WOLAITA SODO UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE

IFRS 3
BUSINESS
COMBINATION
Prepared by: Rahel Kedir
PRESENTATION
AGENDA

 OBJECTIVE
 SCOPE
 DESTNICTION BETWEEN IFRS 3 AND 10
 DETERMINING BUSINESS
COMBINATION
 ACQUISITION METHOD: OVERVIEW
 ACQUISITION METHOD: 4 STEPS
OBJECTIVE
The objective of IFRS 3 Business combination 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.
 More specifically, IFRS 3 establishes principles and
requirements for how the acquirer:
1. Recognizes and measures the IDENTIFIABLE ASSETS
acquired , the LIABILITIES assumed and any NON-
CONTROLLING INTEREST.
OBJECTIVE ……CONT’D

2. Recognizes and measures the GOODWILL

acquired in the business combination, or a
gain from a bargain purchase.
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
IFRS 3 applies to a transaction or other event that
meets the definition of a business combination. But
it does not apply to:
1 • the formation of a joint venture.

• the acquisition of an asset or a

2 group of assets that does not
constitute a business

• a combination of entities or
3 businesses under common
control
 DESTNICTION BETWEEN IFRS 3 IFRS AND 10

 Both standards deal with business combinations

and their financial statements.
 But while IFRS 10 defines a control and
prescribes specific consolidation
procedures, IFRS 3 is more about the
measurement of the items in the consolidated
financial statements, such as goodwill, non-
controlling interest, etc.
 DETERMINING BUSINESS COMBINATION

 IFRS 3 requires that assets and liabilities

acquired NEED TO CONSTITUTE A
BUSINESS, otherwise its not a business
combination and an investor needs to
account for the transaction in line with other
IFRS.
 A business consists of 3 elements:
 DETERMINING BUSINESS
COMBINATION ……CONT’D
1. INPUT: Any economic resource that creates or
can create outputs when one or more processes
are applied to it (E.g. non current assets etc.,)
2. PROCESS: Any system, standard, protocol,
convention or rule that when applied to an input(s),
creates outputs ( E.g. management process,
workforce etc.,)
3. OUTPUT: The results of inputs and processes
applied to those inputs that provide or can
provide a return in the form of dividends, lower
costs or other economic benefits directly to
investors or other owners.
ACQUISITION METHOD: OVERVIEW

 Once the investor acquires a subsidiary, it has

to account for each combination by applying
THE 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]
ACQUISITION METHOD: 4 STEPS

 Steps in applying the acquisition method are:

[IFRS 3.5]
1. Identification of the 'acquirer’
2.  Determination of the 'acquisition date‘
3. Recognition and measurement of the identifiable
assets acquired, the liabilities assumed and any
non-controlling interest (NCI, formerly called
minority interest) in the acquiree
4.  Recognition and measurement of goodwill or a
gain from a bargain purchase
 Step 1: Identification of the
acquirer
 One of the combining entities is identified as the
acquirer for each business combination.
 Entity which has the power to govern the financial
&operating policies of the other entity so as to obtain
benefits from its activities is an acquire.
 Ability to change the operating or capital policies of
the investee
 Ownership of more than 50% of the outstanding voting
shares of another entity
 Control of the board of directors/governing body
Step 1: Identification of the acquirer……
cont’d

 The guidance in IFRS 10 Consolidated Financial

Statements is used to identify an acquirer in a
business combination, i.e. the entity that obtains
'control' of the acquiree. [IFRS 3.7]
 If the guidance in IFRS 10 does not clearly
indicate which of the combining entities is an
acquirer, IFRS 3 provides additional guidance in
its appendix.
Step 2: Determination of the 'acquisition
date’

 The ACQUISITION DATE is the date on which the

acquirer obtains control of the acquiree.
 It is generally the date on which the acquirer
legally transfers the consideration (The payment
for the investment), acquires the assets and
assumes the liabilities of the acquiree – THE
CLOSING DATE.
 However, it can be earlier or later than the
closing date, too.
 Step 3: Recognition and measurement
of the identifiable assets acquired,
the liabilities assumed and any non-
controlling interest (NCI, formerly
called minority interest) in the
acquiree
 Step 3: Recognition and
measurement of the ……cont’d
3.1 ACQUIRED ASSETS AND LIABILITIES
 IFRS 3 establishes the following principles in
relation to the recognition and measurement of
items arising in a business combination:
 Recognition principle: Identifiable assets acquired,
liabilities assumed, and non-controlling interests in
the acquiree, are recognised separately from
goodwill [IFRS 3.10]
  Measurement principle: All assets acquired and
liabilities assumed in a business combination are
measured at acquisition-date fair value. [IFRS 3.18]
Step 3: Recognition and
measurement of the ……cont’d
 Exceptions to the recognition and
measurement principles
 Contingent liabilities and contingent asset (IAS
37);
 Income taxes (IAS 12);
 Employee benefits (IAS 19);
 Indemnification assets; Reacquired rights; Share-
based payment transactions (IFRS 2);
 Assets held for sale (IFRS 5)
Step 3: Recognition and
measurement of the ……cont’d
 3.2 NON-CONTROLLING INTEREST
 Non-controlling interest is the equity in a
subsidiary not attributable, directly or
indirectly, to a parent. IFRS 3 permits
 METHODS OF MEASURING NON-
CONTROLLING INTEREST:
 1.Fair value or
 2. The proportionate share in the recognized
acquiree’s net assets
Step 4:Recognition and measurement of
goodwill or a gain from a bargain purchase
 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 recognized.
  It is calculated as a difference between:
The aggregate of:
1. The fair value of the consideration transferred;
Step 4:Recognition and measurement of goodwill
or a gain ….cont’d

2. The amount of any non-controlling interest;

3. In a business combination achieved in stages: the
acquisition-date fair value of the acquirer’s
previously- held equity interest in the acquiree;
And
4.The acquisition-date amounts of net assets in an
Acquiree.
 Particulars Amount

Fair value of consideration XXXXXXXXXXX

transferred
Non-controlling Interest XXXXXXXXXXX

Fair value of previous equity XXXXXXXXXXX

Interest
Fair value of assets acquired (XXXXXXXXXXX)

Goodwill (OR) Negative Goodwill XXXXXXXXXXX

Step 4:Recognition and measurement
of goodwill or a gain ….cont’d
 The goodwill can be both positive and negative:
 If the goodwill is POSITIVE, then the acquirer
shall recognize it as an intangible asset and
perform annual impairment test;
 If the goodwill is NEGATIVE, then it is a gain on a
bargain purchase Where the consideration is less
than the net assets acquired.
 The acquirer should;
Step 4:Recognition and measurement
of goodwill or a gain ….cont’d
1. Review the procedures for recognizing
assets and liabilities, non-controlling
interest, previously held interest and
consideration transferred (i.e. check
whether they are error-free);
2. Recognize a gain on bargain purchase in
profit or loss. 
The End
Thank you