2. Business Combinations Business combination is defined as: ‘A transaction or other event in which an acquirer obtains control of one or more businesses’. NZ IFRS 3 Appendix A For example: 1. A Ltd acquires all assets and liabilities of B Ltd for shares, cash or other consideration. B Ltd could continue as a company (holding shares in A Ltd), or on receipt of consideration B Ltd could liquidate. 2. C Ltd is formed to acquire all assets and liabilities of A Ltd and B Ltd. A Ltd and B Ltd liquidate.

3. Consolidated Financial Statements Parent and subsidiary If one entity (B Ltd) is controlled by another (A Ltd), the controlling entity (A Ltd) is a parent and the company controlled a subsidiary (B Ltd). A Ltd is the acquirer and B Ltd is the acquiree. Note that not all the net assets need to be acquired – it could be a proportion. Provided that proportionate interest constitutes control, the remaining percentage belongs to the non-controlling interests. A parent entity is required to present consolidated financial statements (NZ IFRS 10, para 4).

4. Acquisition method The acquisition method is used for all business combinations (NZ IFRS 3 para 4). Step 1: Identify the acquirer Step 2: Determining the acquisition date Step 3: Recognising and measuring the identifiable assets, liabilities and non-controlling interest Step 4: Recognising and measuring goodwill or a gain from a bargain purchase Acquisition Method

5. The Acquirer – and Control (Step 1) The acquirer is the entity that obtains control of the acquiree (NZ IFRS 3 para 7). NZ IFRS 10 shall be used to identify the acquirer (parent). Under paragraph 7 of NZ IFRS 10, the following three elements are required in order for an entity to have control: 1. Power over the investee (subsidiary) 2. Exposure or rights to variable returns from its involvement with the investee 3. The ability to use its power over the subsidiary to affect the amount of the investor’s (parent’s) returns All three elements must be present for control to exist.

6. The Acquirer – and Control (Step 1) Power Power is defined as existing rights that give the current ability to direct the relevant activities. It arises from rights which generally arise from a legal contract. e.g. Voting rights, rights to appoint, reassign or remove the subsidiaries’ key management personnel. Note that voting rights of less than 50% can result in an investor having power over a subsidiary (NZ IFRS para B38). The following factors need to be considered when assessing whether there is power in this case: Size of voting interest Dispersion of other shareholders Attendance at AGMs Existence of contracts

7. The Acquirer – and Control (Step 1) The second element of the control definition requires that the investor has the rights to variable returns from the investee. Examples of returns include dividends, economies of scale, cost savings, gaining access to proprietary knowledge, and remuneration for servicing a subsidiaries’ assets or liabilities. The third element requires that the parent have the ability to increase its benefits and limit its losses from the subsidiary’s activities. All three elements must be present for control to exist No control = no parent-subsidiary relationship = no consolidation

8. Determining the acquisition date (Step 2) Acquisition date is the date that the acquirer obtains control of the acquiree (NZ IFRS 3 para 8) Determining the correct acquisition date is important as the following are affected by the choice of date: The fair values of the net assets acquired Consideration given, where the consideration takes a non-cash form Measurement of the non-controlling interest

9. Recognising and measuring the identifiable assets, liabilities and non-controlling interest (Step 3) The acquirer identifies and measures the identifiable assets acquired and the liabilities (including contingent liabilities) assumed at their acquisition-date fair values at acquisition date (NZ IFRS 3 paras 15 and 18) If the consideration given on acquisition exceeds the fair value of the net assets acquired, goodwill is recognised

10. Recognising and measuring goodwill or a gain from a bargain purchase (Step 4) Goodwill Goodwill represents the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognised (NZ IFRS 3 App A) This goodwill asset is initially measured at cost but is subject to annual impairment testing. Goodwill is not amortised.

11. Recognising and measuring goodwill or a gain from a bargain purchase (Step 4) Bargain purchase If the net asset fair value exceeds the purchase price, the values are all reassessed to ensure correctness (NZ IFRS 3 para 36) However, if the resulting gain remains it must be recognised in profit or loss on the acquisition date (para 34)