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Obj=
ective
of IAS 22
The
objective of IAS 22 (Revised 1993) is to prescribe the accounting treat=
ment
for business combinations. The Standard covers both an acquisition of o=
ne
enterprise by another (an acquisition) and also the rare situation wher=
e an
acquirer cannot be identified (a uniting of interests).
Key
Definitions [IAS 22.8]
Bus=
iness
combination: Combining two separate enterprises into a single economic
entity as a result of one enterprise uniting with or obtaining control =
over
the net assets and operations of another enterprise. The combination can
result in a single legal entity or two separate legal entities.
Acq=
uisition: A business
combination in which one of the enterprises, the acquirer, obtains cont=
rol
over the net assets and operations of another enterprise, the acquiree, in exchange for the transfer of assets,
incurrence of a liability or issue of equity.
Uni=
ting
of interests: A business combination in which the shareholders of the
combining enterprises combine control over the whole, or effectively the
whole, of their net assets and operations to achieve a continuing mutual
sharing in the risks and benefits attaching to the combined entity such
that neither party can be identified as the acquirer. Also called a poo=
ling
of interests.
Control: The power to govern the financial and operating policie=
s of
an enterprise so as to obtain benefits from its activities. If one
enterprise controls another, the controlling enterprise is called the <=
u>parent
and the controlled enterprise is called the subsidiary.
Dis=
tinguishing
Between Acquisitions and Unitings of Intere=
sts
Under =
IAS
22, "virtually all" business combinations are acquisitions. [=
IAS
22.10]
Indica=
tions
of an acquisition are: [IAS 22.10]
- One enterprise acquire=
s more
than one half of the voting rights of the other combining enterpri=
se.
- One enterprise has the=
power
over more than one half of the voting rights of the other enterpri=
se
as a result of an agreement with other investors.
- One enterprise has the=
power
to govern the financial and operating policies of the other enterp=
rise
as a result of a statute.
- One enterprise has the=
power
to appoint or remove the majority of the members of the board of
directors or equivalent governing body of the other enterprise.
- One enterprise has pow=
er to
cast the majority of votes at meetings of the board of directors of
the other enterprise.
SIC =
9
explains that the overriding criterion to distinguish an acquisition fr=
om a
uniting of interests is whether an acquirer can be identified, that is =
to
day, whether the shareholders of one of the combining enterprises obtain
control over the combined enterprise.
In an
acquisition, therefore, the acquiring company must be identified. Usual=
ly,
that is evident. If it is not evident, IAS 22.11 provides some guidance=
:
- The fair value of one =
of the
combining enterprises is significantly more than that of the other=
.
- In an exchange of voti=
ng
common shares for cash, the enterprise paying the cash is the
acquirer.
- After the business
combination, the management of one enterprise dominates the select=
ion
of the management team of the combined enterprise.
Indications of a uniting of interests are: [IAS 22.13]
- An acquirer cannot be
identified.
- The shareholders of bo=
th
combining enterprises share control over the combined enterprise
substantially equally.
- The managements of bot=
h of
the combining enterprises share in the management of the combined
entity.
A business combination should be classified as an acquisit=
ion
unless the all of the following three characteristics are present. Even=
if
all three are present, the combination should be presented as a uniting=
of
interests only if the enterprise can demonstrate that an acquirer canno=
t be
identified. [IAS 22.15]
- The substantial majori=
ty of
the voting common shares of the combining enterprises are exchange=
d or
pooled.
- The fair value of one
enterprise is not significantly different from that of the other
enterprise.
- Shareholders of each
enterprise maintain substantially the same voting rights and inter=
ests
in the combined entity, relative to each other, after the combinat=
ion
as before.
The
following suggest that a business combination is not a uniting of
interests: [IAS 22.16]
- Financial arrangements
provide a relative advantage to one group of shareholders.
- One party's share of t=
he
equity in the combined entity depends on the performance, subseque=
nt
to the business combination, of the business which it previously
controlled.
Unitings of Interests - Accounting Procedures
A unit=
ing of
interests should be accounted for using the pooling of interests method.
[IAS 22.77] Under this method:
- Financial statement it=
ems of
uniting entities should be combined, in both the current and prior
periods, as if they had been united from the beginning of the earl=
iest
period presented. [IAS 22.78]
- Any difference between=
the
amount recorded as share capital issued plus any additional
consideration in the form of cash or other assets and the amount
recorded for the share capital acquired should be adjusted against
equity. [IAS 22.79]
- The costs of the combi=
nation
should be expensed when incurred. [IAS 22.82]
Acq=
uisitions
- Accounting Procedures
An
acquisition should be accounted for using the purchase method of
accounting. Under this method: [IAS 22.19]
- The income statement s=
hould
incorporate the results of the acquiree from
the date of acquisition; and
- The balance sheet shou=
ld
include the identifiable assets and liabilities of the acquiree and any goodwill or negative goodwi=
ll
arising.
