IAS 22 is an accounting standard that provides guidance on how to account for business combinations. A business combination is a transaction in which an acquirer gains control over one or more businesses. Here are some examples of business combinations and how they should be accounted for under IAS 22:
Example 1: Company A acquires 100% of the shares of Company B for $10 million in cash. Company B operates in the same industry as Company A and has its own set of assets and liabilities. How should Company A account for this business combination?
Under IAS 22, Company A should recognize the assets acquired and liabilities assumed at their fair values at the acquisition date. Any excess of the purchase price over the fair value of the net assets acquired (also known as goodwill) should be recognized as an asset on the acquirer’s balance sheet. In this case, if the fair value of the net assets acquired is $8 million, then Company A should recognize goodwill of $2 million.
Example 2: Company C acquires 80% of the shares of Company D for $6 million in cash. Company D operates in a different industry than Company C and has its own set of assets and liabilities. How should Company C account for this business combination?
Under IAS 22, Company C should recognize the assets acquired and liabilities assumed at their fair values at the acquisition date. Any excess of the purchase price over the fair value of the net assets acquired should be recognized as goodwill. However, since Company C has acquired less than 100% of the shares of Company D, it should also account for the non-controlling interest (NCI) in Company D. The NCI represents the portion of Company D’s net assets that is not owned by Company C. In this case, if the fair value of the net assets acquired is $5 million, then Company C should recognize goodwill of $1 million and a non-controlling interest of $1 million.
Example 3: Company E acquires a business from Company F for $8 million in cash. The business consists of a group of assets that are used together, but there are no liabilities assumed by Company E. How should Company E account for this business combination?
Under IAS 22, Company E should recognize the assets acquired at their fair values at the acquisition date. Since there are no liabilities assumed, the purchase price should be equal to the fair value of the net assets acquired. If the fair value of the net assets acquired is $8 million, then Company E should recognize the assets at that amount. If the purchase price is less than the fair value of the net assets acquired, then the difference should be recognized as a gain in profit or loss. If the purchase price is more than the fair value of the net assets acquired, then the difference should be recognized as a loss in profit or loss.