International Financial Reporting Standard 3
Business Combinations

 

 

In April 2001 the International Accounting Standards Board (IASB) adopted IAS 22 Business Combinations, which had originally been issued by the International Accounting Standards Committee in October 1998. IAS 22 was itself a revised version of IAS 22 Business Combinations that was issued in November 1983.

In March 2004 the IASB replaced IAS 22 and three related Interpretations (SIC-9 Business

Combinations—Classification either as Acquisitions or Unitings of Interests, SIC-22 Business Combinations—Subsequent Adjustment of Fair Values and Goodwill Initially Reported and SIC-28 Business Combinations—'Date of Exchange' and Fair Value of Equity Instruments) when it issued IFRS 3 Business Combinations.

Minor amendments were made to IFRS 3 in March 2004 by IFRS 5 Non-current Assets Held for

Sale and Discontinued Operations and IAS 1 Presentation of Financial Statements (as revised in September 2007), which amended the terminology used throughout IFRSs, including IFRS 3.

In January 2008 the IASB issued a revised IFRS 3.

 

Other IFRSs have made minor consequential amendments to IFRS 3. They include Improvements to IFRSs (issued in May 2010), IFRS 9 Financial Instruments (issued November 2009 and October 2010), IFRS 10 Consolidated Financial Statements (issued May 2011), IFRS 11 Joint Arrangements (issued May 2011), IFRS 13 Fair Value Measurement (issued May 2011), Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27) (issued October 2012), IFRS 9 Financial Instruments (Hedge Accounting and amendments to IFRS 9, IFRS 7 and IAS 39) (issued November 2013), Annual Improvements to IFRSs 2010-2012 Cycle (issued December 2013) and Annual Improvements to IFRSs 2011-2013 Cycle (issued December 2013).

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CONTENTS   

 

 

INTRODUCTION

INTERNATIONAL FINANCIAL REPORTING STANDARD 3

BUSINESS COMBINATIONS

 

OBJECTIVE

SCOPE

IDENTIFYING A BUSINESS COMBINATION

THE ACQUISITION METHOD

Identifying the acquirer

Determining the acquisition date

Recognising and measuring the identifiable assets acquired, the liabilities

assumed and any non-controlling interest in the acquiree

Recognition principle

Recognition conditions

Classifying or designating identifiable assets acquired and liabilities assumed

in a business combination

Measurement principle

Exceptions to the recognition or measurement principles

Exception to the recognition principle

Exceptions to both the recognition and measurement principles

Exceptions to the measurement principle

Recognising and measuring goodwill or a gain from a bargain purchase

Bargain purchases

Consideration transferred Contingent consideration

Additional guidance for applying the acquisition method to particular types

of business combinations

A business combination achieved in stages

A business combination achieved without the transfer of consideration

Measurement period

Determining what is part of the business combination transaction

Acquisition-related costs

SUBSEQUENT MEASUREMENT AND ACCOUNTING

Reacquired rights

Contingent liabilities

Indemnification assets

Contingent consideration

DISCLOSURES

EFFECTIVE DATE AND TRANSITION

Effective date

Transition

Income taxes

 

International Financial Reporting Standard 3 Business Combinations (IFRS 3) is set out in paragraphs 1-68 and Appendices A-C. All the paragraphs have equal authority. Paragraphs in bold type state the main principles. Terms defined in Appendix A are in italics the first time they appear in the IFRS. Definitions of other terms are given in the

Glossary for International Financial Reporting Standards. IFRS 3 should be read in the

context of its objective and the Basis for Conclusions, the Preface to International Financial Reporting Standards and the Conceptual Framework for Financial Reporting. IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting and applying accounting policies in the absence of explicit guidance.

The revised International Financial Reporting Standard 3 Business Combinations (IFRS 3) is part of a joint effort by the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) to improve financial reporting while promoting the international convergence of accounting standards. Each board decided to address the accounting for business combinations in two phases. The IASB and the FASB deliberated the first phase separately. The FASB concluded its first phase in June 2001 by issuing FASB Statement No. 141 Business Combinations. The IASB concluded its first phase in March 2004 by issuing the previous version of IFRS 3 Business Combinations. The boards' primary conclusion in the first phase was that virtually all business combinations are acquisitions. Accordingly, the boards decided to require the use of one method of accounting for business combinations—the acquisition method.

 

The second phase of the project addressed the guidance for applying the acquisition method. The boards decided that a significant improvement could be made to financial reporting if they had similar standards for accounting for business combinations. Thus, they decided to conduct the second phase of the project as a joint effort with the objective of reaching the same conclusions. The boards concluded the second phase of the project by issuing this IFRS and FASB Statement No. 141 (revised 2007) Business Combinations and the related amendments to IAS 27 Consolidated and Separate Financial Statements and FASB

Statement No. 160 Noncontrolling Interests in Consolidated Financial Statements.1

 

The IFRS replaces IFRS 3 (as issued in 2004) and comes into effect for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2009. Earlier application is permitted, provided that IAS 27 (as amended in 2008) is applied at the same time.

Main features of the IFRS

The objective of the IFRS is to enhance the relevance, reliability and

comparability of the information that an entity provides in its financial statements about a business combination and its effects. It does that by

establishing principles and requirements for how an acquirer:

recognises and measures in its financial statements the identifiable

assets acquired, the liabilities assumed and any non-controlling interest

in the acquiree;

The requirements for consolidated financial statements in IAS 27 were superseded by IFRS 10

Consolidated Financial Statements, issued in May 2011. Topic 810 Consolidation in the FASB Accounting Standards Codification® codified the guidance in SFAS 160.

