BUSINESS COMBINATION

IFRS 3

DEFINITION
A transaction or other event in which an acquirer obtains
Business
Combinat
ion

Acquisitio
n date

Acquirer

Acquiree

control of one or more businesses. Transactions sometimes

referred to as 'true mergers' or 'mergers of equals' are also
business combinations as that term is used in [IFRS 3]

The date on which the acquirer obtains control of the acquiree

The entity that obtains control of the acquiree

The business or businesses that the acquirer obtains control of

in a business combination

IFRS 3
Business Combinationsoutlines the accounting when
an acquirer obtains control of a business (e.g. an
acquisition or merger).
Such business combinations are accounted for using
the 'acquisition method', which generally requires
assets acquired and liabilities assumed to be
measured at their fair values at the acquisition date.

IFRS 3
SCOPE

must be
applied
when
accounting
for
business
combinatio
ns, but
does not
apply to:

The formation of a joint venture [IFRS

3.2(a)]
The acquisition of an asset or group of
assets that is not a business, although
general guidance is provided on how
such transactions should be accounted
for [IFRS 3.2(b)]
Combinations of entities or businesses
under common control (the IASB has a
separate agenda project oncommon
control transactions) [IFRS 3.2(c)]
Acquisitions by an investment entity of
a subsidiary that is required to be
measured at fair value through profit or
loss underIFRS10Consolidated
Financial Statements. [IFRS 3.2A]

WHY BUSINESS COMBINE

Increasing
trend to
expand
operation
through
business
combination
rather than
through
internal
expansion.

Tax advantages

Reduce the
effect of
recession and
inflation.

ADVANTAGES
1. Competition between and among the companies will be
eliminated.
2. Amount of capital can be increased by combiningbusiness.
3. Establishment and management cost can be reduced.
4. Benefits oflarge scaleproduction can be secured.
5. Operating cost can be reduced by avoiding duplication.
6. Research and development facilities are increased.
7. Monopoly in themarketcan be achieved.
8. Bulk purchase of materials at reduced price is possible.
9. Stability of the price of goods is maintained.

DIS-ADVANTAGES

1.Businesscombination brings monopoly in

themarket, which may be harmful for the
society.
2. The identity of the old company finishes.
3. Goodwill of the old companies decrease.
4. Management of the company becomes
difficult.
5.Businesscombination may result in over-

KNOWLEDGE CHECK
What is the accounting standard that governs business
combination?

Joint venture is an example of business combination. True or

False? Why?

Why business combine?

Give at least one advantage of business combination.
Give at least one dis-advantage of business combination.

ACQUIRING CONTROL
Acquisiti
on of
assets
Stock
acquisiti
on

All asset are acquired

All Liabilities are assumed.
Referred to as and acquisition of Net
Assets
Acquiring controlling interest of
another companys voting common
stocks.
Controlling interest means more than
50% shares.

ACQUISITION OF ASSETS
Statutory Consolidation

Combining two or more existing legal entities into one new legal
entities.

Previous companies are dissolved and are then replaced by the new
continuing company.

ACQUISITION OF ASSETS
Statutory Merger

Absorption of one or more existing legal entities by another company

that continues as the sole surviving legal entity.

The absorbed company ceases to exist but may continue as division

of the surviving company.

STOCK ACQUISITION

The acquiring company is termed as the Parent.

The acquired company is termed as a Subsidiary.
Both the parent and the subsidiary remain separate legal
entities and maintain their own financial records and
statements.

KNOWLEDGE CHECK

What are the two ways of acquiring company?

Discuss Acquisition of Asset.
Discuss Stock Acquisition.
Differentiate merger from consolidation.
Give example of merger.
Give example of consolidation.
Give example of stock acquisition.

METHOD OF ACCOUNTING FOR BUSINESS

COMBINATIONS

Acquisition method
The acquisition method (called the
'purchase method' in the 2004
version of IFRS 3) is used for all
business combinations. [IFRS 3.4]
Pooling of interest method was
already eliminated.

ACQUISITION METHOD
Steps in applying the acquisition
method are: [IFRS 3.5]
Identification of the 'acquirer'
Determination of the 'acquisition date'
Recognition and measurement of the
identifiable assets acquired, the liabilities
assumed and any non-controlling interest
(NCI, formerly called minority interest) in
the acquiree.
Recognition and measurement of goodwill
or a gain from a bargain purchase

IDENTIFYING AN ACQUIRER
The acquirer is the entity that obtains control of another entity.
An investor controls an investee when it is exposed, or has
rights, to variable returns from its involvement with the investee
and has the ability to affect those returns through its power over
the investee. [IFRS 10:5-6; IFRS 10:8]
Single consolidation model for all entities, including structured
entities
Consolidation based on control power so as to benefit model

Investor must have some exposure to risks and rewards

Exposure is an indicator of control but not control of itself
Power arises from rightsvoting rights, potential voting
rights, other contractual arrangements, or a combination
thereof.

