How starter kits meet IFRS – IFRS 3
This series of blogs describes how SAP® BusinessObjectsTM Financial Consolidation, Starter Kit for IFRS has been configured to meet International Financial Reporting Standards (IFRS).
In our previous blogs, we have covered the following topics:
- Brief overview of SAP BusinessObjects Financial Consolidation, Starter Kit for IFRS (How Starter kits Meet IFRS requirements – Introduction)
- Presentation of consolidated financial statements according to How Starter Kits meet IFRS – IAS 1 and How Starter Kits meet IFRS – IAS 7
- Translation of a foreign entity’s financial statements (How Starter Kits meet IFRS – IAS 21)
- Current consolidation process (How starter kits meet IFRS – IAS 27 (part 1)), loss of control (How starter kits meet IFRS – IAS 27 (part 2)) and equity transactions (How starter kits meet IFRS – IAS 27 (part 3))
- Accounting for investments in associates (How starter kits meet IFRS – IAS 28) and joint-ventures (How starter kits meet IFRS – IAS 31).
We will end this series with an analysis of IFRS 3 “Business Combinations”
A business combination is defined as a transaction in which an acquirer obtains control of an acquiree. In other words, IFRS 3 only addresses first consolidation of a subsidiary. However, principles prescribed by IAS 28 for the first consolidation of an associate are similar. The acquisition of a joint control in a joint-venture is not explicitly addressed by IFRS. Groups usually apply the same principles as those for subsidiaries.
According to IFRS 3, each business combination should be accounted for using the acquisition method (sometimes referred to as purchase accounting).
First consolidation of an entity
Measuring acquiree’s assets and liabilities
The acquirer should recognize, separately from goodwill, the identifiable assets acquired and the liabilities assumed and measure them at their acquisition-date fair values. It may result in recognizing some assets and liabilities that the acquiree had not previously recognized in its financial statements (for example, intangible assets such as brand name or customer relationship). These acquisition-date fair values become the initial carrying values of the acquired assets and liabilities in the consolidated financial statements.
In the starter kit, adjustments resulting from the remeasurement of identifiable assets and liabilities are booked manually using a dedicated audit-ID (FVA11). Impacts on deferred tax assets and liabilities are also booked manually using the same audit-ID.
Measuring non-controlling interests (NCI)
For each business combination, the acquirer should measure any NCI in the acquiree either at fair value or at their proportionate share of the acquiree’s identifiable net assets. This choice is available for each business combination.
When NCI are measured at fair value, the difference between this amount and their proportionate share of the identifiable net assets is recognized as goodwill (see below).
Goodwill or gain from a bargain purchase
According to IFRS 3 revised, goodwill or gain from a bargain purchase is calculated as follows:
In the starter kit
In the starter kit, goodwill and gain from a bargain purchase are booked automatically in the consolidated balance sheet based on declarations made by manual journal entries. These entries are posted on dedicated technical accounts (XA1310 for goodwill, XA1300 for bargain purchase), with a breakdown per share used to identify the owner company. This breakdown by share is also used to identify the amount of goodwill related to NCI if the fair value method is chosen.
IFRS 3 provides additional guidance for applying the acquisition method to particular types of business combinations such as business combinations achieved in stages (also referred to as “step acquisition”).
In such a business combination, the acquirer should remeasure its previously held equity interest in the acquiree at its acquisition-date fair value and recognize the resulting gain or loss, if any, in profit or loss. In prior reporting periods, the acquirer may have recognized changes in the value of its equity interest in the acquiree in other comprehensive income. If so, the amount that was recognized in other comprehensive income shall be recognized on the same basis as would be required if the acquirer had disposed directly of the previously held equity interest
Step acquisitions cover the following situations:
- associate becoming a subsidiary or a joint-venture
- joint-venture becoming a subsidiary
Associate becomes a subsidiary
According to IFRS 3, this operation is similarly treated as if the interest in the associate was disposed of and a controlling interest in a subsidiary was acquired.
Therefore, the different stages are the following:
- OCI of the associate that have been previously recognized are recycled on the same basis as would be required if the acquirer has disposed of its interest in the associate
- The acquirer remeasures its previously held equity interest in the associate at its acquisition-date fair value and recognise the resulting gain or loss in profit or loss
- The acquisition of a controlling interest is accounted for by applying the acquisition method
In the starter kit
In the starter kit, a change from equity method to full consolidation is handled as follows:
- The line “Investments in associates” is reversed on the “old method” flow (F02) and “replaced” by the subsidiary’s assets and liabilities being loaded on the new method flow (F03).
- The equity accounts (the proportionate share of them that correspond to the consolidation rate) are reversed on the old method flow and reloaded at 100% on the new method flow; allocation between group and NCI is made on this flow according to the new interest rate.
Any goodwill existing at opening (and included in the carrying amount of the investment in associate) is not reloaded on the new method flow. Indeed, it is part of the carrying amount of the previously held interest and is, therefore, taken into account to calculate the profit on “disposal”. A new goodwill has to be calculated as part of the acquisition method process and declared by a manual journal entry using the new method flow.
Accumulated OCI at opening is automatically reclassified to retained earnings on the new method flow, as for incoming entities. Reclassification adjustments displayed in the comprehensive income take into account the old method flow because change in consolidation method is handled as if the associate was disposed of.
Manual journal entries are necessary to:
- recognize a gain or loss on “disposal” of the previously held interest (which means, in particular, remeasure previously held shares in associates to fair value)
- remeasure net identifiable assets of the held company to fair value (as if it was an incoming entity)
- declare goodwill.
Associate becomes a joint-venture
Same as above for an associate becoming a subsidiary.
Joint-venture becomes a subsidiary
This operation should be similarly treated as if the interest in the joint-venture was disposed of and a controlling interest in a subsidiary was acquired.
In SAP BusinessObjects Financial Consolidation, change from proportionate to full consolidation is not regarded as a change in consolidation method but as a change in consolidation rate. Principles are similar regardless of whether there is an increase (as in this case) or a decrease in consolidation rate (see How starter kits meet IFRS – IAS 31).
What’s next ?
This blog was the last one of the series. For more information about how IFRS (including standards that are not addressed in this series of blogs) have been taken into account in SAP BusinessObjects Financial Consolidation, starter kit for IFRS, a comprehensive paper is now available here.