Septiembre 2011

Business combinations and Rules for the preparation of Consolidated financial statements (NOFCAC)

The Spanish National Chart of Accounts includes Recognition and Measurement Standard 19, expressly drafted with a view to

regulating the accounting treatment of business combinations, which is closely related with the rules for the preparation of consolidated financial statements (NOFCAC) included in Spanish Royal Decree 1159/2010, of 17 September.

The existence of rules for business combinations and consolidation that have been harmonised with International Accounting Standards is based on three fundamental principles:

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  The existence of common accounting bases for business combinations regardless of their legal form.
  

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  The consideration of a business combination as a pure acquisition and not as a mere union of entities.
  

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  The application of an entity approach as opposed to the former parent approach in previous consolidation legislation.
  

Business combinations

(amended by Royal Decree 1159/2010)

This standard sets out the common accounting principles applicable to all business combinations, regardless of their legal form (acquisition, merger, spin-off, monetary contribution). However, the standard does not apply to transactions between entities in the same group.

Business combinations are accounted for using the acquisition method.

Definition of business

A business is defined as an integrated set of activities and assets that is capable of being conducted and managed for the purpose of
providing a return, lower costs or other economic benefits directly to the owners and proportionately to policyholders or participants.

Acquisitions of assets that do not constitute a business

These are accounted for as an acquisition of assets and assumption of liabilities, pursuant to the related standard. The acquisition cost is distributed among the assets and liabilities in proportion to their fair value.


In any case, transactions of this nature do not give rise to goodwill or a gain on a bargain purchase.

Acquisition method

The practical application of the acquisition method in a business combination requires:

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  Identifying the acquirer:
  

The acquirer is the entity that obtains control of the acquiree.

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  Determining the acquisition date:
  

The date on which the acquirer obtains control of the acquiree. In the case of mergers and spin-offs, the acquisition date will generally be the date of the general meeting of the shareholders or equivalent body of the acquiree, provided that the resolution regarding the merger or spin-off plan does not provide expressly that the acquirer will obtain control at a subsequent date.

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  Quantifying the cost of the business combination:
  

The cost of a business combination is the aggregate of:

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  The acquisition-date fair values of the assets transferred, liabilities incurred or assumed, and equity instruments issued by the acquirer.
  

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  The fair value of any contingent consideration that depends on future events or on the fulfilment of certain conditions. In any case, assets are not recognised for contingent consideration if the difference is negative.
  

Fees paid to legal advisers and other professionals to effect the combination are recognised as an expense when incurred. In no case does the cost of a business combination include expenses incurred internally in this connection or those incurred by the acquiree in relation to the combination.

• 
  Recognising and measuring the identifiable assets acquired and the liabilities assumed:
  

As a general rule, at the acquisition date the identifiable assets acquired and the liabilities assumed are recognised at fair value, provided that fair value can be measured with sufficient
reliability. However, there are special rules for the recognition and measurement of the identifiable assets acquired and liabilities assumed in the case of:

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  Non-current assets held for sale
  
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  Deferred tax assets and liabilities
  
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  Operating leases and classification of leases
  
• 
  Defined benefit pension plans
  
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  Intangible assets the value of which cannot be calculated by reference to an active market
  
• 
  Indemnification assets
  
• 
  Reacquired rights
  
• 
  Obligations classified as contingent
  

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  Recognising and measuring goodwill or a gain from a bargain purchase:
  

Any excess, at the acquisition date, of the cost of the business combination over the value of the identifiable assets acquired less the liabilities assumed in the terms indicated in the preceding
section is recognised as goodwill. If the difference is negative, it is recognised as income immediately.

Initial accounting determined provisionally

If the initial accounting required for a business combination to be accounted for using the acquisition method can be determined only provisionally by the end of the period in which the combination is effected, the acquirer must account for the combination using those provisional values.

The provisional values are adjusted in the period required to obtain the information necessary to complete the initial accounting, which in no case shall exceed twelve months from the acquisition date.

Changes in the fair value of the contingent consideration arising as a result of additional information obtained about facts and circumstances that already existed at the acquisition date are

recognised as measurement period adjustments. However, changes in the fair value of the contingent consideration arising as a result of events that occurred after the acquisition date, such as reaching a specific share price or reaching a specific milestone in a project, are not treated as measurement period adjustments.

Business combinations achieved in stages

Business combinations achieved in stages are business combinations in which the acquirer obtains control of the acquiree through more than one separate transaction carried out on different dates.

In this case, the goodwill or gain on a bargain purchase is obtained as the difference between:

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  The cost of the business combination, plus the acquisition-date fair value of any previously held equity interest of the acquirer in the acquiree; and
  

• 
  The value of the identifiable assets acquired less the value of the liabilities assumed
  

Any gain or loss arising as a result of the remeasurement to fair value, at the date on which control is obtained, of the previously held equity interest of the acquirer in the acquiree is recognised in profit or loss.

The cost of the business combination is presumed to be the best reference for estimating the acquisition-date fair value of any previously held equity interest in the acquiree.