2. Business Combinations
Business Combinations are normally (...) with a (...) on the current and future performance of the entity: (2)
significant transactions, large impact
(1) Mergers of equals
(2) Acquisitions
Reasons for merges and / or acquisitions (6)
Growth strategy, Synergies, Consolidation of market, Diversification, Acquiring knowledge, Entering of a market
What is the impact of m&a on financial performance: (3)
1. Acquisition price - contingent consideration
2. Financing of acquisition, shares versus cash with loan
3. Combined earnings - contribution to profit, synergies
Two types of growth due to m&a (2)
1. Organic growth
2. Acquired growth
Organic growth meaning:
through existing operations and business activities, using own resources
Acquired growth meaning:
through m&a, using external resources
Why is transparaency very important?
Entities need to disclose in the year of acquisition the impact on revenue and income
Why is transparency only important in the year of the m&a?
There is currently no requirement to disclose the impact of a BC in later years, or to explain the difference between the expacted and actual impact.
What are the various forms of a BC? (3)
1. acquisition of shares in another entity
2. acquisition of a business without acquiring shares
3. combination of both
Definition of a BC:
a transaction or other event, in which an acquirer, obtains control of one or more business
Definition of control
investor is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee
You get the the power to control by having f.e.: (3)
1. Majority of voting rights
2. Nomination of majority of members of the management
3. Contractual right to determine most relevant decisions
Two requirements for a BC is:
1. control
2. business
Business definition
integrated set of activities and assets
that is capable of being conducted and managed
and that can generate economic benefits
Step acquisition and divestment. A has 20% and acquires the other 80% and gets control. IFRS says:
20% interest is sold, and 100% of the acquired company is acquired in a BC
Consequences of step acquisition and divestment
1. 100% IFRS 3 BC
2. Book gain or loss of the 20% already owned
From an accounting perspective there are no mergers, as...
all business combinations must be accounted as acquisitions
Acquirer definition
The acquirer is the combining entity
that obtains control of the other combining entities / business
Definition of a merger of equals
a type of BC where two companies of similar size,
come together to form a single entity
to create a new combined entity
What is the date of a BC?
the date control is transferred
Consideration paid. The value paid of the business acquired is determined...
based on the fair values, at the date of exchange, of:
1. Assets given up
2. Liablities incurred
3. Equity instruments issued
The consideration paid by the acquirer is...
the costs of exchange for control of the acquired company plus the fair value of any existing interest already owned
No considerations paid regarding a BC are... (3)
1. Costs of legal, tax and accounting advice
2. Costs of issuing shares
3. Costs of issuing bonds and loans
Why are costs of advice no costs for the acquisition of a business?
Acquired business must be initially recognized at fair value
What is the value given up when issuing shares?
number of shares given in return for shares in target X fiar value of the shares given at the date acquirer gets control
Difference in journal entries when in f.e. two years shares are transferred compared to when cash is transferred:
Cash should be discounted to the current period, Shares can't be discounted
Difference between consideration and compensation
sometimes contingent consideration may actually be employee compensation and should be expensed
IFRS requires any payments linked to continuing employment to be accounted for as...
compensation
Overall recognition principle
recognize all identifiable assets and liabilities of the acquired company
that existed at the date of acquisition
at their fair values at that date
Exception to the recognition principle:
contingent liabilities: fair value of contingent liability must be reliably measurable,
but outflow of future economic benefits needs to be probable
When can provisions be recognized?
The acquirer cannot recognize liabilities for future losses or costs based on its intentions
Liabilities that were exisiting obligations of the acquired company at the acquisition date may be recognized
During which period provisional values can be adjusted to reflect additional information that becomes available after the business combination
12 months
Goodwill is the difference between ... and ...
fair value of business and fair value of net assets recognized
Why do companies pay for goodwill? (3)
1. Synergies
2. Non-recognizable assets (workforce)
3. Expected future grow of the company
The goodwill needs to recognized as an ... when the goodwill is ...
asset
purchased
Through out the lifetime of goodwill, there is no ...
amortizaiton
Goodwill is tested ... for any ...
annually
indicators of impairment
IFRS 3 provides two possibilities to account for partial acquisition and goodwill
1. Fair value: allocate a part of the fair value of goodwill to non-controlling interest
IFRS 3 provides two possibilities to account for partial acquisition and goodwill
2. Proportionate share: calculate goodwill as the difference between the actual consideration given up and the proportionate share in net assets of the acquired company