The ‘OBJECTIVE’ of IFRS 3 is to Improve the relevance, reliability and comparability of the information that a reporting entity provides in its ‘Financial Statements’ about a business combination and its effects.
To accomplish that, this IFRS establishes principles and requirements for how the acquirer:
- recognizes and Measures in its financial statements the identifiable assets acquired, the liabilities assumed and any non‑controlling interest (NCI) in the acquiree;
- recognizes and Measures the goodwill acquired in the business combination or a gain from a bargain purchase; AND
- determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.
Table of Contents
- IFRS 3 Effective Date
- IFRS 3 – Scope
- Identifying a Business Combination
- IFRS 3 – The Acquisition Method
- 1. Identifying the Acquirer
- 2. Determining the Acquisition Date
- 3. Recognizing and Measuring the Identifiable Assets Acquired, the Liabilities Assumed and Any Non-controlling Interest (NCI) in the Acquiree
- 4. Recognizing and Measuring Goodwill or a Gain from Bargain Purchase
- 5. Additional Guidance for Applying the Acquisition Method to Particular Types of Business Combination
- 6. Measurement Period
- 7. Determining What is Part of the Business Combination Transaction
- IFRS 3 – Subsequent Measurement and Accounting
- IFRS 3 – Disclosures
- Withdrawal of IFRS 3 (2004)
IFRS 3 Effective Date
This IFRS shall be applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2009.
Earlier application is ‘PERMITTED’.
However, this IFRS shall be applied only at the beginning of an annual reporting period that begins on or after 30 June 2007. If an entity applies this IFRS before 1 July 2009, it shall disclose that fact and apply IAS 27 (as amended in 2008) at the same time.
IFRS 3 – Scope
This IFRS applies to a transaction or other event that meets the definition of a business combination. This IFRS does NOT apply to:
- the accounting for the formation of a joint arrangement in the financial statements of the joint arrangement itself.
- the acquisition of an asset or a group of assets that does not constitute a business. In such cases the acquirer shall IDENTIFY and RECOGNIZE the individual identifiable assets acquired (including those ‘assets that meet the definition and recognition criteria for intangible assets’ in IAS 38) and liabilities assumed. The ‘cost‘ of the group shall be allocated to the individual identifiable assets and liabilities on the basis of their relative fair values at the date of purchase. [Such ‘a transaction or event does not give rise to goodwill‘].
- a combination of entities or businesses under common control.
Identifying a Business Combination
An entity shall DETERMINE whether a transaction or other event is a ‘business combination‘ by applying the definition in IFRS 3, which requires that the assets acquired and liabilities assumed constitute a business.
If the assets acquired are NOT a business, the reporting entity shall account for the transaction or other event as an ‘asset acquisition‘.
IFRS 3 – The Acquisition Method
An entity shall account for each business combination by applying the ‘acquisition method’.
1. Identifying the Acquirer
For each business combination, one of the combining entities shall be identified as the ‘acquirer‘—(the entity that obtains control of another entity, i.e the acquiree).
2. Determining the Acquisition Date
The acquirer shall identify the ‘acquisition date‘, which is the date on which it obtains control of the acquiree.
3. Recognizing and Measuring the Identifiable Assets Acquired, the Liabilities Assumed and Any Non-controlling Interest (NCI) in the Acquiree
3.1 Recognition Principle
As of the acquisition date, the acquirer shall RECOGNIZE, separately from goodwill, the identifiable assets acquired, the liabilities assumed and any non‑controlling interest (NCI) in the acquiree.
3.2 Measurement Principle
The acquirer shall MEASURE the identifiable assets acquired and the liabilities assumed at their acquisition‑date fair values.
4. Recognizing and Measuring Goodwill or a Gain from Bargain Purchase
|The acquirer shall recognize Goodwill as of the acquisition date Measured as the excess of (a) over (b) below:
|(a) the aggregate of:
(i) the consideration transferred Measured in accordance with this IFRS, which generally requires acquisition‑date fair value;
(ii) the amount of any non‑controlling interest (NCI) in the acquiree Measured in accordance with this IFRS; AND
(iii) in a business combination achieved in stages, the acquisition‑date fair value of the acquirer’s previously held equity interest in the acquiree.
|(b) the net of the acquisition‑date amounts of the identifiable assets acquired and the liabilities assumed Measured in accordance with this IFRS.
4.1 Bargain Purchase
Occasionally, an acquirer will Make a ‘bargain purchase‘, which is a business combination in which the amount in (b) exceeds the aggregate of the amounts specified in (a). The acquirer shall RECOGNIZE the resulting gain in profit or loss on the acquisition date.
The gain shall be ‘ATTRIBUTED’ to the acquirer.
5. Additional Guidance for Applying the Acquisition Method to Particular Types of Business Combination
5.1 Business Combination Achieved in Stages
An acquirer sometimes obtains control of an acquiree in which it held an equity interest immediately before the acquisition date.
In a business combination ‘achieved in stages‘, the acquirer shall RE-MEASURE its previously held equity interest in the acquiree at its acquisition‑date fair value and RECOGNIZE the resulting gain or loss, if any, in Profit or Loss (P&L) or Other Comprehensive Income (OCI), as appropriate.
In prior reporting periods, the acquirer May have recognised changes in the value of its equity interest in the acquiree in (OCI). If so, the amount that was recognized in (OCI) shall be RECOGNIZED on the same basis as would be required if the acquirer had disposed directly of the previously held equity interest.
