IFRS 3 | Business Combinations

1

Objective

The objective is to improve the relevance, reliability, and comparability of information about business combinations. It establishes principles for recognising and measuring assets, liabilities, non-controlling interest, and goodwill/bargain purchase gains, and for determining disclosures.

2

Scope

This Standard applies to a transaction or other event that meets the definition of a business combination. It does not apply to the formation of a joint arrangement in the financial statements of the joint arrangement itself, the acquisition of an asset or group of assets that does not constitute a business (asset acquisition), or a combination of entities or businesses under common control.

2A

Investment Entities

The Standard does not apply to the acquisition by an investment entity (as defined in IFRS 10) of an investment in a subsidiary that is required to be measured at fair value through profit or loss.

3

Identifying a Combination

An entity shall determine whether a transaction is a business combination by applying the definition (acquiring control of a business). If the assets acquired are not a business, it is accounted for as an asset acquisition.

4

Acquisition Method

An entity shall account for each business combination by applying the acquisition method.

5

Method Steps

Applying the acquisition method requires: (a) identifying the acquirer; (b) determining the acquisition date; (c) recognising and measuring the identifiable assets acquired, liabilities assumed, and non-controlling interest; and (d) recognising and measuring goodwill or a gain from a bargain purchase.

6

Identifying the Acquirer

One of the combining entities shall be identified as the acquirer (the entity that obtains control). The guidance in IFRS 10 is used to identify the acquirer.

8

Acquisition Date

The acquirer shall identify the acquisition date, which is the date on which it obtains control of the acquiree. This is generally the closing date, but can be earlier or later depending on the agreement.

10

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.

11

Recognition Conditions

To qualify for recognition, identifiable assets and liabilities must meet the definitions of assets and liabilities in the Conceptual Framework at the acquisition date. Costs the acquirer expects but is not obliged to incur in the future (e.g., to exit an activity) are not liabilities at the acquisition date.

15

Classification

At the acquisition date, the acquirer shall classify or designate the identifiable assets acquired and liabilities assumed as necessary to apply other IFRSs subsequently (e.g., designating a derivative as a hedging instrument).

18

Measurement Principle

The acquirer shall measure the identifiable assets acquired and the liabilities assumed at their acquisition-date fair values.

19

NCI Measurement

For each business combination, the acquirer measures non-controlling interests (that are present ownership interests entitling holders to a proportionate share of net assets on liquidation) either at fair value or at the proportionate share of the recognised amounts of the acquiree's identifiable net assets. All other NCI components are measured at fair value.

21A

Exceptions

This Standard provides limited exceptions to the recognition and measurement principles for specific items described in paragraphs 22-31A.

22

Contingent Liabilities

An exception to IAS 37: The acquirer recognises a contingent liability assumed in a business combination if it is a present obligation that arises from past events and its fair value can be measured reliably, even if an outflow of resources is not probable.

24

Income Taxes

The acquirer recognises and measures deferred tax assets or liabilities in accordance with IAS 12.

26

Employee Benefits

The acquirer recognises and measures assets and liabilities related to employee benefit arrangements in accordance with IAS 19.

27

Indemnification Assets

If the seller indemnifies the acquirer for the outcome of a contingency (e.g., a specific liability), the acquirer recognises an indemnification asset at the same time and on the same basis as the indemnified item.

28A

Leases

The acquirer recognises right-of-use assets and lease liabilities for leases where the acquiree is the lessee (in accordance with IFRS 16). Exceptions apply for short-term leases and low-value assets.

29

Reacquired Rights

The value of a reacquired right recognised as an intangible asset is measured on the basis of the remaining contractual term of the related contract, regardless of potential renewals market participants might consider.

30

Share-based Payments

Liabilities or equity instruments related to share-based payment transactions of the acquiree are measured in accordance with IFRS 2.

31

Assets Held for Sale

Acquired non-current assets classified as held for sale are measured at fair value less costs to sell in accordance with IFRS 5.

32

Goodwill Measurement

The acquirer recognises goodwill as the excess of (a) the aggregate of the consideration transferred, the amount of any non-controlling interest, and the acquisition-date fair value of any previously held equity interest in the acquiree over (b) the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed.

34

Bargain Purchase

Occasionally, the net of assets and liabilities acquired exceeds the consideration (a bargain purchase). If the excess remains after reassessing the measurements, the acquirer recognises the resulting gain in profit or loss on the acquisition date.

37

Consideration Transferred

Consideration transferred is measured at fair value, calculated as the sum of the acquisition-date fair values of the assets transferred, liabilities incurred to former owners, and equity interests issued by the acquirer.

39

Contingent Consideration

The acquirer recognises the acquisition-date fair value of contingent consideration as part of the consideration transferred. An obligation to pay contingent consideration is classified as a liability or equity based on IAS 32.

41

Step Acquisitions

In a business combination achieved in stages, the acquirer remeasures its previously held equity interest in the acquiree at its acquisition-date fair value and recognises the resulting gain or loss in profit or loss or other comprehensive income.

45

Measurement Period

If initial accounting is incomplete by the end of the reporting period, provisional amounts are reported. During the measurement period (max one year), the acquirer retrospectively adjusts provisional amounts to reflect new information about facts and circumstances that existed at the acquisition date.

51

Separate Transactions

The acquirer identifies amounts that are not part of the exchange for the acquiree (e.g., settlement of pre-existing relationships, remuneration for future services). These are accounted for separately from the business combination.

53

Acquisition-Related Costs

Acquisition-related costs (finder's fees, advisory, legal, valuation fees) are expensed in the periods incurred. Costs to issue debt or equity securities are recognised under IAS 32 and IFRS 9.

54

Subsequent Measurement

General subsequent measurement follows applicable IFRSs. Specific guidance is provided for reacquired rights, contingent liabilities, indemnification assets, and contingent consideration.

55

Reacquired Rights

A reacquired right is amortised over the remaining contractual period of the contract in which the right was granted.

58

Contingent Consideration

Contingent consideration classified as equity is not remeasured. Other contingent consideration (financial instrument or otherwise) is measured at fair value at each reporting date with changes recognised in profit or loss.

59

Disclosures

The acquirer discloses information to enable users to evaluate the nature and financial effect of business combinations occurring during the period or after the period but before statements are authorised.

64

Effective Date

This IFRS applies prospectively to 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.

Appendix A

Definitions

The following terms are used in this Standard with the meanings specified:

• 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.
• 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.
• 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: 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.
• 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: (a) 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 (b) 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.
• 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.

Appendix B

Application Guidance

Contains guidance on identifying a business combination (definition of a business, concentration test), identifying the acquirer, reverse acquisitions, recognising particular assets (intangibles, reacquired rights), and measuring fair value.