Dat=
e of
Acquisition
The da=
te of
acquisition is the date on which control of the net assets and operatio=
ns
of the acquiree is effectively transferred =
to the
acquirer. Goodwill is the difference between the cost of the acquisition
and the acquiring enterprise's share of the fair values of the identifi=
able
assets acquired less liabilities assumed. [IAS 22.20]
Cos=
t of
Acquisition
The co=
st of
the acquisition is the amount of cash paid and the fair value of the ot=
her
consideration given by the acquirer, plus any costs directly attributab=
le
to the acquisition. Contingent consideration should be included in the =
cost
of the acquisition at the date of the acquisition if payment of the amo=
unt
is probable and it can be measured reliably. The cost of acquisition sh=
ould
be adjusted when a relevant contingency is resolved. When settlement of=
the
consideration is deferred, the cost is the present value of such
consideration and not the nominal amount. [IAS 22.21]
Ide=
ntifiable
assets and liabilities
The
identifiable assets and liabilities acquired that are recognised
should be those of the acquiree that existe=
d at
the date of acquisition (some of which may not have been recognised by the acquiree), together with any permitted provisions for
restructuring costs (see below). They should be re=
cognised
separately if it is probable that any associated future economic benefi=
ts
will flow to or from the acquirer, and their cost/fair value can be
measured reliably. Other than permitted provisions for restructuring co=
sts
(see below), liabilities should not be recognised<=
/span>
at the date of acquisition if they result from either:
- the acquirer's intenti=
ons or
actions; or
- future losses or other costs
expected to be incurred an a result of the acquisition.
Res=
tructuring
Provisions
Liabil=
ities
should not be recognised at the date of
acquisition based on the acquirer's stated intentions. Liabilities shou=
ld
also not be recognised for future losses or=
other
costs expected to be incurred as a result of the acquisition, whether t=
hey
relate to the acquirer or the acquiree. [IAS
22.29]
Restru=
cturing
provisions are recognised at acquisition on=
ly if
the restructuring is an integral part of the acquirer's plan for the
acquisition and, among other things, the main features of the restructu=
ring
plan were announced at, or before, the date of acquisition. The
restructuring must involve terminating or reducing the acquired company=
's
activities. Furthermore, even if the main features of a restructuring p=
lan
were announced prior to the acquisition, a provision for the restructur=
ing
sill should not be accrued unless, by the earlier of three months after=
the
date of acquisition and the date when the annual financial statements a=
re authorised for issue, the restructuring plan has =
been
further developed into a detailed formal plan (specifics set out in IAS
22.31].
Mea=
suring
Acquired Assets and Liabilities
Indivi=
dual
assets and liabilities should be recognised
separately as at the date of acquisition when it is probable that any
associated future economic benefits will flow to or from the acquirer, =
and
their cost/fair value can be measured reliably. [IAS 22.26] =
IAS 22
provides for benchmark and an allowed alternative treatments for measur=
ing
the acquired assets and liabilities:
- Under the benchmark
treatment, the assets and liabilities are measured at the aggregat=
e of
the fair value of the identifiable assets and liabilities acquired=
to
the extent of the acquirer's interest obtained, and the minority's
proportion of the pre-acquisition carrying amounts of the assets a=
nd
liabilities. [IAS 22.32]
- Under the allowed
alternative treatment, the assets and liabilities should be measur=
ed
at their fair values as at the date of acquisition with the minori=
ty's
interest being stated at its proportion of the fair value of the
assets and liabilities. [IAS 22.34]
The fa=
ir
values of assets and liabilities should be determined by reference to t=
heir
intended use by the acquirer. Guidelines are provided for the determini=
ng
fair values for specific categories of assets and liabilities. When an
asset or business segment of the acquiree i=
s to
be disposed of, this is taken into consideration in determining fair va=
lue.
