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SLFRS 03 - 2

SLFRS 03 outlines the accounting standards for business combinations, aiming to enhance the relevance and reliability of financial statements. Key components include definitions of terms like acquirer and goodwill, the acquisition method, and principles for recognition and measurement of assets and liabilities. The standard also emphasizes necessary disclosures related to the acquisition and goodwill calculation.

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65 views

SLFRS 03 - 2

SLFRS 03 outlines the accounting standards for business combinations, aiming to enhance the relevance and reliability of financial statements. Key components include definitions of terms like acquirer and goodwill, the acquisition method, and principles for recognition and measurement of assets and liabilities. The standard also emphasizes necessary disclosures related to the acquisition and goodwill calculation.

Uploaded by

savindya weerakoon
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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SLFRS 03 – Business Combination

Dr. Isuru Manawadu


PhD, B.Sc. Accounting (SP) USJP, FCA

Department of Accounting
Faculty of Management Studies and Commerce
University of Sri Jayewardenepura

1
Presentation Outcomes

⚫ Objective of the standard


⚫ Definitions
⚫ Recognition and measurement
⚫ NCI
⚫ Disclosures

2
The objective

The objective of this SLFRS is to improve the


relevance, reliability and comparability of the
information that a reporting entity provides in
its financial statements about a business
combination and its effects.

3
Definitions

⚫ Acquire: The business or businesses that the


acquirer obtains control of in a business
combination.
⚫ Acquirer: The entity that obtains control of
the acquiree.
⚫ Acquisitiondate: The date on which the
acquirer obtains control of the acquiree.

4
Definitions

⚫ Goodwill: An asset representing the future


economic benefits arising from other assets
acquired in a business combination that are
not individually identified and separately
recognised.
⚫ Fair value: Fair value is the price that would
be received to sell an asset or paid to transfer
a liability in an orderly transaction between
market participants at the measurement date.
5
Definitions

⚫ Non-controlling interest: The equity in a


subsidiary not attributable, directly or
indirectly, to a parent.

6
The acquisition method

⚫ Identifying the acquirer;


⚫ Determining the acquisition date;
⚫ Recognising and measuring the identifiable
assets acquired, the liabilities assumed and
any non-controlling interest in the acquiree;
and
⚫ Recognising and measuring goodwill or a
gain from a bargain purchase.

7
Identifying the acquirer

⚫ For each business combination, one of the


combining entities shall be identified as the
acquirer. The guidance in SLFRS 10 shall be
used to identify the acquirer—the entity that
obtains control of another entity, ie the
acquiree.

8
Practice question 1

Company A has 50% ownership of Company


B and 49% ownweship of company C. The
director board of A company has discussed
with shareholders of C company and
concluded that the controlling power of
company C is with company A.
Required
Can company C be consolidated with company
A?
9
Determining the acquisition date

The acquirer shall identify the acquisition date,


which is the date on which it obtains control of
the acquiree.

10
Recognition principle

As of the acquisition date, the acquirer shall


recognise, separately from goodwill, the
identifiable assets acquired, the liabilities
assumed and any non-controlling interest in the
acquiree.

11
Measurement principle

The acquirer shall measure the identifiable


assets acquired and the liabilities assumed at
their acquisition-date fair values.

12
NCI - Measurement

⚫ Fair value; or
⚫ The present ownership instruments’
proportionate share in the recognised
amounts of the acquiree’s identifiable net
assets.

13
Exception to the recognition principle

⚫ LKAS 37 - Contingent liabilities


⚫ LKAS 12 Income Taxes.

14
Fourth step

Recognising and measuring goodwill or a gain


from a bargain purchase
➢ Through Cost of control Account
➢ Through a format

15
Practice Question 2

P Co acquired 100% of S Co at a cost of Rs.


100m. On the acquisition date, the fair value of
the identifiable net assets of S Co was Rs. 98m.
Calculate the goodwill on the acquisition date

16
Practice question 3

Company A has acquired 60% of equity of


company B for Rs. 150 Mn consideration on 1st
of February 2018. The fair value of identifiable
net assets of the company B on the same day is
Rs. 50 Mn. Calculate the goodwill on the
acquisition date if non-controlling interest is
calculated on the book value of the net asset of
the company B.

17
Practice Question 4

Company X has acquired 70% of equity of


company Y for Rs. 429 Mn consideration on
1st of January 2019. The fair value of
identifiable net assets of the company Y on the
same day is Rs. 434 Mn. The fair value of NCI
of company Y is Rs. 136 Mn. Calculate the
goodwill on the both methods mentioned in the
SLFRS 03 for NCI calculations.

18
Fair value of identifiable assets acquired and
liabilities assumed

⚫ Meet the definitions of assets and liabilities


in the Conceptual Framework
⚫ Be part of the business combination
transaction rather than the result of separate
transactions

19
Practice Question 5
Dambulla Co acquired 90% of Alutwewa Co in 20X9 at a cost of
Rs. 340m. The carrying amount of the net assets of Alutwewa
Co on the acquisition date was Rs. 320m; however the fair value
of the identifiable assets of the company was Rs. 350m for the
following reasons.
(a) Alutwewa had developed a brand name with a fair value of
Rs. 20m but this was not recognised in its own financial
statements.
(b) Land with a carrying amount of Rs. 65m had a fair value Rs.
10m in excess of this.
The non-controlling interest is measured as a proportion of net
assets. Calculate the Goodwill on acquisition
20
Consideration transferred

In some cases, consideration is contingent


upon a future event, eg the subsidiary
achieving a certain level of profits post-
acquisition. This contingent consideration is
also included in the goodwill calculation at its
acquisition date fair value.

21
Practice question 6
Company D has acquired 100% of equity of company E on 1st
of January 2019. Company D paid Rs. 10Mn on the acquisition
date as a down payment. The balance consideration will be
paid if E’s earning rate increase more than 10%. If that
condition is fulfilled, company D agreed to pay 2 annual
installments starting from end year 1. Installment value is 2
Mn. The fair value of identifiable net assets of the company E
on the acquisition date is Rs. 9 Mn. Assume that interest rate
as 10% per annum.
Required
⚫ Fair value of the consideration on the acquisition date
⚫ Goodwill on the acquisition date

22
Practice question 7
P Co acquired 75% of S Co's 80m shares on 1 January 20X6. It paid Rs. 25 per
share and agreed to pay a further Rs. 1,080m on 1 January 20X7. The following
details are relevant to the acquisition date.
(a) The fair value of the non-controlling interest was Rs. 250m.
(b) The carrying amount of the net assets of S Co was Rs. 2,300m.
(c) The fair value of S Co's head office was determined to exceed its carrying
amount by Rs. 50m.
(d) S Co had not recognised a publishing title in its own statement of financial
position; this was deemed to have a fair value of Rs. 8m.
(e) S Co had disclosed a contingent liability resulting from a legal case. The
maximum exposure was Rs. 25m and the fair value of the contingent liability was
estimated to be Rs. 15m.
The parent company's cost of capital is 8%.
Required
Calculate the goodwill that arises on the acquisition.

23
Disclosures

⚫ The name and a description of the acquiree


⚫ The acquisition date
⚫ The percentage of voting equity interests
acquired
⚫ The reasons for the business combination
⚫ A qualitative description of the factors that
make up the goodwill recognised

24
Disclosures

⚫ The acquisition date fair value of the total


consideration transferred and each major
class of consideration
⚫ For contingent consideration:
– The amount recognised at acquisition
– A description of the arrangement
– An estimate of the range of outcomes

25
Answers

&
Questions

26

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