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7.  Scope
 Application of the Purchase Method
 Revised IAS 38
 Revised IAS 36
 Valuation Considerations
 Transition
 Questions and Answers

8.  Business Combination
 Transaction where two or more entities or businesses
are brought together to form a single reporting
entity
 Business
 Integrated set of activities and assets conducted
and managed for the purposes of providing
 A return to investors; or
 Lower costs or other economic benefits directly
and proportionately to shareholders.

9.  Scope Exemptions
 Business combinations in which separate entities or
businesses form a joint venture
 Business Combinations involving entities or
businesses under common control
 Business Combinations involving two or more mutual
entities
 Business Combinations in which separate entities or
businesses are brought together by contract alone without
the obtaining of an ownership interest

10. Identify an Acquirer
Determine the cost of
the business
combination
Allocate the cost of
the business
combination

11.  Consider
 Respective sizes of entities prior to the combination
 Power to govern financial and operating policies of
combined entity
 Voting rights in combined entity
 Acquirer for accounting may be different than legal
acquirer (a „reverse acquisition‟)
 Where a new entity is formed one of the pre-existing
entities must be identified as the acquirer

12.  Equity instruments issued as purchase consideration
measured at market price
 Include
 Cash consideration
 Equity instruments issues to effect the transaction
 Expenses incurred by the acquirer solely for
purpose of business combination (e.g. legal fees)
 Contingent payments to the extent they are
probable and can be reliably measured
 Costs of arranging finance for the acquisition and
costs of issuing equity instruments are not
recognised as an asset – they are accounted for in
accordance with IAS 39 (i.e. initial cost to treated as
either liability or offering costs)

13.  Assets are recognized at fair value if it can be measured
reliably and it is probable that the economic benefit will
flow to the acquirer
 Liabilities, other than contingent liabilities are recognized
at fair value only if it can be measures reliably and it is
probable that there would be an outflow of economic
benefit to settle obligation
 Only allocate to those assets, liabilities and contingent
liabilities of the acquiree that exist at the date of
acquisition (i.e. restructuring)
 Measure contingent liabilities if reliably measurable –
base on the amount a third party would charge to assume
the liability

14.  Traded financial instruments (eg. investments) at market values
 Unquoted financial instruments based on estimated values such as price-earning
ratio, dividend yield, growth rates of similar traded instruments
 Long-term receivables and other long-term assets at present values determined at
appropriate current interest rates less allowances for doubtful receivables and
collection costs
 Inventories- Finished goods at selling price less sum of cost of disposal and profit
allowance for acquirer‟s effort
Work-in-progress at selling price of finished goods less sum of cost to
complete, cost of disposal and profit allowance for acquirer‟s effort
Raw materials at replacement cost
 Land and building at market values
 Plant and equipment at market values determined by an appraiser. In absence of
market value depreciated replacement cost
 Net employee defined benefit asset or liability at present value less fair value of
plan assets
 Long-term liability at present values at appropriate interest rates

15. Fair Value of

Cost of assets,
Business - liabilities and >0 Goodwill
Combination contingent
liabilities
assumed
Recognise as an asset at date of transaction
Do not amortise
Test for impairment at least annually

16. Fair Value of

Cost of assets,
Business - liabilities and <0 Negative
Combination contingent Goodwill
liabilities
assumed
 Reassess the fair values originally determined
 Any remaining excess is recognised in profit and
loss immediately

17.  Identification and recognition of certain
intangible assets
 Finite useful life – amortise
 Indefinite useful life – Assess annually for
impairment
 Reassess the useful life of intangible assets at
least annually

18.  Cash-generating units (CGUs)
 The smallest identifiable group of assets that
generate cash inflows that are largely independent
of the cash inflows from other groups of assets
 Allocate acquired goodwill amongst CGUs expected
to benefit from the synergies of the combination
 CGUs (or groups of CGUs) to which goodwill is
allocated for impairment testing must be
 Lowest level at which management monitor
goodwill
 No larger than a segment (in accordance with IAS
14)

19.  Determine carrying amount of the CGU
(including allocated goodwill)
 Determine fair value less costs to sell and/or
value in use
 Compare higher of the two with carrying
amount
 Any shortfall must be recognised as a
recoverable amount write-down

20.  All write-downs are recognised immediately
 Where a write-down is required in relation to a
CGU with allocated goodwill, the goodwill is
first written down
 Any remaining write down is taken
proportionately against the non-monetary
assets
 Write-downs of goodwill may not be reversed
in future reporting periods

21.  A CGU must be assessed at the same time each
year
 Where an indicator of impairment exists, the
asset concerned must be tested for impairment
before testing the CGU
 Detailed calculations may be carried forward
from prior reporting periods providing certain
conditions are met

