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IFRS 3 Business Combinations

was revised in in 2008 as part of the IASB-FASB harmonisation project. IFRS 3 revised allows a choice of accounting treatment for NCI (Non-Controlling Interest) at acquisition. Prior to 2008 IFRS required that NCI at acquisition be measured as a percentage share of the subsidiaries net assets. The revised IFRS 3 permits NCI at acquisition to be valued at fair value.

Evergrow plc wishes to acquire a 70% stake in Titchy plc by purchasing 140 million of Titchy's 200 million £1 ordinary shares. Titchy currently has retained earnings of £730 million and is not expecting to issue any shares or pay any dividends in the immediate future. The purchase of Titchy will be paid for through a combination of cash payments and shares in Evergrow plc.

Evergrow will pay £2,500 million of cash at the date of acquisition, plus a further £550 million in two years' time. 

In addition, Evergrow will issue new shares to the current shareholders of Titchy plc at the date of acquisition.  Evergrow will issue 1 new share for every 2 shares it acquires in Titchy. Evergrow shares are currently trading at £35 per share.

Evergrow will issue up to a further two shares for every share it has acquired in Titchy in two years' time if Titchy has met a certain level of profitability. There is a 30% chance that it will not issue any further shares, a 40% chance that it will issue one share for each share acquired and a 30% chance it will issue the maximum two shares for each Titchy share originally acquired. The offer of contingent shares is estimated to have a fair value of £2,000 million.

Titchy has some valuable brands, trade names and internet domain names. These are not currently recognised in Titchy's financial statements. The estimated fair value of these assets is £2,000 million and these brands and domain names are estimated to have a useful life of approximately 8 years.

Evergrow has not yet determined whether it should measure non-controlling interest in its subsidiaries on the basis of a proportionate interest in the identifiable net assets of the subsidiary or whether it should use the "full goodwill" method. The fair value of a 30% holding in Titchy is estimated to be £1,600 million.

Where appropriate you should assume a discount rate of 5% per annum.

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