These examples accompany, but are not part of, IFRS 3.
Illustrating the consequences of recognising a reverse acquisition by applying paragraphs B19–B27 of IFRS 3.
This example illustrates the accounting for a reverse acquisition in which Entity B, the legal subsidiary, acquires Entity A, the entity issuing equity instruments and therefore the legal parent, in a reverse acquisition on 30 September 20X6. This example ignores the accounting for any income tax effects.
The statements of financial position of Entity A and Entity B immediately before the business combination are:
In these examples monetary amounts are denominated in 'currency units (CU)'.
This example also uses the following information:
On 30 September 20X6 Entity A issues 2.5 shares in exchange for each ordinary share of Entity B. All of Entity B’s shareholders exchange their shares in Entity B. Therefore, Entity A issues 150 ordinary shares in exchange for all 60 ordinary shares of Entity B.
The fair value of each ordinary share of Entity B at 30 September 20X6 is CU40. The quoted market price of Entity A’s ordinary shares at that date is CU16.
The fair values of Entity A’s identifiable assets and liabilities at 30 September 20X6 are the same as their carrying amounts, except that the fair value of Entity A’s non‑current assets at 30 September 20X6 is CU1,500.
As a result of Entity A (legal parent, accounting acquiree) issuing 150 ordinary shares, Entity B’s shareholders own 60 per cent of the issued shares of the combined entity (ie 150 of 250 issued shares). The remaining 40 per cent are owned by Entity A’s shareholders. If the business combination had taken the form of Entity B issuing additional ordinary shares to Entity A’s shareholders in exchange for their ordinary shares in Entity A, Entity B would have had to issue 40 shares for the ratio of ownership interest in the combined entity to be the same. Entity B’s shareholders would then own 60 of the 100 issued shares of Entity B—60 per cent of the combined entity. As a result, the fair value of the consideration effectively transferred by Entity B and the group’s interest in Entity A is CU1,600 (40 shares with a fair value per share of CU40).
The fair value of the consideration effectively transferred should be based on the most reliable measure. In this example, the quoted price of Entity A’s shares in the principal (or most advantageous) market for the shares provides a more reliable basis for measuring the consideration effectively transferred than the fair value of the shares in Entity B, and the consideration is measured using the market price of Entity A’s shares—100 shares with a fair value per share of CU16.
Goodwill is measured as the excess of the fair value of the consideration effectively transferred (the group’s interest in Entity A) over the net amount of Entity A’s recognised identifiable assets and liabilities, as follows:
| CU | CU | |
|---|---|---|
| Consideration effectively transferred | 1,600 | |
| Net recognised values of Entity A’s identifiable assets and liabilities | ||
| Current assets | 500 | |
| Non-current assets | 1,500 | |
| Current liabilities | (300) | |
| Non-current liabilities | (400) | (1,300) |
| Goodwill | 300 | |
The consolidated statement of financial position immediately after the business combination is:
Current assets [CU700 + CU500]
Non-current assets [CU3,000 + CU1,500]
Current liabilities [CU600 + CU300]
Non-current liabilities [CU1,100 + CU400]
250 ordinary shares [CU600 + CU1,600]
The amount recognised as issued equity interests in the consolidated financial statements (CU2,200) is determined by adding the issued equity of the legal subsidiary immediately before the business combination (CU600) and the fair value of the consideration effectively transferred (CU1,600). However, the equity structure appearing in the consolidated financial statements (ie the number and type of equity interests issued) must reflect the equity structure of the legal parent, including the equity interests issued by the legal parent to effect the combination.
Assume that Entity B’s earnings for the annual period ended 31 December 20X5 were CU600 and that the consolidated earnings for the annual period ended 31 December 20X6 were CU800. Assume also that there was no change in the number of ordinary shares issued by Entity B during the annual period ended 31 December 20X5 and during the period from 1 January 20X6 to the date of the reverse acquisition on 30 September 20X6. Earnings per share for the annual period ended 31 December 20X6 is calculated as follows:
Number of shares deemed to be outstanding for the period from 1 January 20X6 to the acquisition date (ie the number of ordinary shares issued by Entity A (legal parent, accounting acquiree) in the reverse acquisition)
[ Refer: paragraph B26(a), ie 2.5 Entity A shares x (issued for each of) 60 Entity B shares]Number of shares outstanding from the acquisition date to 31 December 20X6
[ Refer: paragraph B26(b), ie 100 shares before the reverse acquisition + (60 x 2.5 shares = 150 shares issued in the reverse acquisition)]
Weighted average number of ordinary shares outstanding [(150 [shares] x 9/12 [months] ) + (250 [shares] x 3/12 [months] )]
Restated earnings per share for the annual period ended 31 December 20X5 is CU4.00 (calculated as the earnings of Entity B of 600 divided by the number of ordinary shares Entity A issued in the reverse acquisition (150)).
