture, the acquirer
accounts for the business combination by applying the other requirements under IFRS 3
as it would in any other business combination. Thus, it needs to recognise the net of the
acquisition-date fair values (or other amounts recognised in accordance with the
requirements of the standard) of the identifiable assets acquired and the liabilities
assumed relating to the former associate or joint venture (see 5 above), i.e. perform a
new purchase price allocation. This will include reassessing the classification and
designation of assets and liabilities, including the classification of financial instruments,
embedded derivatives and hedge accounting, based on the circumstances that exist at
the acquisition date (see 5.4 above).
Obtaining control over a former associate or joint venture means that the investor ‘loses’
significant influence or ‘joint control’ over it. Therefore, any amounts recognised in
other comprehensive income relating to the associate or joint venture should be
recognised by the investor on the same basis that would be required if the associate or
joint venture had directly disposed of the related assets or liabilities. For associates and
joint ventures, this is discussed further in Chapter 11 at 7.12.1.
In Example 9.19 above, a gain was recognised as a result of the step-acquisition of the former
associate. However, a loss may have to be recognised as a result of the step-acquisition.
Example 9.20: Business combination achieved in stages – loss arising on step-
acquisition
An investor has an equity-accounted interest in a listed associate comprising 1,000 shares with a carrying
value of €1,000. The quoted price of the associate’s shares is €0.90 per share, i.e. €900 in total. As there is
an impairment indicator, the investment is tested for impairment in accordance with IAS 36. However, as the
investor determines that the investment’s value in use exceeds €1,000, no impairment loss is recognised.
Business
combinations
667
In the following period, the investor acquires all of the other outstanding shares in the associate. Up to the
date of obtaining control, the investor has recognised a further share of profits of the associate, such that the
equity-accounted interest in the associate is now €1,050. At the date of obtaining control, the fair value of
the shares has increased to €0.93. The existing shares are remeasured to fair value at that date and a
loss of
€120 (€1,050 less €930) is recognised in profit or loss.
9.1
Accounting for previously held interests in a joint operation
In December 2017, the IASB issued amendments to IFRS 3 and IFRS 11 as part of
the Annual Improvements to IFRS Standards 2015-2017 Cycle.
The amendments clarified that, when a party to a joint operation (i.e. either a joint
operator or a party that does not share joint control) obtains control of a joint operation
that is a business (as defined in IFRS 3), it must remeasure to fair value the entire interest
it previously held in that joint operation. The IASB views a transaction where control
is gained as a significant change in the nature of, and the economic circumstances
surrounding, the interest in the joint operation. Therefore, IFRS 3 was amended to
clarify that such a transaction must be accounted for as a business combination
achieved in stages. [IFRS 3.42A].
An entity should apply the amendments to business combinations with acquisition dates
on or after 1 January 2019. Earlier application is permitted and should be disclosed.
[IFRS 3.64O].
Chapter 12 at 8.3.2 discusses how a party that participates in (but does not have joint
control over) a joint operation, accounts for obtaining joint control over that joint
operation that is a business (as defined in IFRS 3).
10
BARGAIN PURCHASE TRANSACTIONS
IFRS 3 regards a bargain purchase as being a business combination in which:
• the net of the acquisition-date fair values (or other amounts recognised in
accordance with the requirements of the standard) of the identifiable assets
acquired and the liabilities assumed, exceeds
• the aggregate of:
• the consideration transferred (generally measured at acquisition-date fair value);
• the amount of any non-controlling interest in the acquiree; and
• the acquisition-date fair value of the acquirer’s previously held equity interest
in the acquiree. [IFRS 3.34].
The IASB considers bargain purchases anomalous transactions – business entities and
their owners generally do not knowingly and willingly sell assets or businesses at prices
below their fair values. [IFRS 3.BC371]. Nevertheless, occasionally, an acquirer will make
a bargain purchase, for example, in a forced sale in which the seller is acting under
compulsion. [IFRS 3.35]. These may occur in a forced liquidation or distress sale (e.g. after
the death of a founder or key manager) in which owners need to sell a business quickly.
The IASB observed that an economic gain is inherent in a bargain purchase and
concluded that, in concept, the acquirer should recognise that gain at the acquisition
date. However, there may not be clear evidence that a bargain purchase has taken place,
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9
and because of this there remained the potential for inappropriate gain recognition
resulting from measurement bias or undetected measurement errors. [IFRS 3.BC372-BC375].
