The objective of IAS 22 (Revised 1993) is to prescribe the accounting treatment for business combinations. The Standard covers both an acquisition of one enterprise by another (an acquisition) and also the rare situation where an acquirer cannot be identified (a uniting of interests).
Key Definitions [IAS 22.8]
Business 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.
Acquisition: A business combination in which one of the enterprises, the acquirer, obtains control 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.
Uniting 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 pooling of interests. Control: The power to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities. If one enterprise controls another, the controlling enterprise is called the parent and the controlled enterprise is called the subsidiary.
Distinguishing Between Acquisitions and Unitings of Interests
Under IAS 22, "virtually all" business combinations are acquisitions. [IAS 22.10]
Indications of an acquisition are: [IAS 22.10]
One enterprise acquires more than one half of the voting rights of the other combining enterprise.
One enterprise has the power over more than one half of the voting rights of the other enterprise as a result of an agreement with other investors.
One enterprise has the power to govern the financial and operating policies of the other enterprise 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 power 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 from 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. Usually, 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 voting common shares for cash, the enterprise paying the cash is the acquirer.
After the business combination, the management of one enterprise dominates the selection 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 both combining enterprises share control over the combined enterprise substantially equally.
The managements of both of the combining enterprises share in the management of the combined entity.
A business combination should be classified as an acquisition 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 cannot be identified. [IAS 22.15]
The substantial majority of the voting common shares of the combining enterprises are exchanged 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 interests in the combined entity, relative to each other, after the combination 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 the equity in the combined entity depends on the performance, subsequent to the business combination, of the business which it previously controlled.
Unitings of Interests - Accounting Procedures
A uniting of interests should be accounted for using the pooling of interests method. [IAS 22.77] Under this method:
Financial statement items of uniting entities should be combined, in both the current and prior periods, as if they had been united from the beginning of the earliest 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 combination should be expensed when incurred. [IAS 22.82]
Acquisitions - Accounting Procedures
An acquisition should be accounted for using the purchase method of accounting. Under this method: [IAS 22.19]
The income statement should incorporate the results of the acquiree from the date of acquisition; and
The balance sheet should include the identifiable assets and liabilities of the acquiree and any goodwill or negative goodwill arising.
Date of Acquisition
The date of acquisition is the date on which control of the net assets and operations 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 identifiable assets acquired less liabilities assumed. [IAS 22.20]
Cost of Acquisition
The cost of the acquisition is the amount of cash paid and the fair value of the other consideration given by the acquirer, plus any costs directly attributable to the acquisition. Contingent consideration should be included in the cost of the acquisition at the date of the acquisition if payment of the amount is probable and it can be measured reliably. The cost of acquisition should 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]
Identifiable assets and liabilities
The identifiable assets and liabilities acquired that are recognised should be those of the acquiree that existed 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 recognised separately if 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. Other than permitted provisions for restructuring costs (see below), liabilities should not be recognised at the date of acquisition if they result from either:
the acquirer's intentions or actions; or
future losses or other costs expected to be incurred an a result of the acquisition.
Liabilities should not be recognised at the date of acquisition based on the acquirer's stated intentions. Liabilities should also not be recognised for future losses or other costs expected to be incurred as a result of the acquisition, whether they relate to the acquirer or the acquiree. [IAS 22.29]
Restructuring provisions are recognised at acquisition only if the restructuring is an integral part of the acquirer's plan for the acquisition and, among other things, the main features of the restructuring 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 plan were announced prior to the acquisition, a provision for the restructuring 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 are authorised for issue, the restructuring plan has been further developed into a detailed formal plan (specifics set out in IAS 22.31].
Measuring Acquired Assets and Liabilities
Individual 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 measuring the acquired assets and liabilities:
Under the benchmark treatment, the assets and liabilities are measured at the aggregate 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 and liabilities. [IAS 22.32]
Under the allowed alternative treatment, the assets and liabilities should be measured at their fair values as at the date of acquisition with the minority's interest being stated at its proportion of the fair value of the assets and liabilities. [IAS 22.34]
The fair values of assets and liabilities should be determined by reference to their intended use by the acquirer. Guidelines are provided for the determining fair values for specific categories of assets and liabilities. When an asset or business segment of the acquiree is to be disposed of, this is taken into consideration in determining fair value. [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 relating to the previously held interests are accounted for as revaluations. [IAS 22.36]
Subsequent Adjustments to Original Measurements of Acquired Assets and Liabilities
The carrying amounts of assets and liabilities should be adjusted when additional evidence becomes available to assist with the estimation of the fair value of assets and liabilities at the date of acquisition. Goodwill should also 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.
Goodwill arising on the acquisition should be recognised as an asset and amortised over its useful life. 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" -- for instance if the goodwill is so clearly related to an identifiable asset or group of identifiable assets that it can reasonably be expected to provide benefits over the entire life of those related assets. Amortisation will normally be on a straight-line basis. [IAS 22.50]
Goodwill 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-amortisation of goodwill based on an argument that it has an infinite life is not permitted by IAS 22.
Negative goodwill must always be measured and initially recognised as the full difference between the acquirer's interest in the fair values 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]
An excess of negative goodwill to the extent of the fair values of acquired identifiable nonmonetary assets is recognised in income over the average live of those nonmonetary assets. [IAS 22.62(a)]
Any remaining excess is 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]
Deferred Income Taxes
In both acquisitions and uniting of interests, sometimes the accounting treatment may differ from measurements under national income tax laws. Any resulting deferred tax liabilities and deferred tax assets are recognised under IAS 12, Income Taxes. [IAS 22.84]
These disclosures apply to all business combinations [IAS 22.86]
Names and descriptions of the combining enterprises.
Method of accounting for the combination.
Effective date of the merger.
Plans to dispose of a portion of the combined enterprise
These disclosures apply to acquisitions [IAS 22.87-88]
Percentage of voting shares 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 goodwill and, if over 20 years or non-straight-line, the justification. [IAS 22.88]
Line item(s) of the income 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 information is not required.
Special disclosures in negative goodwill situations. [IAS 22.91]
Problems in determining fair values of assets and liabilities [IAS 22.93]
These 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.