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IFRS 3-Business Combinations

Objective

The objective of this IFRS 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. To accomplish that, this IFRS establishes principles and requirements for how the acquirer:

  • recognises and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree;
  • recognises and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and
  • determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.

Scope

This IFRS applies to a transaction or other event that meets the definition of a business combination. This IFRS does not apply to:

  • the accounting for the formation of a joint arrangement in the financial statements of the joint arrangement itself.
  • the acquisition of an asset or a group of assets that does not constitute a business. In such cases the acquirer shall identify and recognise the individual identifiable assets acquired (including those assets that meet the definition of, and recognition criteria for, intangible assets in IAS 38 Intangible Assets) and liabilities assumed. The cost of the group shall be allocated to the individual identifiable assets and liabilities on the basis of their relative fair values at the date of purchase. Such a transaction or event does not give rise to goodwill.
  • a combination of entities or businesses under common control (paragraphs B1–B4 provide related application guidance).

Recognising and measurement

As of the acquisition 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 paragraphs 11 and 12.

To qualify for recognition as part of applying the acquisition method, the identifiable assets acquired and liabilities assumed must meet the definitions of assets and liabilities in the Conceptual Framework for Financial Reporting 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 IFRSs.

The acquirer shall recognise goodwill as of the acquisition date measured as the excess of (a) over (b) below:

  1. the aggregate of:
  • the consideration transferred measured in accordance with this IFRS, which generally requires acquisition-date fair value (see paragraph 37);
  • the amount of any non-controlling interest in the acquiree measured in accordance with this IFRS; and
  • in a business combination achieved in stages (see paragraphs 41 and 42), the acquisition-date fair value of the acquirer’s previously held equity interest in the acquiree

2. the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed measured in accordance with this IFRS.

Measurement

If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the acquirer shall report in its financial statements provisional amounts for the items for which the accounting is incomplete. During the measurement period, the acquirer shall retrospectively adjust the provisional amounts recognised at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date and, if known, would have affected the measurement of the amounts recognised as of that date. During the measurement period, the acquirer shall also recognise additional assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date and, if known, would have resulted in the recognition of those assets and liabilities as of that date. The measurement period ends as soon as the acquirer receives the information it was seeking about facts and circumstances that existed as of the acquisition date or learns that more information is not obtainable. However, the measurement period shall not exceed one year from the acquisition date.

Defined terms

acquiree The business or businesses that the acquirer obtains control of in a business combination.

acquirer The entity that obtains control of the acquiree.

acquisition date The date on which the acquirer obtains control of the acquiree.

business An integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing goods or services to customers, generating investment income (such as dividends or interest) or generating other income from ordinary activities.

business combination A transaction or other event in which an acquirer obtains control of one or more businesses. Transactions sometimes referred to as β€˜true mergers’ or β€˜mergers of equals’ are also business combinations as that term is used in this IFRS.

contingent consideration Usually, an obligation of the acquirer to transfer additional assets or equity interests to the former owners of an acquiree as part of the exchange for control of the acquiree if specified future events occur or conditions are met. However, contingent consideration also may give the acquirer the right to the return of previously transferred consideration if specified conditions are met.

equity interests For the purposes of this IFRS, equity interests is used broadly to mean ownership interests of investor-owned entities and owner, member or participant interests of mutual entities.

fair value Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. (See IFRS 13.)

goodwill An asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognised.

identifiable An asset is identifiable if it either:

  • is separable, ie capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, identifiable asset or liability, regardless of whether the entity intends to do so; or
  • arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations.

intangible asset An identifiable non-monetary asset without physical substance.

mutual entity An entity, other than an investor-owned entity, that provides dividends, lower costs or other economic benefits directly to its owners, members or participants. For example, a mutual insurance company, a credit union and a co-operative entity are all mutual entities.

non-controlling interest The equity in a subsidiary not attributable, directly or indirectly, to a parent.

owners For the purposes of this IFRS, owners is used broadly to include holders of equity interests of investor-owned entities and owners or members of, or participants in, mutual entities.

Disclosures

The acquirer shall disclose information that enables users of its financial statements to evaluate the nature and financial effect of a business combination that occurs either:

  • during the current reporting period; or
  • after the end of the reporting period but before the financial statements are authorised for issue.

