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| Home > Accounting Standards > Interpretations of Financial Reporting Standards 2003 > INT FRS 9 |
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Interpretation
of Financial Reporting Standard
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Business Combinations - Classification either as Acquisitions or Unitings of Interests |
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Paragraph 11 of FRS 1, Presentation of Financial Statements, requires that financial statements should not be described as complying with Financial Reporting Standards unless they comply with all the requirements of each applicable Standard and each applicable Interpretation of the Financial Reporting Standard. INT FRSs are not intended to apply to immaterial items. |
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Reference: FRS 22, Business Combinations |
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ISSUE |
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- In order to classify a business combination, FRS 22 contains both general definitions in paragraph 8 and additional guidance in paragraphs 10 to 12 for acquisitions and in paragraphs 13 to 16 for unitings of interests. FRS 22 is clear that it will be possible to identify an acquirer in virtually all cases and hence unitings of interests are expected to occur in exceptional circumstances only. However, the Standard does not provide explicit guidance on the interaction between the definitions and the two sections containing guidance on acquisitions and unitings of interests.
- The issues are:
- how the definitions and the additional guidance in FRS 22 are to be interpreted and applied in classifying a business combination; and
- whether a business combination under FRS 22 might be classified as neither an acquisition nor a uniting of interests.
- This INT FRS does not deal with transactions among enterprises under common control.
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CONSENSUS |
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| 4. |
A business combination should be accounted for as an acquisition, unless an acquirer cannot be identified. In virtually all business combinations an acquirer can be identified, i.e. the shareholders of one of the combining enterprises obtain control over the combined enterprise.
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| 5. |
The classification of a business combination should be based on an overall evaluation of all relevant facts and circumstances of the particular transaction. The guidance given in FRS 22 provides examples of important factors to be considered, not a comprehensive set of conditions to be met. Single characteristics of a combined enterprise such as voting power or relative fair values of the combining enterprises should not be evaluated in isolation in order to determine how a business combination should be accounted for. |
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| 6. |
FRS 22.15(a), (b) and (c) describe the essential characteristics of a uniting of interests. An enterprise should classify a business combination as an acquisition, unless all of these three characteristics are present. Even if all of the three characteristics are present, an enterprise should classify a business combination as a uniting of interests only if the enterprise can demonstrate that an acquirer cannot be identified. |
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| 7. |
All business combinations under FRS 22 are either an "acquisition" or a "uniting of interests". |
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BASIS FOR CONCLUSIONS |
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| 8. |
Following the definitions in FRS 22.08, the decisive and overriding criterion for classifying a business combination is whether an acquirer can be identified. FRS 22.08 defines an acquirer as an enterprise that obtains control over the net assets and operations of another enterprise. FRS 22.08 and FRS 27.05 define control as the power to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities; control under the broad definition of these Standards can arise in many different ways. An acquirer cannot be identified when, in substance, the shareholders of one of the combining entities do not obtain control over the combined entity (FRS 22.13). |
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| 9. |
The guidance set out in FRS 22.10 to FRS 22.12 for acquisitions and in FRS 22.13 to 16 for unitings of interests is intended only to explain the overriding requirements of FRS 22.08, in particular the circumstances in which it is difficult or impossible to identify an acquirer. The indicators listed in the Standard are examples of important factors that are to be considered in order to evaluate a particular transaction in light of the overriding criterion to identify an acquirer whenever possible. This guidance is not intended to be comprehensive and to be used as "checklists" of conditions that must be met based on arbitrary cut-off points. The interpretation of terms such as "substantial majority", "significantly different" and "substantially the same" (FRS 22.15) requires, in each case, professional judgement in the context of all relevant factors. |
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| 10. |
Under FRS 22.15(a), (b) and (c), the three criteria (exchange or pooling of the substantial majority of the voting common shares of the combining enterprises, relative equality in fair values of the combining enterprises and continuance of substantially the same percentage in voting rights and interest of the shareholders of each combining enterprise in the combined enterprise) must all apply in order to achieve mutual sharing of risks and benefits of the combined enterprise. Therefore, if any of these criteria is not met, a business combination is to be treated as an acquisition. |
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| 11. |
According to the rationale of the guidance set out in FRS 22.10 to FRS 22.12 for acquisitions and in FRS 22.13 to FRS 22.16 for unitings of interests and following FRS 22.08, FRS 22.09 and FRS 22.13, all business combinations within the scope of the Standard are to be accounted for as acquisitions, unless it can be demonstrated that it is not possible to identify an acquirer. All other transactions under FRS 22 should be accounted for as unitings of interests if, and only if, such an identification is impossible. This is expected to occur only rarely. |
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Effective Date: INT FRS 9 comes into effect on 1 February 2003. |
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