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  • 1

    Consolidated Financial Statements(Workshop 2) 23 March 2011

    2005-11 Nelson Consulting Limited 1

    Nelson LamNelson Lam MBA MSc BBA ACA ACS CFA CPA(Aust) CPA(US) CTA FCCA FCPA MHKSI MSCA

    The Companies Ordinance(Chapter 32) W k h 1

    Consolidated Financial Statements

    (Chapter 32)

    HKFRS 3 Business Combinations

    HKAS 27 Consolidated and Separate HKAS 27 Consolidated and Separate Financial Statements

    AG 5 Merger Accounting for Common AG 5 Merger Accounting for Common Control Combinations

    Workshop 1 Business Combinations and

    Consolidation in Hong KongWorkshop 2 Changes in a group

    More calculations inWorkshop 2 and 3

    You are welcome to bring your

    2005-11 Nelson Consulting Limited 2

    HKAS 28 Investments in Associates

    HKAS 31 Interests in Joint Ventures

    Workshop 3 Other consolidation issues

    You are welcome to bring your own calculator to practise

  • 2

    The Companies Ordinance(Chapter 32)

    Agenda of Workshop 2

    Changes in a group1. Reverse acquisition2 Business combination(Chapter 32)

    HKFRS 3 Business Combinations

    HKAS 27 Consolidated and Separate HKAS 27 Consolidated and Separate Financial Statements

    2. Business combination achieved in stages (Step acquisition)

    3. Disposala. Full disposalb. Partial disposalc. Deemed disposald Business disposal

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    RequirementsRequirements(from buy to sell)

    Practical Practical ExamplesExamples

    Real CasesReal Cases

    d. Business disposal

    1. Reverse AcquisitionChanges in a group1. Reverse acquisition

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    1. Reverse Acquisition

    Scope

    An entity shall account for each business combination by applying the acquisition method. (HKFRS 3.4)

    Application of the method

    Method of accounting

    Applying the acquisition method requires: a) identifying the acquirer; b) determining the acquisition date; c) recognising and measuring

    Guidance in HKAS 27

    Date of control obtained

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    ) g g g the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree; and

    d) recognising and measuring goodwill or a gain from a bargain purchase. (HKFRS 3.5)

    1. Reverse Acquisition

    Scope

    Application of the method

    Method of accounting

    Applying the acquisition method requires: a) identifying the acquirer;

    The guidance in HKAS 27 Consolidated and Separate Financial

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    The guidance in HKAS 27 Consolidated and Separate Financial Statements shall be used to identify the acquirer the entity that obtains control of the acquiree.

    If a business combination has occurred but applying the guidance in HKAS 27 does not clearly indicate which of the combining entities is the acquirer, the factors in HKFRS 3.B14B18 shall be considered in making that determination.

  • 4

    1. Reverse Acquisition

    Indication of Control Control is the power to govern the financial and operating policies of

    an entity or business so as to obtain benefits from its activitiesan entity or business so as to obtain benefits from its activities. Presumed to have control when an entity acquires more than one-half

    of that other entitys voting rights, unless demonstrated contrary Even if no such voting rights, it might have control by obtaining:

    a) power over more than one-half of the voting rights of the other entityby virtue of an agreement with other investors; or

    b) power to govern the financial and operating policies of the other entity under a statute or an agreement; or

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    under a statute or an agreement; orc) power to appoint or remove the majority of the members of the board of

    directors or equivalent governing body of the other entity; ord) power to cast the majority of votes at meetings of the board of directors or

    equivalent governing body of the other entity.

    1. Reverse Acquisition

    Indication as an Acquirer In a business combination effected primarily by transferring

    cash or other assets or by incurring liabilitiescash or other assets or by incurring liabilities, the acquirer is usually the entity that

    transfers the cash or other assets or incurs the liabilities.

    In a business combination effected primarily by exchanging equity interests,

    the acquirer is usually the entity that issues its equity interests.

