BUSINESS COMBINATIONS AND GOODWILL

Section 19

Business Combinations and Goodwill

Scope of this section

19. 1 This section applies to accounting for business combinations. It provides guidance on identifying the acquirer, measuring the cost of the business combination and allocating that cost to the assets acquired and liabilities and provisions for contingent liabilities assumed. It also addresses accounting for goodwill both at the time of a business combination and subsequently.

19. 2 This section specifies the accounting for all business combinations except:
    1. combinations of entities or businesses under common control. Common control means that 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.
    2. the formation of a joint venture.
    3. acquisition of a group of assets that do not constitute a business.

Business combinations defined

19. 3 A business combination is the bringing together of separate entities or businesses into one reporting entity. The result of nearly all business combinations is that one entity, the acquirer, obtains control of one or more other businesses, the acquiree. The acquisition date is the date on which the acquirer obtains control of the acquiree.

19. 4 A business combination may be structured in a variety of ways for legal, taxation or other reasons. It may involve the purchase by an entity of the equity of another entity, the purchase of all the net assets of another entity, the assumption of the liabilities of another entity, or the purchase of some of the net assets of another entity that together form one or more businesses.

19. 5 A business combination may be effected by the issue of equity instruments, the transfer of cash, cash equivalents or other assets, or a mixture of these. The transaction may be between the shareholders of the combining entities or between one entity and the shareholders of another entity. It may involve the establishment of a new entity to control the combining entities or net assets transferred, or the restructuring of one or more of the combining entities.

Accounting

19. 6 All business combinations shall be accounted for by applying the purchase method.

19. 7 Applying the purchase method involves the following steps:
    1. identifying an acquirer;
    2. measuring the cost of the business combination; and
    3. allocating, at the acquisition date, the cost of the business combination to the assets acquired and liabilities and provisions for contingent liabilities assumed.

Identifying the acquirer

19. 8 An acquirer shall be identified for all business combinations. The acquirer is the combining entity that obtains control of the other combining entities or businesses.

19. 9 Control is the power to govern the financial and operating policies of an entity or business so as to obtain benefits from its activities. Control of one entity by another is described in Section 9 Consolidated and Separate Financial Statements.

19. 10 Although it may sometimes be difficult to identify an acquirer, there are usually indications that one exists. For example:
    1. if the fair value of one of the combining entities is significantly greater than that of the other combining entity, the entity with the greater fair value is likely to be the acquirer;
    2. if the business combination is effected through an exchange of voting ordinary equity instruments for cash or other assets, the entity giving up cash or other assets is likely to be the acquirer; and
    3. if the business combination results in the management of one of the combining entities being able to dominate the selection of the management team of the resulting combined entity, the entity whose management is able so to dominate is likely to be the acquirer.

Cost of a business combination

19. 11 The acquirer shall measure the cost of a business combination as the aggregate of:
    1. the fair values, at the date of acquisition, of assets given, liabilities incurred or assumed and equity instruments issued by the acquirer, in exchange for control of the acquiree; plus
    2. any costs directly attributable to the business combination.

Adjustments to the cost of a business combination contingent on future events

19. 12 When a business combination agreement provides for an adjustment to the cost of the combination contingent on future events, the acquirer shall include the estimated amount of that adjustment in the cost of the combination at the acquisition date if the adjustment is probable and can be measured reliably.

19. 13 However, if the potential adjustment is not recognised at the acquisition date but subsequently becomes probable and can be measured reliably, the additional consideration shall be treated as an adjustment to the cost of the combination.

Allocating the cost of a business combination to the assets acquired and liabilities and contingent liabilities assumed

19. 14 The acquirer shall, at the acquisition date, allocate the cost of a business combination by recognising the acquiree’s identifiable assets and liabilities and a provision for those contingent liabilities that satisfy the recognition criteria in paragraph 19.15 at their fair values at that date except as follows:
    1. a deferred tax asset or deferred tax liability arising from the assets acquired and liabilities assumed in a business combination shall be recognised and measured in accordance with Section 29 Income Tax; and
    2. a liability (or asset, if any) related to the acquiree’s employee benefit arrangements shall be recognised and measured in accordance with Section 28 Employee Benefits.

Any difference between the cost of the business combination and the acquirer’s interest in the net fair value of the identifiable assets, liabilities and provisions for contingent liabilities so recognised shall be accounted for in accordance with paragraphs 19.22–19.24 (as goodwill or so-called ‘negative goodwill’). Any non-controlling interest in the acquiree is measured at the non-controlling interest’s proportionate share of the recognised amounts of the acquiree’s identifiable net assets.

19. 15 The acquirer shall recognise separately the acquiree’s identifiable assets, liabilities and contingent liabilities at the acquisition date only if they satisfy the following criteria at that date:
    1. in the case of an asset other than an intangible asset, it is probable that any associated future economic benefits will flow to the acquirer and its fair value can be measured reliably;
    2. in the case of a liability other than a contingent liability, it is probable that an outflow of resources will be required to settle the obligation and its fair value can be measured reliably;
    3. in the case of an intangible asset, its fair value can be measured reliably without undue cost or effort; and
    4. in the case of a contingent liability, its fair value can be measured reliably.