 TheACQUIRER
IDENTIFYING AN
acquirer is usually the entity that
If the
guidance in
IFRS 10 does
not clearly
indicate
which of the
combining
entities is an
acquirer, IFRS
3 provides
additional
guidance
which is then
considered:

transfers cash or other assets where the

business combination is effected in this
manner [IFRS 3.B14]
The acquirer is usually, but not always,
the entity issuing equity interests where
the transaction is effected in this
manner, however the entity also
considers other pertinent facts and
circumstances including: [IFRS 3.B15]
relative voting rights in the combined
entity after the business combination
the existence of any large minority
interest if no other owner or group of
owners has a significant voting interest
the composition of the governing body
and senior management of the
combined entity
the terms on which equity interests are

DE FACTO CONTROL

18

Entity can control with less than 50% of voting rights.

Factors to consider include:

size of the holding relative to the size and dispersion of

other vote holders

potential voting rights

other contractual rights

If the above not conclusive consider additional facts and

circumstances that provide evidence of power (eg voting
patterns at previous board meeting, etc)

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

DE FACTO CONTROL

Entity A owns 45 per cent of the ordinary shares of

Entity B to which voting rights are attached.

Entity A is the largest shareholder of Entity B.

It also has the right to appoint the majority of the
members of the Board of Directors (the management
board) of Entity B in accordance with special rights
given to Entity A in the founding document of the entity.

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

DETERMINING THE ACQUISITION DATE

The acquisition date is the date on which the

acquirer obtains control
often the date the consideration is
transferred, assets are acquired and
liabilities assumedclosing date
may be other dates (earlier or later than
the closing date) at which control is
assumed

This date is critical to determine the fair

value of the company acquired.

RECOGNITION AND MEASUREMENT

Recognition principle (IFRS 3.1017):
separate recognition of identifiable assets acquired,
liabilities and contingent liabilities assumed
(think Conceptual Framework)

Measurement principle (IFRS 3.1820):

assets and liabilities that qualify for recognition are
measured at their acquisition-date fair values

measurement at fair value provides relevant

information that is more comparable and
understandable (IFRS 3.BC198)

EXCEPTIONS TO THE MEASUREMENT

Reacquired rights
measured at fair value based on remaining

contractual term ignoring the fair value effect of

renewal

Share-based payment transactions

replacement awards: measured in accordance with
IFRS 2

Assets held for sale

measured in accordance with IFRS 5 (ie fair value
less costs to sell)

22
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

EXCEPTIONS TO BOTH THE RECOGNITION AND

MEASUREMENT PRINCIPLES

Income taxes
deferred tax assets or liabilities arising from acquired
assets or liabilities accounted for using IAS 12

Employee benefits
accounted for using IAS 19
Indemnification assets
may not be recognised at fair value if it relates to an

item not recognised or measured in accordance with

IFRS 3

CONSIDERATION TRANSFERRED
The consideration transferred is measured at the fair
value of the sum of assets transferred and liabilities
assumed

acquisition-related costs are excluded

contingent consideration is included at its fair

value at acquisition date (subsequent changes in

fair value are not included in the consideration
transferred at acquisition-date)

EXAMPLE:

WHAT IS THE COST OF THE BUS COM?

Entity A acquires 75% of entity B in exchange for

Php85,000 cash and 1,000 entity A shares (fair

value = Php10,000) issued for the transfer.
Entity A incurred Php5,000 advisory and legal costs
directly attributable to the business combination
and Php1,000 share issue expenses.

GOODWILL
Goodwill (an asset) is measured initially
indirectly as the difference between the
consideration transferred (see IFRS 3.37
40) excluding transaction costs in exchange
for the acquirees identifiable assets,
liabilities and contingent liabilities
(measured as set out above)

GOODWILL CONTINUED
If the value of acquired identifiable assets and liabilities
exceeds the consideration transferred, the acquirer
immediately recognises a gain (bargain purchase)

Goodwill is not amortised, but is subject to an impairment

test.

If less than 100% of the equity interests of another entity

is acquired in a business combination, non-controlling
interest is recognised.

Choice in each business combination to measure noncontrolling interest either at fair value or at the non27
controlling interests proportionate share of the acquirees
identifiable net assets.
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

DISCLOSURE
Comprehensive disclosure requirements designed to
enable users to evaluate the nature and financial
effects of business combinations (and any
adjustments made to prior period business
combinations).

Refer to IFRS 3.B64B67.

COMPARISON TO THE IFRS FOR SMES

The main differences between IFRS 3 and Section 19 Business

Combinations and Goodwill of the IFRS for SMEs include:

the costs associated with acquisition are included in the

consideration transferred rather than being expensed

changes in the recognised amount of contingent

consideration affect goodwill

goodwill is amortised over its estimated useful life (or 10

years if a reliable estimate cannot be made)

non-controlling interest must be measured using the

proportionate share method

JUDGEMENTS AND ESTIMATES

Determining whether a particular set of assets and
activities is a business requires assessing their
capabilities of being conducted and managed for the
purpose of providing economic benefits.

Identifying the acquirer in some business

combinations that combine two or more entities can
require judgement.

JUDGEMENTS AND ESTIMATES

CONTINUED

Accounting for business combinations requires broad use of

fair value estimates. Level 3 fair value measurement can
require significant judgements and estimates (see IFRS 13).

The acquirees identifiable intangible assets at the

acquisition date are recognised separately and might include
assets that have not been recognised by the acquiree.