Therefore, before recognising a gain on a bargain purchase, the acquirer should reassess
all components of the computation to ensure that the measurements are based on all
available information as of the acquisition date. This means ensuring that it has
correctly identified all of the assets acquired and all of the liabilities assumed and does
not have to recognise any additional assets or liabilities. Having done so, the acquirer
must review the procedures used to measure all of the following:
(a) the identifiable assets acquired and liabilities assumed;
(b) the non-controlling interest in the acquiree, if any;
(c) for a business combination achieved in stages, the acquirer’s previously held
equity interest in the acquiree; and
(d) the
consideration
transferred.
[IFRS 3.36].
If an excess remains, the acquirer recognises a gain in profit or loss on the acquisition
date. All of the gain is attributed to the acquirer. [IFRS 3.34].
The computation means that a gain on a bargain purchase and goodwill cannot both be
recognised for the same business combination. [IFRS 3.BC376-BC377].
IFRS 3 acknowledges that the requirements to measure particular assets acquired or
liabilities assumed in accordance with other IFRSs, rather than their fair value, may
result in recognising a gain (or change the amount of a recognised gain) on acquisition.
[IFRS 3.35, BC379].
The computation of a gain on a bargain purchase is illustrated in the following example,
which is based on one included within the Illustrative Examples accompanying IFRS 3.
[IFRS 3.IE45-IE49].
Example 9.21: Gain on a bargain purchase (1)
Entity A acquires 80% of the equity interests of Entity B, a private entity, in exchange for cash of €150m.
Because the former owners of Entity B needed to dispose of their investments in Entity B by a specified date,
they did not have sufficient time to market Entity B to multiple potential buyers. The management of Entity A
initially measures the separately recognisable identifiable assets acquired and the liabilities assumed as of
the acquisition date in accordance with the requirements of IFRS 3. The identifiable assets are measured at
€250m and the liabilities assumed are measured at €50m. Entity A engages an independent consultant, who
determines that the fair value of the 20% non-controlling interest in Entity B is €42m.
Entity B’s identifiable net assets of €200m (being €250m – €50m) exceed the fair value of the consideration
transferred plus the fair value of the non-controlling interest in Entity B. Therefore, Entity A reviews the
procedures it used to identify and measure the assets acquired and liabilities assumed and to measure the fair
value of both the non-controlling interest in Entity B and the consideration transferred. After that review,
Entity A decides that the procedures and resulting measures were appropriate. Entity A measures the gain on
its purchase of the 80% interest as follows:
Business
combinations
669
€m €m
Amount of the identifiable net assets acquired (€250m – €50m)
200
Less:
Fair value of the consideration transferred for Entity A’s 80% interest
150
Fair value of non-controlling interest in Entity B
42
192
Gain on bargain purchase of 80% interest in Entity B
8
Entity A would record its acquisition of Entity B in its consolidated financial statements as follows:
Dr
Cr
€m €m
Identifiable net assets acquired
250
Cash
150
Liabilities assumed
50
Gain on bargain purchase
8
Equity – non-controlling interest in Entity B
42
If Entity A chose to measure the non-controlling interest in Entity B on the basis of its proportionate interest in
the identifiable net assets of the acquiree, the gain on the purchase of the 80% interest would have been as follows:
€m €m
Amount of the identifiable net assets acquired (€250m – €50m)
200
Less:
Fair value of th
e consideration transferred for Entity A’s 80% interest
150
Non-controlling interest in Entity B (20% × €200m)
40
190
Gain on bargain purchase of 80% interest in Entity B
10
On that basis, Entity A would record its acquisition of Entity B in its consolidated financial statements as follows:
Dr
Cr
€m €m
Identifiable net assets acquired
250
Cash
150
Liabilities assumed
50
Gain on bargain purchase
10
Equity – non-controlling interest in Entity B
40
It can be seen from the above example that the amount of the gain recognised is affected
by the way in which the non-controlling interest is measured. Indeed, it might be that
if the non-controlling interest is measured at its acquisition-date fair value, goodwill is
recognised rather than a gain as shown below.
670 Chapter
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Example 9.22: Gain on a bargain purchase (2)
This example uses the same facts as in Example 9.21 above, except that the independent consultant,
determines that the fair value of the 20% non-controlling interest in Entity B is €52m.
In this situation, the fair value of the consideration transferred plus the fair value of the non-controlling
interest in Entity B exceeds the amount of the identifiable net assets acquired, giving rise to goodwill on the
acquisition as follows:
€m
Fair value of the consideration transferred for Entity A’s 80% interest
150
Fair value of non-controlling interest in Entity B