[IAS 22.39]
Step
Acquisitions (Successive Share Purchases)
Where =
the acquisition
is achieved by successive share purchases, each significant transaction=
is
treated separately for the purpose of determining the fair values of the
assets/liabilities acquired and for determining the amount of goodwill
arising on that transaction - comparing each individual investment with=
the
percentage interest in the fair values of the assets and liabilities
acquired at each significant step. If all of the assets and liabilities=
are
restated to fair values at the time of each purchase, adjustments relat=
ing
to the previously held interests are accounted for as revaluations. [IAS
22.36]
Sub=
sequent
Adjustments to Original Measurements of Acquired Assets and Liabilities=
The ca=
rrying
amounts of assets and liabilities should be adjusted when additional
evidence becomes available to assist with the estimation of the fair va=
lue
of assets and liabilities at the date of acquisition. Goodwill should a=
lso
be adjusted if the adjustment is made by the end of the first annual
accounting period commencing after the acquisition (providing that it is
probable that the amount of the adjustment will be recovered from the
expected future economic benefits). Otherwise, the adjustment should be
treated as income or expense. [IAS 22.68] Further guidance is provided =
in SIC22.
Goo=
dwill
Goodwi=
ll
arising on the acquisition should be recognised
as an asset and amortised over its useful l=
ife.
There is a rebuttable presumption that the =
useful
life of goodwill will exceed 20 years. [IAS 22.44] IAS 22 indicates that
the 20-year maximum presumption can be overcome "in rare cases&quo=
t;
-- for instance if the goodwill is so clearly related to an identifiable
asset or group of identifiable assets that it can reasonably be expecte=
d to
provide benefits over the entire life of those related assets. Amortisation will normally be on a straight-line =
basis.
[IAS 22.50]
Goodwi=
ll is
subject to the general impairment requirements of IAS 36. [IAS 22.=
55] If
the amortisation period exceeds 20 years,
recoverable amount must be calculated annually, even if there is no
indication that it is impaired. [IAS 22.56] Non-am=
ortisation
of goodwill based on an argument that it has an infinite life is not
permitted by IAS 22.
Neg=
ative
Goodwill
Negati=
ve
goodwill must always be measured and initially rec=
ognised
as the full difference between the acquirer's interest in the fair valu=
es
of the identifiable assets and liabilities acquired less the cost of
acquisition. [IAS 22.59]
- To the extent that it
relates to expected future losses and expenses that are identified=
in
the acquirer's acquisition plan, the negative goodwill is recognised as income when the future losses =
and
expenses are recognised. [IAS 22.61] <=
o:p>
- An excess of negative
goodwill to the extent of the fair values of acquired identifiable=
nonmonetary assets is r=
ecognised
in income over the average live of those nonm=
onetary
assets. [IAS 22.62(a)]
- Any remaining excess i=
s recognised as income immediately. [IAS 22.62=
(b)]
- Negative goodwill is
presented as a deduction from the assets of the enterprise, in the
same balance sheet classification as (positive) goodwill. [IAS 22.=
64]
Def=
erred
Income Taxes
In both
acquisitions and uniting of interests, sometimes the accounting treatme=
nt
may differ from measurements under national income tax laws. Any result=
ing
deferred tax liabilities and deferred tax assets are recognised
under IAS 12, Inc=
ome
Taxes. [IAS 22.84]
Dis=
closure
The=
se
disclosures apply to all business combinations [IAS 22.86]
- Names and descriptions=
of
the combining enterprises.
- Method of accounting f=
or the
combination.
- Effective date of the
merger.
- Plans to dispose of a
portion of the combined enterprise
The=
se
disclosures apply to acquisitions [IAS 22.87-88]
- Percentage of voting s=
hares
acquired. [IAS 22.87]
- Cost of acquisition,
including a description of the purchase consideration paid or
contingently payable. [IAS 22.87]
- Amortisation period(s) for goodwil=
l and,
if over 20 years or non-straight-line, the justification. [IAS 22.=
88]
- Line item(s) of the in=
come
statement in which the amortisation of
goodwill is included [IAS 22.88]
- A reconciliation of the
carrying amount of goodwill at the beginning and end of the period
[IAS 22.88]
- Comparative informatio=
n is
not required.
- Special disclosures in
negative goodwill situations. [IAS 22.91]
- Problems in determinin=
g fair
values of assets and liabilities [IAS 22.93]
The=
se
disclosures apply to unitings of interest [=
IAS
22.94]
- Information about type=
and
number of shares issued
- Amounts of assets and
liabilities contributed by each enterprise; and =
- Sales revenue, other
operating revenues, extraordinary items and the net profit or loss=
of each
enterprise prior to the date of the combination that
are included in the net profit or loss shown by the combined
enterprise's financial statements.
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