IFRS 3 Business Combinations Archives – FAQ | IFRS

IFRS 3 Objective Scope

Objective – IFRS 3 Objective ScopeIFRS 3 Objective Scope

1 The objective of this IFRS 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:

  1. recognises and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree;
  2. recognises and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and
  3. determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.

Scope

2 This IFRS applies to … Read more

IFRS 3 The acquisition method

4 An entity shall account for each business combination by applying the acquisition method. IFRS 3 The acquisition methodIFRS 3 The acquisition method

5 Applying the acquisition method requires: IFRS 3 The acquisition method

  1. identifying the acquirer; IFRS 3 The acquisition method
  2. determining the acquisition date; IFRS 3 The acquisition method
  3. recognising and measuring the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree; and
  4. recognising and measuring goodwill or a gain from a bargain purchase. IFRS 3 The acquisition method

Identifying the acquirer

6 For each business combination, one of the combining entities shall be identified as the acquirer. IFRS 3 The acquisition method

7 The guidance in IFRS 10 shall be used to identify the acquirer—the entity that … Read more

IFRS 3 Subsequent measurement and accounting

IFRS 3 Subsequent measurement and accountingIFRS 3 Subsequent measurement and accounting

54 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. However, this IFRS provides guidance on subsequently measuring and accounting for the following assets acquired, liabilities assumed or incurred and equity instruments issued in a business combination:

  1. reacquired rights; IFRS 3 Subsequent measurement and accounting
  2. contingent liabilities recognised as of the acquisition date; IFRS 3 Subsequent measurement and accounting
  3. indemnification assets; and IFRS 3 Subsequent measurement and accounting
  4. contingent consideration. IFRS 3 Subsequent measurement and accounting

Paragraph B63 provides related application guidance. IFRS 3 Subsequent measurement Read more

IFRS 3AG Entities under common control

Appendix B Application guidance IFRS 3AG Entities under common controlIFRS 3AG Entities under common control

This appendix is an integral part of the IFRS. IFRS 3AG Entities under common control

Business combinations of entities under common control (application of paragraph 2(c))

B1 This IFRS does not apply to a business combination of entities or businesses under common control. A business combination involving entities or businesses under common control is a business combination in which all of the combining entities or businesses are ultimately controlled by the same party or parties both before and after the business combination, and that control is not transitory.

B2 A group of individuals shall be regarded as controlling an entity when, as a result of contractual arrangements, they … Read more

IFRS 3AG Identifying a business combination

Identifying a business combination (application of paragraph 3)IFRS 3AG Identifying a business combination

B5 This IFRS defines a business combination as a transaction or other event in which an acquirer obtains control of one or more businesses. An acquirer might obtain control of an acquiree in a variety of ways, for example:

  1. by transferring cash, cash equivalents or other assets (including net assets that constitute a business);
  2. by incurring liabilities;
  3. by issuing equity interests;
  4. by providing more than one type of consideration; or
  5. without transferring consideration, including by contract alone (see paragraph 43).

B6 A business combination may be structured in a variety of ways for legal, taxation or other reasons, which include but are not limited to:

  1. one or more businesses become subsidiaries
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IFRS 3AG Definition of a business

Definition of a business (application of paragraph 3)

[changed May 2019] B7 A business consists of inputs and processes applied to those inputs that have the ability to contribute to the creation of outputs. The three elements of a business are defined as follows (see paragraphs B8–B12D for guidance on the elements of a business):

  1. Input: Any economic resource that creates outputs, or has the ability to contribute to the creation of outputs when one or more processes are applied to it. Examples include non-current assets (including intangible assets or rights to use non-current assets), intellectual property, the ability to obtain access to necessary materials or rights and employees.
  2. Process: Any system, standard, protocol, convention or rule that
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IFRS 3AG Identifying the acquirer

Identifying the acquirer (application of paragraphs 6 and 7)

B13 The guidance in IFRS 10 Consolidated Financial Statements shall be used to identify the acquirer—the entity that obtains control of the acquiree. If a business combination has occurred but applying the guidance in IFRS 10 does not clearly indicate which of the combining entities is the acquirer, the factors in paragraphs B14–B18 shall be considered in making that determination.

B14 In a business combination effected primarily by transferring cash or other assets or by incurring liabilities, the acquirer is usually the entity that transfers the cash or other assets or incurs the liabilities.

B15 In a business combination effected primarily by exchanging equity interests, the acquirer is usually the entity … Read more

IFRS 3AG Reverse acquisitions

B19 A reverse acquisition occurs when the entity that issues securities (the legal acquirer) is identified as the acquiree for accounting purposes on the basis of the guidance in paragraphs B13–B18. The entity whose equity interests are acquired (the legal acquiree) must be the acquirer for accounting purposes for the transaction to be considered a reverse acquisition. For example, reverse acquisitions sometimes occur when a private operating entity wants to become a public entity but does not want to register its equity shares. To accomplish that, the private entity will arrange for a public entity to acquire its equity interests in exchange for the equity interests of the public entity. In this example, the public entity is the legal acquirer … Read more

IFRS 3AG Recognition assets and liabilities

Recognising particular assets acquired and liabilities assumed (application of paragraphs 10–13)

B28 – B30 [Deleted]

Intangible assets

B31 The acquirer shall recognise, separately from goodwill, the identifiable intangible assets acquired in a business combination. An intangible asset is identifiable if it meets either the separability criterion or the contractual-legal criterion.

B32 An intangible asset that meets the contractual-legal criterion is identifiable even if the asset is not transferable or separable from the acquiree or from other rights and obligations. For example:

  1. [deleted]
  2. an acquiree owns and operates a nuclear power plant. The licence to operate that power plant is an intangible asset that meets the contractual-legal criterion for recognition separately from goodwill, even if the acquirer cannot sell or transfer
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IFRS 3AG Measurement in an bargain purchase

Measuring goodwill or a gain from a bargain purchase

Measuring the acquisition-date fair value of the acquirer’s interest in the acquiree using valuation techniques (application of paragraph 33)

B46 In a business combination achieved without the transfer of consideration, the acquirer must substitute the acquisition-date fair value of its interest in the acquiree for the acquisition-date fair value of the consideration transferred to measure goodwill or a gain on a bargain purchase (see paragraphs 32–34).

Special considerations in applying the acquisition method to combinations of mutual entities (application of paragraph 33)

B47 When two mutual entities combine, the fair value of the equity or member interests in the acquiree (or the fair value of the acquiree) may be more reliably … Read more