SIC-9, also known as “Business Combinations – Classification either as Acquisitions or Unitings of Interests,” provides guidance on how to classify business combinations as either acquisitions or unitings of interests in accordance with International Accounting Standards (IAS). In this article, we will provide definitions, explanations, examples, and case studies to illustrate the application of SIC-9.
Definition:
Business combination:
A transaction or event in which an acquirer obtains control over one or more businesses. It may involve the acquisition of net assets or equity interests in another entity, or the combination of entities under common control.
Acquisition:
A business combination in which one entity acquires control over one or more other entities. The acquiring entity is referred to as the acquirer, and the acquired entities are referred to as the acquiree(s).
Uniting of interests:
A business combination in which entities combine under common control to form a new reporting entity, and the entities do not have clearly identifiable acquirer(s). The combining entities become subsidiaries of the new reporting entity, and no consideration is exchanged.
Explanations:
SIC-9 provides guidance on how to determine whether a business combination should be classified as an acquisition or a uniting of interests. The classification depends on the substance of the transaction rather than the legal form.
According to SIC-9, a business combination should be classified as an acquisition if any one of the following conditions is met:
One entity acquires control over one or more other entities, and consideration is transferred.
One entity acquires control over one or more other entities, and there is evidence of fair value being determined and allocated to the acquired assets, liabilities, and equity interests.
One entity acquires control over one or more other entities, and the transaction results in a newly formed entity that is controlled by the acquirer(s).
If none of the above conditions are met, the business combination should be classified as a uniting of interests.
Examples:
Example 1: Acquisition
Company A acquires 100% of the shares of Company B for a total consideration of $1 million. Company A obtains control over Company B as it has the power to govern its financial and operating policies. The fair value of the net assets acquired, including identifiable assets, liabilities, and equity interests, is $900,000. In this case, it is a clear acquisition as Company A has acquired control over Company B by transferring consideration and fair value has been determined and allocated to the acquired assets and liabilities.
Example 2: Uniting of Interests
Company X and Company Y, both under common control of the same parent entity, decide to combine their operations to form a new reporting entity called Company Z. No consideration is exchanged between Company X and Company Y. In this case, it is a uniting of interests as the combining entities are under common control, and no consideration is transferred.
Case Study 1: Company C
Company C is a global conglomerate that acquires a controlling interest of 70% in Company D, a smaller entity operating in a different industry. Company C pays $50 million in cash to acquire the shares of Company D and obtains control over its operations. The fair value of the net assets acquired, including identifiable assets, liabilities, and equity interests, is determined to be $40 million. In this case, the transaction would be classified as an acquisition, as Company C has acquired control over Company D by transferring consideration and fair value has been determined and allocated to the acquired assets and liabilities.
In conclusion, SIC-9 provides guidance on how to classify business combinations as acquisitions or unitings of interests based on the substance of the transaction. It is important for entities to carefully assess the specific circumstances of each business combination to determine the appropriate classification in accordance with the relevant International Accounting Standards.
In summary, SIC-9 provides guidance on how to classify business combinations as either acquisitions or unitings of interests. The classification depends on the substance of the transaction rather than the legal form, and careful consideration of the specific circumstances of each business combination is required. Proper classification is crucial for financial reporting as it determines the accounting treatment and disclosure requirements. Compliance with SIC-9 and other relevant International Accounting Standards is essential to ensure accurate and transparent financial reporting for business combinations.