22.  Overview
– Cash Generating Unit Valuations
– Identifiable Intangible Asset Valuations
– Documentation Guidelines

23.  Assessing the Recoverable Amount of a CGU
 IAS 36 (18) defines recoverable amount as the HIGHER of:
 Fair value less costs to sell; and
 Value in Use
 Best evidence of an asset‟s FAIR VALUE (less costs to sell) is a price
in a binding sale in an arm‟s length transaction, adjusted
incremental costs that would be directly attributable to the disposal
of the asset. Consider:
 Binding sales agreement; or
 Comparable companies and Transactions involving similar
companies (MARKET APPROACH)
 The expected present value of the future cash flows derived from
the asset (DCF APPROACH) should be used in assessing the
VALUE IN USE

24.  MARKET APPROACH – Key Elements and
Considerations
 Typical methodologies
 Comparable public companies
 Comparable transactions
 Valuation multiples
 Market value of “Invested Capital” to
revenue, EBITDA, or EBIT
 Market value of “Equity” to net income, or BV of
tangible net equity

25.  Recognition as part of a business combination
 Recognised separately if it meets the following criteria:
 Separately identifiable (i.e. capable of being separated or
divided from the entity and
sold, transferred, licensed, rented, or exchanged – either
individually or together with a related contract, asset
or liability)
 Controlled by the entity (arises from contractual or other
legal rights, regardless of whether those rights are
transferable or separable from the entity or from other rights
and obligations)
 A source of future economic benefits
 Fair value can be measured reliably
 Useful list of “Illustrative Examples” of types intangibles is
provided with IFRS 3 – similar to SFAS 141
 Determination will ultimately be based on the facts and
circumstances of each individual business combination

26.  Intangible Asset Valuations
 Market Approach
 Comparable transaction
 Income Approach
 Relief-from-royalty
 Discounted cash flow
 Cost-savings
 Cost Approach
 Replacement cost

27.  Key Elements of Valuation Documentation
 Description of the CGU
 Nature of operations
 Consider value drivers
 Financial analysis with respect to the CGU
 Financial condition
 Profitability and earnings capacity
 Available documentation regarding
forecasts

28.  Key Elements of Valuation Documentation
(cont.)
 Supporting calculations consistent with generally
accepted valuation procedures for each valuation
method adopted
 Sufficient documentation of key assumptions and
sources of data
 Rationale for conclusion and rationalisation of
various indications of value – global sense check

29.  Appropriate valuation methodologies should
be carefully selected and consistently applied
over time
 Whether a particular fair value measurement is
prepared internally or with the assistance of a
third-party specialist, the level of
documentation to support the conclusions of
the entity is expected to be similar
 It‟s a subjective and difficult area – so please
consult with the appropriate specialists

30.  Fair value of assets and liabilities may result in
deferred tax asset or liability
 If asset or liability is not recognized which
subsequently is incurred or realized then:
recognize benefit expense in P&L
adjust carrying value of goodwill through P&L

31.  Applies to transactions for which agreement date is on or after 31
March 2004
 In the first reporting period beginning on or after 31 March 2004
 Discontinue amortisation of goodwill in first reporting period
after
 Eliminate carrying amount of goodwill amortisation against
goodwill
 Test carrying amount of goodwill for impairment
 Reclassify intangibles recognised in previous business
combinations that do not meet the recognition criteria to
goodwill
 Early adoption can only be achieved in conjunction with early
adoption of revised IAS 36 and IAS 38
 Transitional requirements should be applied in respect of
goodwill arising from joint ventures and associates

32.  Not required to restate prior business combinations
accounted for under a standard different from the
IFRS applicable at the date of reporting.
 Still need to eliminate assets and liabilities that do
not meet the recognition criteria under IFRS outside
of a business combination (adjustment to goodwill).
 If subsidiary has not been consolidated under
previous GAAP, restate assets and liabilities in
accordance with IFRS
 Test goodwill in opening IFRS balance sheet for
impairment.
 Must account for all business combinations after date
of transition in accordance with IFRS 3

33.  COACHING CLASSES FOR COMMERCE STUDENTS:
INTER COMMERCE
1ST YEAR 2ND YEAR
ACCOUNTING
BUSINESS MATHS STATISTICS
 ECONOMICS BANKING
B.COM
PART 1 ACCOUNTING, ECONOMICS & STATISTICS .
PART 2 ADVANCED ACCOUNTING
O LEVELS
ACCOUNTS, ECONOMICS, BUSINESS STUDIES, PAKISTAN STUDIES
& URDU.
ICMAP STAGE 1,2,3,4
PIPFA
ICAP MODULE B & D
CAT T1-T8
ACCA F1,F2,F3,F5,F8,P1,P7
MA-ECONOMICS
100 % RESULT IN 2011-2012
KHALID AZIZ
0322-3385752
R1173, ALNOOR SOCIETY, BLOCK 19, POWER
HOUSE, F.B.AREA, KARACHI.