Pre-existing relationships and reacquired rights under IFRS 3
Determining what is part of the business
combination transaction (Pre-existing relationships and
reacquired rights):-
(Note- It covers paragraphs 51-52 & B50 to
B62 of bear standard IFRS 3)
The acquirer and the acquire (or its former owners) might
have a pre‑existing relationship
or any other prearrangement before initiating the negotiations for business
combination, or may enter into any such arrangement during the process of business
combination negotiations which is separate in nature. In any of above mentioned
situation, the acquirer will identify any amounts which is not part of what the
acquirer and the acquire have exchanged in the business combination. The
acquirer shall consider as part of applying the acquisition method only on the consideration
transferred to acquiree and the assets acquired and liabilities identified in
the exchange process. Any separate transactions which will have been treated
for in accordance with the relevant applicable IFRSs.
A transaction made by or on behalf of the acquirer or principally
for the benefit of the acquirer or the combined entity, rather than primarily
for the benefit of the acquiree (or its former owners) prior to the
combination, is expected to be a separate transaction. Below are examples of
separate transactions that should not be included when acquisition method will
be applicable:
(a) a transaction that effectively establishes pre-existing
relationships between the acquirer and the acquiree;
(b) a transaction that remunerates the acquiree's employees
or former owners for future services; and
(c) a transaction that repays the acquiree or its former
owners for paying the costs related to the acquisition of the acquirer.
The acquirer should study the below factors, those
are neither mutually exclusive not individually conclusive, to identify and
conclude whether a transaction is portion of any exchange or the transaction is
separate from any business combination:
(a) the causes for the transaction: understanding the
reasons why the parties of the combination (the acquirer and acquiree and their
owners, directors, manager and their agents) conducted a particular transaction
or arrangement may give insight into if it is part of the consideration given
and the assets acquired or the liabilities assumed. For illustration, if any
transaction is arranged mainly for benefit of acquirer/ Any combined entity
rather than principally for benefit of the acquire/ its former owners prior to
the combination, that share of the transaction price paid (and any assets or
related liability) a smaller amount to be part of the exchange for the
acquiree. Consequently, the acquirer would account for that part separately
from the business combination.
(b) initiator of transaction: The understanding who was the
initiator of the transaction can also provide information about whether it should
be part of the exchange for the acquired entity. For example, a transaction or
other event
the acquirer-initiated may subscribe for the determination
of providing future economic benefits to the acquirer or any combined entity
with small or almost no benefit received by the acquirer or its former owners
prior to the combination. Conversely, a transaction or agreement introduced by
the acquired entity or its former owners is a smaller amount benefited to the
acquirer or the combined entity and more probable that it will be part of the
business combination.
(c) the time of the transaction: The time of transaction might
also provide information on whether it should be part of the exchange for the
acquired entity.
For example, any transaction between the acquirer and acquiree
that occurs during negotiations of the terms of a business combination may have
been made in observation of the business combination to make available the
future economic benefits for the acquirer or to the combined entity. Accordingly,
the acquiree or its ex owners prior to the business combination are expected to
receive small or nope benefit from the transaction, except for the benefits
they obtain as part of the combined entity.
Effective settlement of a pre‑existing relationship between the acquirer and
acquiree in a business combination
The acquirer and the acquiree might have a relationship
that existed before contemplating the business combination, referred to herein
as "pre-existing relationship". A pre-existing relationship between
the acquirer and the acquiree may be contractual (for example, seller and
customer or licensor and licensee) or non-contractual (for example, plaintiff
and defendant). If the business combination establishes a pre-existing relationship,
the acquirer recognizes a gain or loss, measured as follows:
(a) for a pre-existing non-contractual relationship (such
as a lawsuit), fair value.
(b) for a pre-existing contractual relationship, the lesser
of (i) and (ii):
(i) the amount for which the contract is favorable or
unfavorable from the acquirer's perspective compared to the terms of current
market transactions for the same or similar items. (An unfavorable contract is
an unfavorable contract in terms of current market terms. It is not necessarily
an onerous contract in which the unavoidable costs of fulfilling the contract
obligations exceed the economic benefits expected to be received pursuant to
it.)
(ii) the amount of any settlement provision established in
the contract available to the counterparty for which the contract is
unfavorable.
If (ii) is less than (i), the difference is included as
part of the business combination accounting.
The amount of the recognized gain or loss may depend in
part on whether the acquirer had previously recognized a related asset or
liability, and the reported gain or loss, therefore, may differ from the amount
calculated applying the above requirements.
A pre-existing relationship can be a contract that the
acquirer recognizes as a reacquired right. If the contract includes terms that
are favorable or unfavorable compared to the current market transaction price
for the same or similar items, the acquirer recognizes, separately from the
business combination, a gain or loss for the effective settlement of the contract.
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