IFRS 3 Business Combinations (as revised by January 2008) required a business combination transaction be accounted for by applying the acquisition method, unless it is a combination involving entities or business under common control.
IFRS 3 Business Combinations applies to a transaction or other event that meets the definition of business combination.
An entity shall determine whether a transaction or other event is a business combination by applying the definition in this IFRS, which requires that the assets acquired and liabilities assumed constitute a business. If the assets acquired are not a business, the reporting entity shall account for the transaction or other event as an asset acquisition.
This IFRS defines a business combination as a transaction or other event in which an acquirer obtains control of one or more business. Transactions sometimes referred to as ‘true mergers’ or ‘mergers of equals’ are also business combination as that term is used in this IFRS.
As mentioned above, this IFRS only applies to a transaction or other event that meets the definition of a business combination, and does not apply to: (a) the formation of a joint venture, (b) the acquisition of an asset or a group of assets that does not constitute a business, and (c) a combination of entities or business under common control
Business combinations of entities under common control
Paragraph B1-B4 of IFRS 3 provide guidance apply to business combinations of entities under common control.
Paragraph B1 stated that this IFRS does not apply to a business combination of entities or business under common control. A business combination involving entities or business under common control is a business combination in which all of the combining entities or businesses are ultimately controlled by the same party or parties both before and after the business combination, and that control is not transitory.
Following, paragraph B2 expressed that a group of individuals shall be regarded as controlling an entity when, as a result of contractual arrangements, they collectively have the power to govern its financial and operating policies so as to obtain benefits from its activities.
Therefore, a business combination is outside the scope of this IFRS when the same group of individuals has, as a result of contractual arrangements, ultimate collective power to govern the financial and operating policies of each of the combining entities so as to obtain benefits from their activities, and that ultimate collective power is not transitory.
Further, paragraph B3 stated that an entity may be controlled by an individual or by a group of individuals acting together under a contractual arrangement, and that individual or group of individuals may not be subject to the financial reporting requirements of IFRSs.
Therefore, it is not necessary for combining entities to be included as part of the same consolidated financial statements for a business combination to be regarded as one involving entities under common control.
Latest, paragraph B4 stated that the extent of non-controlling interests in each of the combining entities before and after the business combination is not relevant to determining whether the combination involves entities under common control.
Similarly, the fact that one of the combining entities is a subsidiary that has been excluded from the consolidated financial statements is not relevant to determining whether a combination involves entities under common control.
WILEY – IFRS 2008 Interpretation and Application of IFRS described that IFRS 3 explicitly does not apply to entities under common control (e.g., brother-sister corporations).
A question arises, however, when a parent (Company P) transfers ownership in one of its subsidiaries (Company B) to another of its subsidiaries (Company A) in exchange for additional shares of Company A.
In such an instance, A’s carrying value for the investment in B should be P’s basis, not B’s book value. Furthermore, if A subsequently retires the interests of minority owners of B, the transaction should be accounted for as a purchase, whether it is effected through a stock issuance by A or by a cash payment to the selling shareholders.
Furthermore, when a purchase transaction is closely followed by a sale of the parent’s subsidiary to the newly acquired (target) entity, these two transactions should be viewed as a single transaction. Accordingly, the parent should recognize gain or loss on the sale of its subsidiary to the target company, to the extent of minority interest in the target entity.
As a result, there will be a new basis (step-up) not only for the target company’s assets and liabilities, but also for the subsidiary company’s net assets. Basis is stepped up to the extent of minority participation in the target entity to which the subsidiary company was transferred (Hrd) ***
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