RSM321H1 Chapter Notes - Chapter 3: Financial Statement, Reverse Takeover, Historical Cost

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Published on 3 Dec 2017
School
UTSG
Department
Rotman Commerce
Course
RSM321H1
Chapter 3
A business combination is defined in IFRS 3 Business Combinations as a transaction or other
event in which an acquirer obtains control of one or more businesses. This definition has two key
aspects: control and businesses. When a business combination does occur, the requirements of
IFRS 3 must be applied. On the other hand, if an entity acquires all of the assets of another entity
but they do not meet the definition of a business, IFRS 3 would not be applicable. Instead, the
assets acquired would be treated as a basket purchase, and the total cost would be allocated to the
individual assets in proportion to their fair market values.
There are many types of business combinations including a conglomerate business combination,
a horizontal business combination, and a vertical business combination. Other terms that are
often used synonymously with the term business combination are takeover, amalgamation,
acquisition, and merger.
A business combination takes place when one company gains control over the net assets of
another company. Control can be achieved by the purchase of the net assets or by the purchase of
enough voting shares to gain control over the use of the net assets. In the latter situation a
parentsubsidiary relationship is created that requires the preparation of consolidated financial
statements.
Guidance for determining control is provided in IFRS 10 Consolidated Financial Statements.
IFRS 10 states that an investor controls an investee when it is exposed or has rights to variable
returns from its involvement with the investee, and it has the ability to affect those returns
through its power over the investee. This definition contains the following three elements: (a)
power, (b) returns, and (c) links between power and returns.
Effective January 1, 2011, the acquisition method must be used to report a business combination,
and an acquirer must be identified. Under the acquisition method, the identifiable assets and
liabilities acquired are recorded at fair values, with the acquisition cost excess recorded as
goodwill. An acquirer must be identified for all business combinations. This is important because
it is the net assets of the acquiree that are reported at fair values. The acquirer is determined
based on which shareholder group controls the consolidated company. The acquisition cost is
measured as the fair value of consideration given to acquire the business. The acquisition cost
does not include costs such as professional fees or costs of issuing debt or shares. The acquisition
cost is allocated to the acquirer’s interest in the fair value of the identifiable assets and liabilities
of the acquired company. Identifiable assets and liabilities should be recorded separately from
goodwill. Goodwill is the excess of the purchase price over the fair value of identifiable assets
and liabilities. If the acquisition cost is less than the fair value of the identifiable net assets
acquired, we have what is sometimes described as a negative goodwill situation. Negative
goodwill (also known as a bargain purchase) could result in the reporting of a gain on purchase
by the acquiring company.
Financial Reporting after the Combination - The net income generated by the net assets of the
acquired company is reported in the financial statements of the acquirer commencing with the
date of acquisition. This net income must be adjusted to reflect the amortizations of the fair
values of the assets and liabilities purchased and any goodwill losses due to impairment. Prior
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Document Summary

A business combination is defined in ifrs 3 business combinations as a transaction or other event in which an acquirer obtains control of one or more businesses. This definition has two key aspects: control and businesses. When a business combination does occur, the requirements of. On the other hand, if an entity acquires all of the assets of another entity but they do not meet the definition of a business, ifrs 3 would not be applicable. Instead, the assets acquired would be treated as a basket purchase, and the total cost would be allocated to the individual assets in proportion to their fair market values. There are many types of business combinations including a conglomerate business combination, a horizontal business combination, and a vertical business combination. Other terms that are often used synonymously with the term business combination are takeover, amalgamation, acquisition, and merger.

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