Obtaining of control and mandatory offer treated as linked transaction, significant judgement

Nokia Oyj – Annual report – 31 December 2016

Industry: telecoms

  1. Use of estimates and critical accounting judgments (extract)

Business combinations

The Group applies the acquisition method to account for acquisitions of separate entities or businesses. The determination of the fair value and allocation thereof to each separately identifiable asset acquired and liability assumed as well as the determination of the acquisition date, when the valuation and allocation is to be conducted require estimation and judgment.

Estimation and judgment are required in determining the fair value of the acquisition, including the discount rate, the terminal growth rate, the number of years on which to base the cash flow projections, and the assumptions and estimates used to determine the cash inflows and outflows. The discount rate reflects current assessments of the time value of money, relevant market risk premiums, and industry comparisons. Risk premiums reflect risks and uncertainties for which the future cash flow estimates have not been adjusted. Terminal values are based on the expected life of products and forecasted life cycle, and forecasted cash flows over that period. The assumptions are based on information available at the date of acquisition; actual results may differ materially from the forecast as more information becomes available. Refer to Note 5, Acquisitions.

Judgment was required in determining the date on which the Group obtained control of Alcatel Lucent. Nokia and Alcatel Lucent combined through a public exchange offer in which the Group offered to exchange all Alcatel Lucent shares, American Depositary Shares and OCEANE convertible bonds for Nokia shares. The initial offer period was opened on November 18, 2015 and it was closed on December 23, 2015. On January 4, 2016 the French stock market authority Autorité des Marchés Financiers (“AMF”) published the interim results of the successful offer which indicated that the Group held 70.52% of the Alcatel Lucent share capital on a fully diluted basis. On January 7, 2016 the Group announced that it had settled the offer and registered the new shares in the Finnish Trade Register, which created legal standing for the acquisition.

The management concluded that it had obtained control over Alcatel Lucent on January 4, 2016 when it was announced that the offer had been successful and the Group had acquired the majority of voting rights in Alcatel Lucent.

In addition, management judgment was used to determine that the initial and reopened offers would be accounted for as a linked transaction. Pursuant to the Article 232-4 of the AMF General Regulation, any public exchange offer made shall be reopened with the same terms and conditions within ten trading days of publication of the final outcome of the offer provided that the offer has been successful. In conformity to this rule, the offer was reopened on January 14, 2016 and closed on February 3, 2016. The AMF published the results of the reopened offer on February 10, 2016 according to which the Group held 91.25% of the share capital of Alcatel Lucent. Based on the facts that the reopened offer was compulsory according to the AMF General Regulation, the same terms and conditions applied to both the initial and reopened offers, and the reopened offer followed shortly after the initial offer and was open only for a short period, the management concluded that the initial and reopened offers are essentially parts of the same transaction. Therefore, the ownership interests acquired in the initial and reopened offers were accounted for as if they were all acquired at the acquisition date as part of the transaction to gain control. Acquisitions of ownership interests subsequent to the closing of the reopened offer were accounted for as equity transactions with the non-controlling interests in Alcatel Lucent.

 

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