19. 16 The acquirer’s statement of comprehensive income shall incorporate the acquiree’s profits and losses after the acquisition date by including the acquiree’s income and expenses based on the cost of the business combination to the acquirer. For example, depreciation expense included after the acquisition date in the acquirer’s statement of comprehensive income that relates to the acquiree’s depreciable assets shall be based on the fair values of those depreciable assets at the acquisition date, ie their cost to the acquirer.

19. 17 Application of the purchase method starts from the acquisition date, which is the date on which the acquirer obtains control of the acquiree. Because control is the power to govern the financial and operating policies of an entity or business so as to obtain benefits from its activities, it is not necessary for a transaction to be closed or finalised at law before the acquirer obtains control. All pertinent facts and circumstances surrounding a business combination shall be considered in assessing when the acquirer has obtained control.

19. 18 In accordance with paragraph 19.14, the acquirer recognises separately only the identifiable assets, liabilities and contingent liabilities of the acquiree that existed at the acquisition date and that satisfy the recognition criteria in paragraph 19.15. Consequently:
    1. the acquirer shall recognise liabilities for terminating or reducing the activities of the acquiree as part of allocating the cost of the combination only when the acquiree has, at the acquisition date, an existing liability for restructuring recognised in accordance with Section 21 Provisions and Contingencies; and
    2. the acquirer, when allocating the cost of the combination, shall not recognise liabilities for future losses or other costs expected to be incurred as a result of the business combination.

19. 19 If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the acquirer shall recognise in its financial statements provisional amounts for the items for which the accounting is incomplete. Within twelve months after the acquisition date, the acquirer shall retrospectively adjust the provisional amounts recognised as assets and liabilities at the acquisition date (ie account for them as if they were made at the acquisition date) to reflect new information obtained. Beyond twelve months after the acquisition date, adjustments to the initial accounting for a business combination shall be recognised only to correct an error in accordance with Section 10 Accounting Policies, Estimates and Errors.

Contingent liabilities

19. 20 Paragraph 19.15 specifies that the acquirer recognises separately a provision for a contingent liability of the acquiree only if its fair value can be measured reliably. If its fair value cannot be measured reliably:
    1. there is a resulting effect on the amount recognised as goodwill or accounted for in accordance with paragraph 19.24; and
    2. the acquirer shall disclose the information about that contingent liability as required by Section 21.

19. 21 After their initial recognition, the acquirer shall measure contingent liabilities that are recognised separately in accordance with paragraph 19.15 at the higher of:
    1. the amount that would be recognised in accordance with Section 21; and
    2. the amount initially recognised less amounts previously recognised as revenue in accordance with Section 23 Revenue.

Goodwill

19. 22 The acquirer shall, at the acquisition date:
    1. recognise goodwill acquired in a business combination as an asset; and
    2. initially measure that goodwill at its cost, being the excess of the cost of the business combination over the acquirer’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised in accordance with paragraph 19.14.

19. 23 After initial recognition, the acquirer shall measure goodwill acquired in a business combination at cost less accumulated amortisation and accumulated impairment losses:
    1. an entity shall follow the principles in paragraphs 18.19–18.24 for amortisation of goodwill. If the useful life of goodwill cannot be established reliably, the life shall be determined based on management’s best estimate but shall not exceed ten years.
    2. an entity shall follow Section 27 Impairment of Assets for recognising and measuring the impairment of goodwill.

Excess over cost of acquirer’s interest in the net fair value of acquiree’s identifiable assets, liabilities and contingent liabilities

19. 24 If the acquirer’s interest in the net fair value of the identifiable assets, liabilities and provisions for contingent liabilities recognised in accordance with paragraph 19.14 exceeds the cost of the business combination (sometimes referred to as ‘negative goodwill’), the acquirer shall:
    1. reassess the identification and measurement of the acquiree’s assets, liabilities and provisions for contingent liabilities and the measurement of the cost of the combination; and
    2. recognise immediately in profit or loss any excess remaining after that reassessment.

Disclosures

For business combination(s) during the reporting period

19. 25 For each business combination during the period, the acquirer shall disclose the following:
    1. the names and descriptions of the combining entities or businesses;
    2. the acquisition date;
    3. the percentage of voting equity instruments acquired;
    4. the cost of the combination and a description of the components of that cost (such as cash, equity instruments and debt instruments);
    5. the amounts recognised at the acquisition date for each class of the acquiree’s assets, liabilities and contingent liabilities, including goodwill;
    6. the amount of any excess recognised in profit or loss in accordance with paragraph 19.24 and the line item in the statement of comprehensive income (and in the income statement, if presented) in which the excess is recognised; and
    7. a qualitative description of the factors that make up the goodwill recognised, such as expected synergies from combining operations of the acquiree and the acquirer, or intangible assets or other items not recognised in accordance with paragraph 19.15.

For all business combinations

19. 26 An acquirer shall disclose the useful lives used for goodwill and a reconciliation of the carrying amount of goodwill at the beginning and end of the reporting period, showing separately:
    1. changes arising from new business combinations;
    2. impairment losses;
    3. disposals of previously acquired businesses; and
    4. other changes.

This reconciliation need not be presented for prior periods.