Step 1: identifying a business combination

is the business combination within the scope of IFRS 3?

A business combination involves an entity obtaining control over one or more
businesses.

Definition of control (IFRS 3 and IAS 27.4) “control is the power to govern the financial
and operating policies of an entity so as to obtain benefits from its activities”

A business is defined in IFRS 3 Business Combinations as:

‘An integrated set of activities and assets that is capable of being conducted and
managed for the purpose of providing a return in the form of dividends, lower costs or
other economic benefits directly to investors or other owners, members or
participants.’ (IFRS 3 Appendix A).
Integrated set of activities
Determining whether a particular set of assets and activities is a business should be
based on whether a particular set is a business, it is not relevant whether a seller
operated the set as a business or whether the acquirer intends to operate the set as a
business.

 confirmed that a business must include inputs and a process, and clarified that:
o the process must be substantive; and
o the inputs and process must together significantly contribute to creating
outputs.
 narrowed the definitions of a business by focusing the definition of outputs on
goods and services provided to customers and other income from ordinary
activities, rather than on providing dividends or other economic benefits directly
to investors or lowering costs; and
 added a test that makes it easier to conclude that a company has acquired a
group of assets, rather than a business, if the value of the assets acquired is
substantially all concentrated in a single asset or group of similar assets.
Goodwill
Goodwill is an asset representing the future economic benefits arising from other assets
acquired in a business combination that are not individually identified and separately
recognised.
Goodwill can only be recognised when assets acquired as part of a business (IFRS 2(b)).
Goodwill is the excess of the consideration transferred over the net fair value of the
identifiable assets acquired and liabilities assumed.
Goodwill = consideration transferred – acquirer's interest in the net fair value of the
acquiree’s identifiable assets and liabilities

The existence of goodwill is strong evidence that the acquisition is a business

combination under IFRS 3 Business Combinations.
IFRS 3.B12 notes that:
‘In the absence of evidence to the contrary, a particular set of assets and activities in
which goodwill is present shall be presumed to be a business. However, a business need
not have goodwill.’

This IFRS does not apply to...

(b) the acquisition of an asset or a group of asset that does not constitute a business...’