IFRS 3 Business Combinations addresses the accounting for when an acquirer obtains control of a business (e.g., through acquisition or merger). The objective of this standard 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 achieve this, IFRS 3 establishes principles and requirements on how the acquirer shall:
(a) Recognize and measure in the financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree;
(b) Recognize and measure goodwill acquired in the business combination or a gain from a bargain purchase; and
(c) Determine what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.
IFRS 10 Consolidated Financial Statements and IFRS 3 Business Combinations both address business combinations and consolidated financial reporting. However, IFRS 10 defines control and sets out the procedures for consolidation, while IFRS 3 focuses more on the measurement of items in the consolidated financial statements, such as goodwill, non-controlling interests, etc. If a company has elements of a business combination, it is necessary to apply both standards, it is not a matter of choosing one or the other.
1. Key Issues to Note During Transition
| Content | IFRS | VAS |
| IFRS 3 vs. VAS 11 – Business Combinations | ||
| Accounting Method | The acquisition method is used for all business combinations. The steps in applying the acquisition method are:
| All business combinations must be accounted for using the acquisition method. Applying the acquisition method involves the following steps:
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| Recognition and Measurement of Goodwill | Goodwill is measured as the difference between:
| Goodwill is initially measured at cost, representing the excess of the cost of the business combination over the acquirer’s share in the net fair value of the identifiable assets, liabilities, and recognized contingent liabilities in accordance with the requirements. |
| Measurement of Non-controlling Interests (NCI) | IFRS 3 allows an accounting policy choice, available on a transaction-by-transaction basis, to measure non-controlling interests (NCI) as either:
| The term used: Minority interests. Measurement at initial recognition: based on the minority shareholders’ ownership proportion in the fair value of the acquiree’s net assets. |
| Allocation of Goodwill Value | IFRS 3 does not permit the amortization of goodwill. Instead, goodwill must be tested for impairment at least annually in accordance with IAS 36 – Impairment of Assets. | Goodwill may be recognized as an expense in full or amortized gradually, but not exceeding 10 years. |
| Business Combination Achieved in Stages | Goodwill is determined at the date control is obtained, including all previously acquired interests. Previously held investments are remeasured at fair value on the date control is obtained. | Goodwill is determined for each transaction. Previously held investments are not remeasured. |
| Identifying the Components of a Business Combination Transaction | There may be pre-existing relationships or agreements between the acquirer and the acquiree before entering into business combination negotiations, or during the negotiation process, the two parties may enter into a separate agreement. In both cases, the acquirer must identify all amounts that do not fall within the scope of the exchange between the acquirer and the acquiree (or the acquiree’s former owners) in the business combination – that is, amounts that the acquirer does not pay to obtain control of the acquiree. When applying the acquisition method, the acquirer shall only recognize the consideration transferred to the acquiree and the assets acquired and liabilities assumed in exchange for control of the acquiree. Separate transactions must be accounted for in accordance with the requirements of the relevant IFRS. | Not addressed. |
| Acquisition-related Costs | Acquisition-related costs are the costs incurred by the acquirer to carry out a business combination. These costs include brokerage fees, advisory fees, legal fees, accounting fees, valuation fees, and other professional or consulting service fees; general administrative costs, including the costs of maintaining an internal mergers and acquisitions department; and costs related to registering and issuing debt and equity securities. The acquirer must account for acquisition-related costs as expenses in the period in which the costs are incurred and the services are received, with one exception. Costs related to issuing debt or equity securities must be recognized in accordance with the requirements of IAS 32 and IFRS 9. | VAS 11 permits the recognition of direct costs related to the acquisition of a business as part of the cost of the business combination. |
| Measurement Period / Contingent Liabilities of the Acquiree | IFRS 3 prescribes a measurement period: If by the end of the reporting period in which the business combination occurs the initial accounting for the business combination is incomplete, the acquirer must report in the financial statements provisional amounts for the items where the accounting is incomplete. During the measurement period, the acquirer must retrospectively adjust the provisional amounts recognized at the acquisition date to reflect new information about facts and circumstances that existed as of the acquisition date and that, if known at that time, would have affected the measurement of the amounts recognized as of that date. During the measurement period, the acquirer must also recognize additional assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date and that, if known at that time, would have required the recognition of those assets or liabilities as of the acquisition date. The measurement period ends as soon as the acquirer receives the necessary information about the facts and circumstances that existed as of the acquisition date or learns that no additional information can be obtained. However, the measurement period shall not exceed one year from the acquisition date. Once the measurement period has ended, the acquirer may adjust the accounting for the business combination only to correct errors in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. | VAS 11 only provides regulations on the acquiree’s contingent liabilities as follows: The acquirer recognizes the acquiree’s contingent liabilities separately as part of the cost of the business combination only when the fair value of the contingent liability can be reliably measured. If the fair value of the contingent liability cannot be reliably measured: a) It will affect the amount recognized as goodwill or be recognized in the income statement in accordance with paragraph 55 of VAS 11; and b) The acquirer shall disclose information about the contingent liability in accordance with Accounting Standard No. 18 “Provisions, Contingent Assets and Contingent Liabilities.” |
