Handout 1

IFRS 3

How much?

Pill, a well established publicly listed pharmaceutical company

acquires 80% of Drop, a young pharmaceutical company with a promising R&D pipeline.
One R&D project is well advanced and Drop has applied for regulatory approval with
local and international food and drug agencies.
Drops management is made up of three well known researchers who are heavily
involved in the companys R&D activities. Two of those management members are 30%
shareholders of Drop and they have sold their stake to Pill. Prior to the negotiations with
Pill, Drop was looking to acquire the machinery and equipment necessary to manufacture
certain drugs once they have received regulatory approval.
Pill is going to pay the following consideration to Drops shareholders (80% shareholding
including the 30% owned by the two members of Drop management):
Cash of C 10 million.
Pill to issue 100,000 new shares, the share price being C 3 at the date of signing the
purchase agreement, and C 5 at the date control over Drop was obtained. Pill has
incurred costs of C 0.1m issuing the shares. The average share price between the date
of signing and the date control was obtained was C4 per share.
Pill will pay an additional amount of cash (C 5 million; fair value (discounted) C 3.8
million) plus another 100,000 shares should Drop receive approval from the national
and international food and drug agency for their recently filed product. Pill has bought
these shares back at C 2 each and currently holds them as treasury shares. (FV of C4
per share at the acquisition date).
Pill have also agreed to transfer to Drops shareholders some machinery and equipment.
The machinery currently has a carrying value of C 0.5 million in Pill. It has a fair value of
C 1 million.
As Drops employees hold share options on Drops shares, Pill has agreed to replace
those share options with its own share options. This is included in the purchase
agreement. The employees had all completed the required vesting period before the
business combination. The new plan does not require an additional service after the
acquisition date. The fair value of the replacement awards is C 8 million and the fair value
of the existing awards is C 8 million. (Both values are calculated in accordance with IFRS
2).
The two managing shareholders of Drop will receive an additional payment of C 500,000
each if they are still be employees of the combined entity two years after the acquisition
date. If they leave the combined entity before then, the payment is forfeited.
In connection with the business combination, Pill incurred C 500,000 in lawyers fees, C
300,000 for due diligence work and C 700,000 for a success fee paid to an M&A advisor.
You will find black and white cards on your tables of all these items.
In your table groups work out which of these items can be included as part of the
cost of the combination.

Handout 1
IFRS 3
Stick on your flipchart, in the shape of a chequered flag, the elements that you
think should form part of the cost of consideration.