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  • 5

    Indication as an Acquirer

    1. Reverse Acquisition

    Other pertinent facts and circumstances shall also be considered in identifying the acquirer in a business combination effected byidentifying the acquirer in a business combination effected by exchanging equity interests, including:

    a) the relative voting rights in the combined entity after the business combination

    b) the existence of a large minority voting interest in the combined entity if no other owner or organised group of owners has a significant voting interest

    c) the composition of the governing body of the combined entity

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    d) the composition of the senior management of the combined entitye) the terms of the exchange of equity interests

    Indication as an Acquirer

    1. Reverse Acquisition

    The acquirer is usually the combining entity whose relative size (measured in for example assets revenues or profit) is significantly(measured in, for example, assets, revenues or profit) is significantly greater than that of the other combining entity or entities.

    In a business combination involving more than two entities, determining the acquirer shall include a consideration of, among other things, which of the combining entities initiated the combination, as well as the relative size of the combining entities.

    A new entity formed to effect a business combination is not necessarily the acquirer

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    the acquirer. If a new entity is formed to issue equity interests to effect a business

    combination, one of the combining entities that existed before the business combination shall be identified as the acquirer by applying the guidance in HKFRS 3.B13B17 (as discussed now).

    In contrast, a new entity that transfers cash or other assets or incurs liabilities as consideration may be the acquirer.

  • 6

    Indication as an Acquirer

    1. Reverse Acquisition

    In some business combinations, commonly called reverse acquisitions the issuing entity is the acquireeacquisitions , the issuing entity is the acquiree.

    A reverse acquisition occurs when: the entity that issues securities (the legal acquirer) is identified as the

    acquiree for accounting purposes on the basis of the guidance in HKFRS 3.B13B18 (as discussed in previous slides).

    The entity whose equity interests are acquired (the legal acquiree) must be the acquirer for accounting purposes for the transaction to be considered a reverse acquisition.

    2005-11 Nelson Consulting Limited 11

    e.g. reverse acquisitions sometimes occur when a private operating entity wants to become a public entity but does not want to register its equity shares.a private entity arranges to have itself acquired by a smaller public entity as a means of obtaining a stock exchange listing also termed as reverse takeover or back door listing-

    Before Business Combination

    1. Reverse Acquisition

    After Business Combinations

    Example

    Owner B

    100%

    Owner A

    100%

    Listed Co. A

    Listed Co. A

    Owner BOwner A

    10%

    100%

    90%

    Listed Co. A acquires Entity B by issuing Accounting

    Legal parent under Accounting

    Acquiree under HKFRS 3

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    Entity B Entity BEntity B by issuing shares to Owner B

    Which entity is the legal acquirer?Which entity is the acquirer under HKFRS 3?

    Acquirer under Accounting

    Acquirer under HKFRS 3

    Legal subsidiary

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    1. Reverse AcquisitionExample

    Is the following case a Reverse Acquisition? Group A has 100 outstanding shares wholly owned by Peter It acquires Group Xs interest in Hotel Group by issuingIt acquires Group X s interest in Hotel Group by issuing

    additional 120 outstanding to Group X

    Before Business Combination

    XPeter

    After Business Combinations

    XPeter

    100 120Yes, a reverse acquisition After the share issues,

    Group X will hold 54.5% of Group

    2005-11 Nelson Consulting Limited 13

    HotelGroup

    A A

    Hotel Group

    p In substance, Hotel

    Group (or Group X, i.e. the owners of Hotel Group) has power to govern the financial and operating policies of Group A

    1. Reverse AcquisitionExample

    Group B has 100 outstanding shares in issue wholly owned

    Is the following case a Reverse Acquisition?

    p g yby Stella

    It acquires Group ALs interest in Property Group by issuing 80

    shares to Group AL GVs interest in Retail Chain Group by issuing 80 shares

    to Group GV

    Lets see the changes in group structure

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    Let s see the changes in group structure

  • 8

    Before Business Combination

    1. Reverse AcquisitionExample

    After Business Combinations

    Is the following case a Reverse Acquisition?

    AL GVStella

    B

    100

    B

    ALStella

    80

    GV

    80

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    PropertyGroup

    Retail Chain Group

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