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TALLINN UNIVERSITY OF TECHNOLOGY Tallinn School of Economics and Business Administration Department of Accounting Chair of Financial Accounting Nikolai Lotorev ANALYSIS OF IMPLEMENTATION OF IFRS 3 AND IAS 36 BY LISTED COMPANIES ON THE NASDAQ TALLINN STOCK EXCHANGE IN THE PERIOD 2007–2014 Master‘s Thesis Supervisor: Professor Lehte Alver Tallinn 2016 I declare I have written the master’s thesis independently. All works and major viewpoints of the other authors, data from other sources of literature and elsewhere used for writing this paper have been referenced. Nikolai Lotorev …………………………… (Signature, date) Student’s code: 104630TARMM Student’s e-mail address: [email protected] Supervisor: Professor Lehte Alver: The thesis conforms to the requirements set for the master’s thesis. …………………………………………… (Signature, date) Chairman of defense committee: Permitted to defense …………………………………………… (Title, name, signature, date) 2 CONTENT CONTENT ...................................................................................................................................... 3 ABBREVIATIONS ......................................................................................................................... 5 ABSTRACT .................................................................................................................................... 6 INTRODUCTION ........................................................................................................................... 7 1. BACKGROUND FOR BUSINESS COMBINATIONS AND GOODWILL ....................... 11 1.1. BUSINESS COMBINATIONS .......................................................................................... 11 1.1.1. Treatment of business combinations ....................................................................... 11 1.1.2. Accounting for business combinations .................................................................... 17 1.2. GOODWILL ....................................................................................................................... 21 1.2.1. Definitions and types of goodwill ........................................................................... 21 1.2.2. Purchase price allocation to goodwill and identifiable intangible assets ................ 24 1.2.3. Subsequent impairment testing of goodwill ............................................................ 27 1.3. DISCLOSURE REQUIREMENTS ................................................................................ 36 1.3.1. Disclosure under IFRS 3 Business Combinations ................................................... 36 1.3.2. Disclosure under IAS 36 Impairment of Assets ...................................................... 38 1.4. PREVIOUS RESEARCH ............................................................................................... 39 2. EMPIRICAL RESEARCH AND RESULTS ........................................................................ 43 2.1. METHODOLOGY ............................................................................................................. 43 2.2. EMPIRICAL ANALYSIS AND FINDINGS ................................................................. 44 2.2.1. GENERAL TRENDS ANALYSIS ......................................................................... 44 2.2.2. BUSINESS COMBINATIONS AND PURCHASE PRICE ALLOCATION ........ 47 2.2.3. SUBSEQUENT IMPAIRMENT TESTING OF GOODWILL AND CASH- GENERATING UNITS ......................................................................................................... 70 2.2.4. DISCLOSURES ...................................................................................................... 80 CONCLUSION ............................................................................................................................. 83 REFERENCES .............................................................................................................................. 87 3 APPENDICES ............................................................................................................................... 90 Appendix 1. The sample of listed companies on the NASDAQ Tallinn Stock Exchange for the empirical research ...................................................................................................................... 90 Appendix 2. The proportion of total assets attributed to goodwill in the period 2007–2014 .... 91 Appendix 3. The list of business combinations without goodwill and/or identifiable intangible assets excluded from the sample selection ................................................................................ 94 Appendix 4. The detailed data from the financial statements of companies with positive goodwill and/or identifiable intangible assets in the period 2007–2014 ................................... 95 Appendix 5. Tables for the empirical research performed in the section 2.2.2 ....................... 103 Appendix 6. The list of main business combinations with goodwill and/or identifiable intangible assets included in the sample selection ................................................................... 107 Appendix 7. The detailed data from the financial statements of companies with negative goodwill in the period 2007–2014 ........................................................................................... 113 Appendix 8. The list of business combinations with negative goodwill included in the sample selection ................................................................................................................................... 115 Appendix 9. Tables for the empirical research performed in the section 2.2.3 ....................... 116 Appendix 10. The detailed data from the financial statements of companies regarding CGUs in the period 2007–2014 .............................................................................................................. 121 Appendix 11. The detailed data from the financial statements of companies regarding valuation methods in the period 2007–2014 ............................................................................................ 124 Appendix 12. The detailed data from the financial statements of companies regarding main input factors used in the DCF model for determination of VIU in the period 2007–2014 ...... 125 Appendix 13. Tables for the empirical research performed in the section 2.2.4 ..................... 128 4 ABBREVIATIONS BC Business combinations BMPP Business Process Maturity Models CAPM Capital Asset Pricing Model CGU Cash-generating units DCF model Discounted cash flow model EFRAG European Financial Reporting Advisory Group ESMA European Security and Markets Authority EY Ernst & Young FASB Financial Accounting Standards Board FVLCS Fair value less cost to sell FX rates Foreign exchange rate, forex rate GAAP Generally Accepted Accounting Principles IA Identifiable intangible assets IAS International Accounting Standard IASB International Accounting Standards Board IFRS International Financial Reporting Standards M&A Mergers and acquisitions NCI Non-controlling interest PPA Purchase price allocation PwC PriceWaterhouseCoopers R&D Research and Development SFAS Statement of Financial Accounting Standards TNA Tangible net assets VIU Value in use WACC Weighted Average Cost of Capital 5 ABSTRACT In the last decades the importance of business combinations, goodwill accounting and fair value measurement have been significantly increased as a result of knowledge-driven and technology-based global economy. In such environment the high quality of financial reporting and disclosure became more important. As a result, it has become crucial to revise and implement new regulations and guidelines for goodwill accounting, its subsequent impairment testing and relevant disclosures. The purpose of this study is to perform the detailed analysis over the implementation of IFRS 3 Business Combinations and IAS 36 Impairment of Assets by listed companies on the NASDAQ Tallinn stock exchange. The analysis is performed in order to examine trends in business combinations, assess purchase price allocation to goodwill and identifiable intangible assets, analyze subsequent impairment testing of goodwill and verify compliance with IFRS 3 and IAS 36 disclosure requirements. The author analyzed in details 118 financial statements under IFRS of all existing 15 listed companies on the NASDAQ Tallinn stock exchange in the period 2007–2014. The results of this study show that the number of business combinations in listed companies on the NASDAQ Tallinn stock exchange, respectively the amount of cost of acquisition, positive goodwill/negative goodwill and/or identifiable intangible assets, and also the amount of goodwill impairment significantly decreased after the global financial crisis in 2008. In addition, the identification and measurement of intangible assets improved only partially after issuing the revised IFRS 3 and amendments to IAS 38 in July 2009. Furthermore, this study provides evidence supporting that if companies allocate goodwill to more numerous and/or to the lower level of cash- generating units, those companies perform more impairment tests and, as a result identify more impairment losses. Finally, the thesis confirms that listed companies comply partially with IFRS 3 and IAS 36 disclosure requirements in the tested period, as there were companies that did not fulfill the relevant disclosure requirements or fulfilled it partially. Keywords: Business combinations, Goodwill, Goodwill

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