quiz business combinations

7/28/2019 Quiz Business Combinations

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International Financial Reporting Standards

The views expressed in this presentation are those of the

presenter, not necessarily those of the IASB or IFRS Foundation.

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Quiz:Business combinations

and consolidated

financial statementsJoint World Bank and IFRS Foundation

train the trainers workshop hosted by the

ECCB, 30 April to 4 May 2012


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Question 1:

Entity A owns a 60 per cent voting interest in Entity B.

Entity B owns a 70 per cent voting interest in Entity C.

How should Entity A account for its investment in Entity C

in its consolidated financial statements?

a. consolidate Entity C.

b. account for investment in Entity C using the equity

method.

c. account for its investment in Entity C using the policy it

has adopted to account for associates


Quiz: Business combinations


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Question 1:

Entity A owns a 60 per cent voting interest in Entity B.

Entity B owns a 70 per cent voting interest in Entity C.

How should Entity A account for its investment in Entity C

in its consolidated financial statements?

a. consolidate Entity C. Note confusion is because Aeffective interest is 42%, but it has control

b. account for investment in Entity C using the equity

method.

c. account for its investment in Entity C using the policy ithas adopted to account for associates




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Question 2:

The facts are the same as those in Question 1. Determine

the appropriate percentage for the attribution of post-

acquisition increases in Entity Cs equity to Entity A.

a. 70 per cent.

b. 60 per cent.

c. 42 per cent.




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Question 2:

The facts are the same as those in Question 1. Determine

the appropriate percentage for the attribution of post-

acquisition increases in Entity Cs equity to Entity A.

a. 70 per cent.

b. 60 per cent.

c. 42 per cent.




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Question 3:

Does investor A have control?

An investor holds 48% of the equity (and related voting

rights) of an investee. The remaining equity and voting

rights are held by numerous other shareholders, none

individually holding more than 1% of the voting rights.None of the shareholders has arrangements to consult

any of the others or make collective decisions.

Decisions about the relevant activities of the investeerequire the approval of a majority of votes cast at relevant

shareholders meetings.




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Question 3 continued:

70% of the voting rights of the investee have been cast at

recent relevant shareholder meetings, with the exception

of one meeting when 78% of the voting rights were cast.

Decisions taken at that meeting included changing the

financing arrangements entered into by the investee thatcould affect future dividend payments to shareholders.

There are no other contractual arrangements that would

affect the assessment of power.




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Question 3:Given the level of shareholder participation and

considering the size and dispersion of shareholdings, in

accordance with IFRS 10, the investor with 48 per cent of

the voting rights would conclude that it controls the

investee:(i) its rights are sufficient to give it power over the

investee (ie it has the practical ability to direct the

relevant activities of the investee unilaterally);

(ii) it has exposure to variable returns; and(iii) the ability to affect those variable returns through its

voting rights.




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In accordance with IFRS 12, there are a number of

disclosures that the investor would be required to make to

help users understand and evaluate the nature of its

relationship with the investee. Those disclosures would

include:(i) disclosures about significant judgements it has made

in determining that it has control of the investee; and

(ii) disclosures about non-controlling interests in the

investee (eg summarised financial information aboutthe investee).




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Question 4:

An investment vehicle is created to purchase a portfolio of

financial assets, funded by debt and equity instruments

issued to a number of investors.

The equity tranche is designed to absorb the first losses

incurred by the portfolio and to receive residual returns ofthe investment vehicle.




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Investor A holds 35 per cent of the equity tranche and is

also the asset manager, managing the vehicles asset

portfolio within portfolio guidelines.

Managing the fund includes decisions about the selection,

acquisition and disposal of the assets within thatportfolios guidelines and the management upon default of

any asset in the portfolio.

Investor A also receives market-based fixed and

performance-related fees for its asset managementservices.




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Question 4:

Investor A would, in accordance with IFRS 10, conclude

that it controls the investment vehicle and must

consolidate it:

(i) investor A has the ability to direct the relevant

activities;(ii) has rights to variable returns from the performance of

the vehicle; and

(iii) has the ability to use its power to affect the returns it

receives.




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disclosures that Investor A must make to help users

understand and evaluate the nature

of its relationship with the consolidated investment

vehicle.




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Question 5:

Fund Manager A has a 45% shareholding in

Fund B, which it also manages within defined parameters.

