What is a Business Combination?

- Definition & International Implications - Video & Lesson Transcript |

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Business Combination

A business combination is when a buyer takes control of another business by way of a transaction. There
are three important considerations in this definition:

The business is the target entity, which has inputs and processes to convert them into recognizable
outputs.

The transaction takes place when the acquirer transfers an amount, (called a consideration, in the form
of cash, liabilities, or equities to purchase the target).

When obtaining control of the business, the acquirer must take an ownership stake of more than 50% in
the business.

Business combinations can happen in the form of an acquisition or merger of two businesses. Such
combinations usually take place to expand the business of the acquirer. Situations such as purchase of
assets and formation of joint ventures are not considered business combinations.

The accounting standards and financial reporting implications for business combinations are covered
under the International Financial Reporting Standard 3 (IFRS3). It covers the principles for recognizing
and measuring assets and liabilities and measuring goodwill and disclosures.

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Accounting Implications

There are four steps involved in accounting of a business combination. Let's take a look at each one.

1. Identifying the acquirer

According to the IFRS3, the acquirer is the company that takes control of the target business. The
company that assumes liabilities or transfers the consideration amount to purchase the business
becomes the acquirer.
2. Determining the acquisition date

The date of acquisition is the date on which the buyer obtains control of the target business. This date is
very important as the value of all of the amounts included in the business combination are measured at
this date, and the buyer starts consolidation of the target for accounting.

3. Recognizing and measuring assets, liabilities, and non-controlling interest

According to the IFRS3, the acquired assets and the assumed liabilities should be recognized separately.
Assets are the probable future economic benefits obtained, while liabilities are the probable future
expenses.

The identified intangible assets must fulfill the following conditions to be recognized:

The assets should arise from contractual or legal rights.

The assets should be capable of being separated from the business.