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

Core principle

An acquirer of a business recognises the assets acquired and liabilities assumed

at their acquisition-date fair values and discloses information that enables users to evaluate the nature and financial effects of the acquisition.

 

Applying the acquisition method

A business combination must be accounted for by applying the acquisition

method, unless it is a combination involving entities or businesses under common control or the acquiree is a subsidiary of an investment entity, as defined in IFRS 10 Consolidated Financial Statements, which is required to be

measured at fair value through profit or loss. One of the parties to a business combination can always be identified as the acquirer, being the entity that obtains control of the other business (the acquiree). Formations of a joint venture or the acquisition of an asset or a group of assets that does not constitute a business are not business combinations.

 

The IFRS establishes principles for recognising and measuring the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree. Any classifications or designations made in recognising these items must be made in accordance with the contractual terms, economic conditions, acquirer's operating or accounting policies and other factors that exist at the acquisition date.

 

Each identifiable asset and liability is measured at its acquisition-date fair value. Non-controlling interests in an acquiree that are present ownership interests and entitle their holders to a proportionate share of the entity's net assets in the event of liquidation are measured at either fair value or the present ownership instruments' proportionate share in the recognised amounts of the acquiree's net identifiable assets. All other components of non-controlling interests shall be measured at their acquisition-date fair values, unless another measurement basis is required by IFRSs.

 

The IFRS provides limited exceptions to these recognition and measurement

principles:

Leases and insurance contracts are required to be classified on the basis

of the contractual terms and other factors at the inception of the contract (or when the terms have changed) rather than on the basis of the factors that exist at the acquisition date.

 

Only those contingent liabilities assumed in a business combination that are a present obligation and can be measured reliably are recognised.

Some assets and liabilities are required to be recognised or measured in

accordance with other IFRSs, rather than at fair value. The assets and liabilities affected are those falling within the scope of IAS 12 Income

 

Taxes, IAS 19 Employee Benefits, IFRS 2 Share-based Payment and IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.

There are special requirements for measuring a reacquired right.

Indemnification assets are recognised and measured on a basis that is

consistent with the item that is subject to the indemnification, even if that measure is not fair value.

The difference will, generally, be recognised as goodwill. If the acquirer has

made a gain from a bargain purchase that gain is recognised in profit or loss.

 

The consideration transferred in a business combination (including any contingent consideration) is measured at fair value.

 

In general, an acquirer measures and accounts for assets acquired and liabilities assumed or incurred in a business combination after the business combination has been completed in accordance with other applicable IFRSs. However, the IFRS provides accounting requirements for reacquired rights, contingent liabilities, contingent consideration and indemnification assets.

 

Disclosure

The IFRS requires the acquirer to disclose information that enables users of its

financial statements to evaluate the nature and financial effect of business combinations that occurred during the current reporting period or after the reporting date but before the financial statements are authorised for issue. After a business combination, the acquirer must disclose any adjustments recognised in the current reporting period that relate to business combinations that occurred in the current or previous reporting periods.

 

Identifying the acquirer

For each business combination, one of the combining entities shall be

identified as the acquirer.

 

The guidance in IFRS 10 shall be used to identify the acquirer—the entity that obtains control of another entity, ie the acquiree. If a business combination has occurred but applying the guidance in IFRS 10 does not clearly indicate which of the combining entities is the acquirer, the factors in paragraphs B14-B18 shall be considered in making that determination.

 

Determining the acquisition date

The acquirer shall identify the acquisition date, which is the date on

which it obtains control of the acquiree.

 

The date on which the acquirer obtains control of the acquiree is generally the date on which the acquirer legally transfers the consideration, acquires the assets and assumes the liabilities of the acquiree—the closing date. However, the acquirer might obtain control on a date that is either earlier or later than the closing date. For example, the acquisition date precedes the closing date if a written agreement provides that the acquirer obtains control of the acquiree on a date before the closing date. An acquirer shall consider all pertinent facts and circumstances in identifying the acquisition date.

 

Recognising and measuring the identifiable assets

acquired, the liabilities assumed and any non-controlling

interest in the acquiree

 

Recognition principle

 

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.

 

 

Recognition conditions

 

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 Framework2 for the Preparation and Presentation of Financial Statements 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.

 

In addition, to qualify for recognition as part of applying the acquisition method, the identifiable assets acquired and liabilities assumed must be part of what the acquirer and the acquiree (or its former owners) exchanged in the business combination transaction rather than the result of separate transactions. The acquirer shall apply the guidance in paragraphs 51-53 to determine which assets acquired or liabilities assumed are part of the exchange for the acquiree and which, if any, are the result of separate transactions to be accounted for in accordance with their nature and the applicable IFRSs.

 

The acquirer's application of the recognition principle and conditions may result in recognising some assets and liabilities that the acquiree had not previously recognised as assets and liabilities in its financial statements. For example, the acquirer recognises the acquired identifiable intangible assets, such as a brand name, a patent or a customer relationship, that the acquiree did not recognise as assets in its financial statements because it developed them internally and charged the related costs to expense.

 

Paragraphs B28-B40 provide guidance on recognising operating leases and intangible assets. Paragraphs 22-28 specify the types of identifiable assets and liabilities that include items for which this IFRS provides limited exceptions to the recognition principle and conditions.

 

Classifying or designating identifiable assets acquired and liabilities

assumed in a business combination

 

At the acquisition date, the acquirer shall classify or designate the identifiable assets acquired and liabilities assumed as necessary to apply other IFRSs subsequently. The acquirer shall make those classifications or designations on the basis of the contractual terms, economic conditions, its operating or accounting policies and other pertinent conditions as they exist at the acquisition date.

 

In some situations, IFRSs provide for different accounting depending on how an entity classifies or designates a particular asset or liability

 

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