The constitution of the fund defines the funds purpose

and sets out the investment parameters within which the

fund manager can invest. The constitution also requiresFund Manager A to act in the best interests of the

shareholders. Within the defined parameters, however,

the investment manager (Fund Manager A) has discretion

about the assets in which Fund B will invest.




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Question 5:

Fund Manager A would, in accordance with

IFRS 10, conclude that it controls Fund B because:

(i) it has the power to direct Fund Bs relevant activities

through directing the investment decisions;

(ii) has exposure to variable returns from Fund B; and(iii) can use its power to affect the amount of its returns.




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disclosures that Fund Manager A would be required to

make to help users understand and evaluate the nature of

its relationship with Fund B.

In addition, Fund Manager A would need to disclose any

significant risks associated with Fund B, including the

terms of any contractual arrangements that require it to

provide financial support to Fund B.




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Question 6:

Investor A holds 70% of the voting rights of Investee C,

with Investor B holding the remaining 30% of the voting

rights as well as an option to acquire half of the voting

rights of Investor A.

The option can be exercised over the next two years but is

exercisable at a fixed price that is currently deeply out of

the money, and the option is expected to remain out of the

money over the course of the three-year period.




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Question 6:

Investors A and B would, in accordance with

IFRS 10, look at the purpose and design of the potential

voting rights, and their terms and conditions, to assess

whether they are substantive. In this case, Investors A

and B would conclude that the potential voting rights arenot substantive because the exercise price creates a

barrier to exercise during the exercise period. Therefore,

Investor A would consolidate Investee C because it has

the current ability to direct the relevant activities of thatinvestee.




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disclosures that Investor A would have to make to help

users understand and evaluate the nature of its

relationship with Investee C. Those disclosures would

include:(i) disclosures about non-controlling interests in Investee

C; and

(ii) significant judgements it has made in determining that

it controls Investee C, including the terms andconditions of the potential voting rights that Investor B

holds.




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In addition, Investor B must make disclosures about its

interests in Investee C. Investor B must also make

disclosures that would help users to understand the

nature and extent of its interest in Investee C and the risks

associated with that interest. For example, Investor Bwould disclose the reasons why it concluded that it does

not control Investee C, which may mean disclosing

information about the terms and conditions of the potential

voting rights it holds.




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Question 7:On 1/1/20X1 A has 100 issued voting shares. On

2/1/20X1 A acquires 100% of B from Bs shareholders

in exchange for 150 A voting shares.

Who is the acqui rer in th is business combinat ion?

a. A?

b. B?

c. Neither A nor B?




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Question 7:On 1/1/20X1 A has 100 issued voting shares. On

2/1/20X1 A acquires 100% of B from Bs shareholders

in exchange for 150 A voting shares.

Who is the acqui rer in th is business combinat ion?

a. A?

b. B? Bs shareholders now own 60% of the combined

entity. As shareholders own 40% of the combined entity

c. Neither A nor B?




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Question 8:

A & B transfer their businesses to Z. In return A & B

each receive 50% of the voting shares in Z. A & B

each appoint 3 members to Zs 6 member board of

directors. A also appoints the chairman of Z. The

chairman has a casting vote.Who is the acquirer?

a. A?

b. B?

c. Neither A nor B?




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24Quiz: Business combinations

Question 8:

A & B transfer their businesses to Z. In return A & Beach receive 50% of the voting shares in Z. A & B

each appoint 3 members to Zs 6 member board of

directors. A also appoints the chairman of Z. The

chairman has a casting vote.Who is the acquirer?

a. A? The casting vote means that A will ultimately control

the assets of Z

b. B?

c. Neither A nor B?



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25Questions or comments?

Expressions of individual viewsby members of the IASB and its

staff are encouraged.

The views expressed in this

presentation are those of the

presenter.

Official positions of the IASB on

accounting matters aredetermined only after extensive

due process and deliberation.



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2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org

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The requirements are set out in International FinancialReporting Standards (IFRSs), as issued by the IASB at1 January 2012 with an effective date after 1 January2012 but not the IFRSs they will replace.

The IFRS Foundation, the authors, the presenters andthe publishers do not accept responsibility for losscaused to any person who acts or refrains from actingin reliance on the material in this PowerPointpresentation, whether such loss is caused by

negligence or otherwise.

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IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

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