The Acquisition Method – FAQ | IFRS

The acquisition method

An entity shall account for each business combination by applying the acquisition method. Applying the acquisition method requires:

  1. identifying the acquirer;
  2. determining the acquisition date;
  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.

Identifying the acquirer

For each business combination, one of the combining entities shall be identified as the acquirer.

The guidance in IFRS 10 Consolidated Financial Statements shall be used to identify the acquirer—the entity that obtains control of another entity, ie 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 Guidance in identifying the acquirer shall be considered in making that determination.


Determining the acquisition date

The acquirer shall identify the acquisition date, which is the date on which it obtains control of the acquiree.

The date on which the acquirer obtains control of the acquiree is generally the date on which the acquirer legally transfers the consideration, acquires the assets and assumes the liabilities of the acquiree—the closing date. However, the acquirer might obtain control on a date that is either earlier or later than the closing date. For example, the acquisition date precedes the closing date if a written agreement provides that the acquirer obtains control of the acquiree on a date before the closing date. An acquirer shall consider all pertinent facts and circumstances in identifying the acquisition date.


Recognition principle

The acquisition methodAs of the purchase date, the acquirer shall recognise, separately from goodwill, the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree. Recognition of identifiable assets acquired and liabilities assumed is subject to the conditions specified in Recognition conditions – Identifiable assets acquired and liabilities assumed and Recognition conditions – Assets and liabilities part of the exchange (see below).

The acquisition method The acquisition method The acquisition method 

The acquisition method The acquisition method The acquisition method

The acquisition method The acquisition method The acquisition method The acquisition method

Recognition conditions – Identifiable assets acquired and liabilities assumed

To qualify for recognition as part of applying the purchase method, the identifiable assets acquired and liabilities assumed must meet the definitions of assets and liabilities in the Conceptual Framework at the acquisition date. For example, costs the acquirer expects but is not obliged to incur in the future to effect its plan to exit an activity of an acquiree or to terminate the employment of or relocate an acquiree’s employees are not liabilities at the acquisition date. Therefore, the acquirer does not recognise those costs as part of applying the acquisition method. Instead, the acquirer recognises those costs in its post-combination financial statements in accordance with other IFRS.


Recognition conditions – Assets and liabilities part of the exchange

In addition, to qualify for recognition as part of applying the acquisition method, the identifiable assets acquired and liabilities assumed must be part of what the acquirer and the acquiree (or its former owners) exchanged in the business combination transaction rather than the result of separate transactions. The acquirer shall apply the guidance in Determining what is part of the business combination transaction to determine which assets acquired or liabilities assumed are part of the exchange for the acquiree and which, if any, are the result of separate transactions to be accounted for in accordance with their nature and the applicable IFRSs.


Recognition conditions – Recognising previously not recognised assets and liabilites

The acquirer’s application of the recognition principle and conditions may result in recognising some assets and liabilities that the acquiree had not previously recognised as assets and liabilities in its financial statements. For example, the acquirer recognises the acquired identifiable intangible assets, such as a brand name, a patent or a customer relationship, that the acquiree did not recognise as assets in its financial statements because it developed them internally and charged the related costs to expense.


Recognition conditions – Recognising leases and intangible assets

Recognising leases and intangible assets provide guidance on recognising operating leases and intangible assets. Exception to the recognition principle and Exceptions to both the recognition and measurement principles in Exceptions to IFRS principles in the acquisition method specify the types of identifiable assets and liabilities that include items for which this IFRS provides limited exceptions to the recognition principle and conditions.


Classifying or designating identifiable assets acquired and liabilities assumed in a business combination

At the acquisition date, the acquirer shall classify or designate the identifiable assets acquired and liabilities assumed as necessary to apply other IFRSs subsequently. The acquirer shall make those classifications or designations on the basis of the contractual terms, economic conditions, its operating or accounting policies and other pertinent conditions as they exist at the acquisition date.


Classifying or designating identifiable assets and liabilities in a business combination – Different accounting possible

In some situations, IFRSs provide for different accounting depending on how an entity classifies or designates a particular asset or liability. Examples of classifications or designations that the acquirer shall make on the basis of the pertinent conditions as they exist at the acquisition date include but are not limited to:

  1. classification of particular financial assets and liabilities as measured at fair value through profit or loss or at amortised cost, or as a financial asset measured at fair value through other comprehensive income in accordance with IFRS Financial Instruments;
  2. designation of a derivative instrument as a hedging instrument in accordance with IFRS 9; and
  3. assessment of whether an embedded derivative should be separated from a host contract in accordance with IFRS 9 (which is a matter of ‘classification’ as this IFRS uses that term).

Classifying or designating identifiable assets and liabilities in a business combination – Exceptions

This IFRS provides two exceptions to the principle relating to Classify or designate assets and liabilities:

  1. classification of a lease contract as either an operating lease or a finance lease in accordance with IFRS 16 Leases; and
  2. classification of a contract as an insurance contract in accordance with IFRS 4 Insurance Contracts.

The acquirer shall classify those contracts on the basis of the contractual terms and other factors at the inception of the contract (or, if the terms of the contract have been modified in a manner that would change its classification, at the date of that modification, which might be the acquisition date).


Measurement principle – Acquisition-date fair values

The acquirer shall measure the identifiable assets acquired and the liabilities assumed at their acquisition-date fair values.


Measurement principle – Non-controlling interests

The acquisition method19 For each business combination, the acquirer shall measure at the acquisition date components of non-controlling interests in the acquiree that are present ownership interests and entitle their holders to a proportionate share of the entity’s net assets in the event of liquidation at either:

  1. fair value; or
  2. the present ownership instruments’ proportionate share in the recognised amounts of the acquiree’s identifiable net assets.

All other components of non-controlling interests shall be measured at their acquisition-date fair values, unless another measurement basis is required by IFRSs.



Measurement principle – Exceptions

20 Exceptions to both the recognition and measurement principles in Exceptions to IFRS principles in the acquisition method specify the types of identifiable assets and liabilities that include items for which this IFRS provides limited exceptions to the measurement principle.

Continue reading: Goodwill or gain from a bargain

See also: The IFRS Foundation

Leave a comment