To meet the objective in paragraph 59, the acquirer shall disclose the following information for each business combination that occurs during the reporting period:

  1. the name and a description of the acquiree.
  2. the acquisition date.
  3. the percentage of voting equity interests acquired.
  4. the primary reasons for the business combination and a description of how the acquirer obtained control of the acquiree.
  5. a qualitative description of the factors that make up the goodwill recognised, such as expected synergies from combining operations of the acquiree and the acquirer, intangible assets that do not qualify for separate recognition or other factors.
  6. the acquisition-date fair value of the total consideration transferred and the acquisition-date fair value of each major class of consideration, such as:
  • cash;
  • other tangible or intangible assets, including a business or subsidiary of the acquirer;
  • liabilities incurred, for example, a liability for contingent consideration; and
  • equity interests of the acquirer, including the number of instruments or interests issued or issuable and the method of measuring the fair value of those instruments or interests.

7. for contingent consideration arrangements and indemnification assets:

  • the amount recognised as of the acquisition date;
  • a description of the arrangement and the basis for determining the amount of the payment; and
  • an estimate of the range of outcomes (undiscounted) or, if a range cannot be estimated, that fact and the reasons why a range cannot be estimated. If the maximum amount of the payment is unlimited, the acquirer shall disclose that fact.

8. for acquired receivables:

  • the fair value of the receivables;
  • the gross contractual amounts receivable; and
  • the best estimate at the acquisition date of the contractual cash flows not expected to be collected.
  • The disclosures shall be provided by major class of receivable, such as loans, direct finance leases and any other class of receivables.

9. the amounts recognised as of the acquisition date for each major class of assets acquired and liabilities assumed.

10. for each contingent liability recognised in accordance with paragraph 23, the information required in paragraph 85 of IAS 37 Provisions, Contingent Liabilities and Contingent Assets. If a contingent liability is not recognised because its fair value cannot be measured reliably, the acquirer shall disclose:

  • the information required by paragraph 86 of IAS 37; and
  • the reasons why the liability cannot be measured reliably.

11. the total amount of goodwill that is expected to be deductible for tax purposes.

12. for transactions that are recognised separately from the acquisition of assets and assumption of liabilities in the business combination in accordance with paragraph 51:

  • a description of each transaction;
  • how the acquirer accounted for each transaction;
  • the amounts recognised for each transaction and the line item in the financial statements in which each amount is recognised; and
  • if the transaction is the effective settlement of a pre-existing relationship, the method used to determine the settlement amount.

13. the disclosure of separately recognised transactions required by (l) shall include the amount of acquisition-related costs and, separately, the amount of those costs recognised as an expense and the line item or items in the statement of comprehensive income in which those expenses are recognised. The amount of any issue costs not recognised as an expense and how they were recognised shall also be disclosed.

14. in a bargain purchase (see paragraphs 34–36):

  • the amount of any gain recognised in accordance with paragraph 34 and the line item in the statement of comprehensive income in which the gain is recognised; and
  • a description of the reasons why the transaction resulted in a gain.

15. for each business combination in which the acquirer holds less than 100 per cent of the equity interests in the acquiree at the acquisition date:

  • the amount of the non-controlling interest in the acquiree recognised at the acquisition date and the measurement basis for that amount; and
  • for each non-controlling interest in an acquiree measured at fair value, the valuation technique(s) and significant inputs used to measure that value.

16. in a business combination achieved in stages:

  • the acquisition-date fair value of the equity interest in the acquiree held by the acquirer immediately before the acquisition date; and
  • the amount of any gain or loss recognised as a result of remeasuring to fair value the equity interest in the acquiree held by the acquirer before the business combination (see paragraph 42) and the line item in the statement of comprehensive income in which that gain or loss is recognised.

17. the following information:

  • the amounts of revenue and profit or loss of the acquiree since the acquisition date included in the consolidated statement of comprehensive income for the reporting period; and
  • the revenue and profit or loss of the combined entity for the current reporting period as though the acquisition date for all business combinations that occurred during the year had been as of the beginning of the annual reporting period.

If disclosure of any of the information required by this subparagraph is impracticable, the acquirer shall disclose that fact and explain why the disclosure is impracticable. This IFRS uses the term β€˜impracticable’ with the same meaning as in IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.