Assume the same facts as above, except that only 56 of Entity B’s 60 ordinary shares are exchanged. Because Entity A issues 2.5 shares in exchange for each ordinary share of Entity B, Entity A issues only 140 (rather than 150) shares. As a result, Entity B’s shareholders own 58.3 per cent of the issued shares of the combined entity (140 of 240 issued shares). The fair value of the consideration transferred for Entity A, the accounting acquiree, is calculated by assuming that the combination had been effected by Entity B issuing additional ordinary shares to the shareholders of Entity A in exchange for their ordinary shares in Entity A. That is because Entity A is the accounting acquirer, and paragraph B20 of IFRS 3 requires the acquirer to measure the consideration exchanged for the accounting acquiree.
In calculating the number of shares that Entity B would have had to issue, the non‑controlling interest is excluded from the calculation. The majority shareholders own 56 shares of Entity B. For that to represent a 58.3 per cent equity interest, Entity B would have had to issue an additional 40 shares. The majority shareholders would then own 56 of the 96 issued shares of Entity B and, therefore, 58.3 per cent of the combined entity. As a result, the fair value of the consideration transferred for Entity A, the accounting acquiree, is CU1,600 (ie 40 shares, each with a fair value of CU40). That is the same amount as when all 60 of Entity B’s shareholders tender all 60 of its ordinary shares for exchange. The recognised amount of the group’s interest in Entity A, the accounting acquiree, does not change if some of Entity B’s shareholders do not participate in the exchange.
The non‑controlling interest is represented by the four shares of the total 60 shares of Entity B that are not exchanged for shares of Entity A. Therefore, the non‑controlling interest is 6.7 per cent. The non‑controlling interest reflects the proportionate interest of the non‑controlling shareholders in the pre‑combination carrying amounts of the net assets of Entity B, the legal subsidiary. Therefore, the consolidated statement of financial position is adjusted to show a non‑controlling interest of 6.7 per cent of the pre‑combination carrying amounts of Entity B’s net assets (ie CU134 or 6.7 per cent of CU2,000).
The consolidated statement of financial position at 30 September 20X6, reflecting the non‑controlling interest, is as follows:
Current assets [CU700 + CU500]
Non-current assets [CU3,000 + CU1,500]
Current liabilities [CU600 + CU300]
Non-current liabilities [CU1,100 + CU400]
Retained earnings [CU1,400 × 93.3 per cent]
240 ordinary shares [CU560 + CU1,600]
The non‑controlling interest of CU134 has two components. The first component is the reclassification of the non‑controlling interest’s share of the accounting acquirer’s retained earnings immediately before the acquisition (CU1,400 × 6.7 per cent or CU93.80). The second component represents the reclassification of the non‑controlling interest’s share of the accounting acquirer’s issued equity (CU600 × 6.7 per cent or CU40.20).
Illustrating the consequences of applying paragraphs 10–14 and B31–B40 of IFRS 3.
The following are examples of identifiable intangible assets acquired in a business combination. Some of the examples may have characteristics of assets other than intangible assets. The acquirer should account for those assets in accordance with their substance. The examples are not intended to be all‑inclusive.
Intangible assets identified as having a contractual basis are those that arise from contractual or other legal rights. Those designated as having a non‑contractual basis do not arise from contractual or other legal rights but are separable. Intangible assets identified as having a contractual basis might also be separable but separability is not a necessary condition for an asset to meet the contractual‑legal criterion.
Marketing‑related intangible assets are used primarily in the marketing or promotion of products or services. Examples of marketing‑related intangible assets are:
| Class | Basis |
|---|---|
| Trademarks, trade names, service marks, collective marks and certification marks | Contractual |
| Trade dress (unique colour, shape or package design) | Contractual |
| Newspaper mastheads | Contractual |
| Internet domain names | Contractual |
| Non-competition agreements | Contractual |
Trademarks are words, names, symbols or other devices used in trade to indicate the source of a product and to distinguish it from the products of others. A service mark identifies and distinguishes the source of a service rather than a product. Collective marks identify the goods or services of members of a group. Certification marks certify the geographical origin or other characteristics of a good or service.
Trademarks, trade names, service marks, collective marks and certification marks may be protected legally through registration with governmental agencies, continuous use in commerce or by other means. If it is protected legally through registration or other means, a trademark or other mark acquired in a business combination is an intangible asset that meets the contractual‑legal criterion. Otherwise, a trademark or other mark acquired in a business combination can be recognised separately from goodwill if the separability criterion is met, which normally it would be.
The terms brand and brand name, often used as synonyms for trademarks and other marks, are general marketing terms that typically refer to a group of complementary assets such as a trademark (or service mark) and its related trade name, formulas, recipes and technological expertise. IFRS 3 does not preclude an entity from recognising, as a single asset separately from goodwill, a group of complementary intangible assets commonly referred to as a brand if the assets that make up that group have similar useful lives.