5.2 Business Combination Achieved Without the Transfer of Consideration
An acquirer sometimes obtains control of an acquiree without transferring consideration.
In a business combination achieved by ‘contract alone‘, the acquirer shall ATTRIBUTE to the owners of the acquiree the amount of the acquiree’s net assets recognized in accordance with this IFRS.
In other words, the equity interests in the acquiree held by parties other than the acquirer are a non‑controlling interest (NCI) in the acquirer’s post‑combination financial statements even if the result is that all of the equity interests in the acquiree are attributed to the (NCI).
6. Measurement Period
If the initial accounting for a business combination is Incomplete by the end of the reporting period in which the combination occurs, the acquirer shall REPORT in its financial statements ‘provisional amounts‘ for the items for which the accounting is In-complete.
During the ‘Measurement period‘, the acquirer shall RETROSPECTIVELY adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date and, if known, would have affected the Measurement of the amounts recognized as of that date.
The acquirer as per IFRS 3 shall also RECOGNIZE additional assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date and, if known, would have resulted in the recognition of those assets and liabilities as of that date.
The ‘Measurement period’ ends as soon as the acquirer receives the information it was seeking about facts and circumstances that existed as of the acquisition date or learns that more information is not obtainable.
However, the Measurement period shall NOT exceed one year from the acquisition date.
7. Determining What is Part of the Business Combination Transaction
The acquirer and the acquiree may have a ‘pre‑existing relationship‘ or other arrangement before negotiations for the business combination began, or they May enter into an arrangement during the negotiations that is separate from the business combination.
In either situation, the acquirer shall IDENTIFY any amounts that are not part of what the acquirer and the acquiree (or its ‘former owners’) exchanged in the business combination, i.e amounts that are not part of the exchange for the acquiree. The acquirer shall RECOGNIZE as part of applying the acquisition method only the consideration transferred for the acquiree and the assets acquired and liabilities assumed in the exchange for the acquiree.
Separate transactions shall be accounted for in accordance with the relevant IFRSs.
7.1 Acquisition-Related Costs
These are costs the acquirer incurs to effect a business combination. Those costs include ‘finder’s fees‘; advisory, legal, accounting, valuation and ‘other professional or consulting fees‘; general administrative costs, including ‘the costs of maintaining an internal acquisitions department‘; and costs of registering and issuing debt and equity securities.
The acquirer shall account for acquisition-related costs as ‘expenses’ in the periods in which the costs are incurred and the services are received as per IFRS 3, with one Exception. The costs to issue debt or equity securities shall be RECOGNIZED in accordance with IAS 32 and IFRS 9.
IFRS 3 – Subsequent Measurement and Accounting
In general, an acquirer shall subsequently MEASURE and account for assets acquired, liabilities assumed or incurred and equity instruments issued in a business combination in accordance with other applicable IFRSs for those items, depending on their nature.
1. Re-Acquired Rights
A ‘Re-acquired right’ recognized as an intangible asset shall be AMORTIZED over the remaining contractual period of the contract in which the right was granted. An acquirer that subsequently sells a reacquired right to a third party shall include the carrying amount of the intangible asset in determining the gain or loss on the sale.
2. Contingent Liabilities
After Initial recognition and until the liability is settled, cancelled or expires, the acquirer shall MEASURE a contingent liability recognized in a business combination at the higher of:
- the amount that would be recognized in accordance with IAS 37; AND
- the amount initially recognized LESS, if appropriate, the cumulative amount of income recognized in accordance with the principles of IFRS 15.
This requirement does NOT apply to contracts accounted for in accordance with IFRS 9.
3. Indemnification Assets
At the end of each subsequent reporting period, the acquirer shall MEASURE an ‘indemnification asset‘ that was recognized at the acquisition date on the same basis as the indemnified liability or asset, subject to any contractual limitations on its amount and, for an indemnification asset that is NOT subsequently measured at its fair value, management’s assessment of the collectibility of the indemnification asset.
The acquirer shall DE-RECOGNIZE the indemnification asset only when it collects the asset, sells it or otherwise loses the right to it.
4. Contingent Consideration
|The acquirer shall account for changes in the fair value of contingent consideration that are not Measurement period adjustments as follows:
|(a) Contingent consideration classified as equity shall not be RE-MEASURED and its subsequent settlement shall be accounted for within equity.
|(b) Other ‘contingent consideration‘ that:
(i) is within the scope of IFRS 9 shall be MEASURED at fair value at each reporting date and changes in fair value shall be recognized in profit or loss in accordance with IFRS 9.
(ii) is not within the scope of IFRS 9 shall be MEASURED at fair value at each reporting date and changes in fair value shall be recognized in profit or loss.
IFRS 3 – Disclosures
The acquirer shall DISCLOSE information that enables users of its financial statements to evaluate the nature and financial effect of a business combination that occurs either:
- during the current reporting period; OR
- after the end of the reporting period but before the financial statements are authorized for issue.
The acquirer shall disclose information that ENABLES users of its financial statements to evaluate the financial effects of adjustments recognized in the current reporting period that relate to ‘business combinations’ that occurred in the period or previous reporting periods.
Withdrawal of IFRS 3 (2004)
This IFRS ‘supersedes‘ IFRS 3 Business Combinations (as issued in 2004).
Chartered Accountant (Institute of Chartered Accountants of Pakistan)
Bachelor of Accounting Honours (Asia e University, Malaysia)