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IFRS standards

IFRS 3

Business Combinations

1Objective and scope

IFRS 3 improves the relevance, reliability and comparability of information a reporting entity provides about a business combination and its effects, by establishing principles and requirements for how the acquirer recognises and measures the identifiable assets acquired, the liabilities assumed, and any non-controlling interest; recognises and measures goodwill or a gain from a bargain purchase; and determines what information to disclose.

2Key definitions

Business combination
A transaction or event in which an acquirer obtains control of one or more businesses.
Acquisition method
The method used to account for every business combination within the scope of IFRS 3.
Non-controlling interest (NCI)
The equity in a subsidiary not attributable, directly or indirectly, to a parent.
Goodwill
An asset representing future economic benefits from other assets acquired in a business combination that are not individually identified and separately recognised.

3Applying the acquisition method

  • Identify the acquirer - the entity that obtains control
  • Determine the acquisition date - the date control is obtained
  • Recognise and measure the identifiable assets acquired, liabilities assumed, and any non-controlling interest, generally at acquisition-date fair value
  • Recognise and measure goodwill, or a gain on a bargain purchase

Goodwill computation

Consideration transferred (fair value, including any contingent consideration at fair value)

+ Amount of non-controlling interest (at fair value under the full goodwill method, or at its proportionate share of net identifiable assets under the partial goodwill method - a choice made for each acquisition)

+ Fair value of any previously held equity interest, in a step acquisition

- Fair value of identifiable net assets acquired

= Goodwill (or, if negative after reassessment, a bargain purchase gain recognised immediately in profit or loss)

Acquisition-related costs (legal fees, due diligence, advisory fees) are expensed as incurred - they are NOT part of the consideration transferred and do NOT increase goodwill, even though they were necessary to complete the deal. The acquirer has a measurement period, ending no later than one year after the acquisition date, in which to retrospectively adjust the provisional amounts recognised for the identifiable assets, liabilities and consideration, if new information about facts and circumstances existing at the acquisition date comes to light.

4Presentation and disclosure

  • Information to enable users to evaluate the nature and financial effect of a business combination occurring during the period, or after the reporting period but before the financial statements are authorised for issue
  • The consideration transferred and the fair value of each major class of assets acquired and liabilities assumed
  • The basis used to measure non-controlling interest (fair value or proportionate share)

5Examinable focus

What KASNEB tests

Goodwill computation under both the full goodwill (NCI at fair value) and partial goodwill (NCI at proportionate share) methods, and correctly expensing acquisition-related costs rather than capitalising them, is a heavily and numerically examined topic, almost always combined with an IFRS 10 consolidation question.