An Internet domain name is a unique alphanumeric name that is used to identify a particular numeric Internet address. Registration of a domain name creates an association between that name and a designated computer on the Internet for the period of the registration. Those registrations are renewable. A registered domain name acquired in a business combination meets the contractual‑legal criterion.
Examples of customer‑related intangible assets are:
| Class | Basis |
|---|---|
| Customer lists | Non-contractual |
| Order or production backlog | Contractual |
| Customer contracts and related customer relationships | Contractual |
| Non-contractual customer relationships | Non-contractual |
A customer list consists of information about customers, such as their names and contact information. A customer list also may be in the form of a database that includes other information about the customers, such as their order histories and demographic information. A customer list does not usually arise from contractual or other legal rights. However, customer lists are often leased or exchanged. Therefore, a customer list acquired in a business combination normally meets the separability criterion.
An order or production backlog arises from contracts such as purchase or sales orders. An order or production backlog acquired in a business combination meets the contractual‑legal criterion even if the purchase or sales orders can be cancelled.
If an entity establishes relationships with its customers through contracts, those customer relationships arise from contractual rights. Therefore, customer contracts and the related customer relationships acquired in a business combination meet the contractual‑legal criterion, even if confidentiality or other contractual terms prohibit the sale or transfer of a contract separately from the acquiree.
A customer contract and the related customer relationship may represent two distinct intangible assets. Both the useful lives and the pattern in which the economic benefits of the two assets are consumed may differ.
A customer relationship exists between an entity and its customer if (a) the entity has information about the customer and has regular contact with the customer and (b) the customer has the ability to make direct contact with the entity. Customer relationships meet the contractual‑legal criterion if an entity has a practice of establishing contracts with its customers, regardless of whether a contract exists at the acquisition date. Customer relationships may also arise through means other than contracts, such as through regular contact by sales or service representatives.
As noted in paragraph IE25, an order or a production backlog arises from contracts such as purchase or sales orders and is therefore considered a contractual right. Consequently, if an entity has relationships with its customers through these types of contracts, the customer relationships also arise from contractual rights and therefore meet the contractual‑legal criterion.
The following examples illustrate the recognition of customer contract and customer relationship intangible assets acquired in a business combination.
Acquirer Company (AC) acquires Target Company (TC) in a business combination on 31 December 20X5. TC has a five‑year agreement to supply goods to Customer. Both TC and AC believe that Customer will renew the agreement at the end of the current contract. The agreement is not separable.
The agreement, whether cancellable or not, meets the contractual‑legal criterion. Additionally, because TC establishes its relationship with Customer through a contract, not only the agreement itself but also TC’s customer relationship with Customer meet the contractual‑legal criterion.
AC acquires TC in a business combination on 31 December 20X5. TC manufactures goods in two distinct lines of business: sporting goods and electronics. Customer purchases both sporting goods and electronics from TC. TC has a contract with Customer to be its exclusive provider of sporting goods but has no contract for the supply of electronics to Customer. Both TC and AC believe that only one overall customer relationship exists between TC and Customer.
The contract to be Customer’s exclusive supplier of sporting goods, whether cancellable or not, meets the contractual‑legal criterion. Additionally, because TC establishes its relationship with Customer through a contract, the customer relationship with Customer meets the contractual‑legal criterion. Because TC has only one customer relationship with Customer, the fair value of that relationship incorporates assumptions about TC’s relationship with Customer related to both sporting goods and electronics. However, if AC determines that the customer relationships with Customer for sporting goods and for electronics are separate from each other, AC would assess whether the customer relationship for electronics meets the separability criterion for identification as an intangible asset.
AC acquires TC in a business combination on 31 December 20X5. TC does business with its customers solely through purchase and sales orders. At 31 December 20X5, TC has a backlog of customer purchase orders from 60 per cent of its customers, all of whom are recurring customers. The other 40 per cent of TC’s customers are also recurring customers. However, as of 31 December 20X5, TC has no open purchase orders or other contracts with those customers.
Regardless of whether they are cancellable or not, the purchase orders from 60 per cent of TC’s customers meet the contractual‑legal criterion. Additionally, because TC has established its relationship with 60 per cent of its customers through contracts, not only the purchase orders but also TC’s customer relationships meet the contractual‑legal criterion. Because TC has a practice of establishing contracts with the remaining 40 per cent of its customers, its relationship with those customers also arises through contractual rights and therefore meets the contractual‑legal criterion even though TC does not have contracts with those customers at 31 December 20X5.
AC acquires TC, an insurer, in a business combination on 31 December 20X5. TC has a portfolio of one‑year motor insurance contracts that are cancellable by policyholders.
Because TC establishes its relationships with policyholders through insurance contracts, the customer relationship with policyholders meets the contractual‑legal criterion. IAS 36 Impairment of Assets and IAS 38 Intangible Assets apply to the customer relationship intangible asset.