04 May 2020
If entities have grown through acquisition during the year or complete acquisitions during the coronavirus pandemic they must follow the FRS 102 requirements for business combinations.
What does FRS 102 say?
FRS 102 (Chapter 19) ‘Business combinations and goodwill’ outlines the use of the “purchase method” of accounting for a business combination whereby the acquiring entity should:
- identify the acquirer;
- determine the acquisition date;
- measure the cost of the business combination;
- allocate at acquisition date the cost of the business combination to the assets acquired and liabilities assumed, and recognise and measure any non-controlling (minority) interest; and
- recognise and measure goodwill.
The FRC issued an FRS 102 factsheet in December 2018 with additional guidance on business combinations.
Practical impact and interpretation for preparers
Considering the stages set out above:
- The identity of the acquirer is unlikely to be impacted by coronavirus.
- The acquisition date may have been impacted in the final stages of the deal.
a) The acquisition date is defined in section 19.3 as the date at which the acquirer obtains control of the acquirer.
b) Preparers of accounts should review the terms of each deal and the dates of key events and determine the point at which control is obtained.
c) In some cases, the early stages of completion may have occurred before the balance sheet date, but control is not transferred until after the end of the reporting period.
- The cost of a business combination is defined as the fair value of assets, liabilities and equity instruments exchanged for the business combination plus any directly attributable costs.
a) Cash assets are relatively straightforward to determine fair value for, but other assets, liabilities and equity instruments may be subject to more complex fair value assumptions depending on the timing of the deal in the context of the pandemic.
b) Directly attributable costs will typically be professional fees in relation to the deal. In many cases these are incorrectly expensed as exceptional items but should be included as a cost in the balance sheet.
c) A business combination with an extended timeframe may be subject to increased professional fees in relation to the deal.
d) The best estimate of the amounts required to settle contingent consideration may have changed substantially between the date of acquisition to the reporting date.
- Cost is allocated against the fair value of acquired assets and liabilities at the acquisition date. This includes intangible assets acquired.
a) FRS 102 requires the fair value of these items to be retrospectively adjusted if new information comes to light within twelve months of the acquisition date. In practice this means that careful consideration should be taken over the assets acquired.
b) For example, a 31 March 2020 reporter might enact a business combination including a book of trade receivables acquired on 1 February 2020. By 30 April it might be apparent that this book of trade receivables includes several items that may not be recovered.
c) The facts and circumstances around the recoverability need to be considered when assessing the fair value at acquisition date.
- The standard states that the acquirer must identify and determine the fair value of the assets, liabilities and contingent liabilities of the acquiree at the acquisition date. Any difference between this and the cost of the business combination is allocated to Goodwill.
Entities should review business combinations enacted in their reporting period carefully including:
- determination of the date of acquisition;
- careful consideration of the fair value of any non-cash items exchanged on business combination;
- identification of all direct costs related to the business combination, especially if there has been a delay. This should include a review of professional fees of advisors at a detailed level to identify which fees relate to the deals and which relate to other matters;
- a detailed review of all assets and liabilities acquired including careful consideration of the fair value of these items at acquisition date;
- a careful review of deferred and contingent consideration, which may have changed from the acquisition date to the reporting date; and
- whether the acquired entity is still a going concern at the reporting date.
Entities should also consider business combination enacted in previous reporting periods using the list above, particularly around earn-out and contingent consideration liabilities, and the potential impact on goodwill.
Coronavirus almost certainly constitutes an indicator of impairment. It is advisable to perform an impairment review of the Goodwill balance at acquisition to consider if this balance requires immediate impairment.