IFRS 3 – BUSINESS COMBINATION

HISTORY September 1981

Exposure Draft E22 Accounting for Business Combinations

November 1983

IAS 22 Accounting for Business Combinations

1 January 1985 Effective date of IAS 22 (1983)June 1992 Exposure Draft E54 Business

CombinationsDecember 1993

IAS 22 (1993), Business Combinations (revised as part of the 'Comparability of Financial Statements' project)

1 January 1995 Effective date of IAS 22 (1993)

HISTORY August 1997 Exposure Draft E61 Business

CombinationsSeptember 1998

IAS 22 (1998) Business Combinations

1 July 1999 Effective date of IAS 22 (1998) Business Combinations

31 March 2004 IAS 22 superseded by IFRS 3 Business Combinations (2004), effective for business combinations for which the agreement date is on or after 31 March 2004

HISTORY

31 March 2004

IFRS 3 Business Combinations and related amended versions of IAS 36and IAS 38; IFRS 3 supersedes IAS 22

1 April 2004 Effective date of IFRS 329 April 2004 Exposure Draft of 

Proposed Amendments to IFRS 3 Combinations by Contract Alone or Involving Mutual Entities After considering comments on this ED, the Board decided to include the issues addressed in the ED in the 30 June 2005 exposure draft.

25 June 2005 Exposure Draft of Proposed Amendments to IFRS 3

HISTORY10 January 2008

Revised IFRS 3 (2008) issued. Click for Information about the 2008 revisions to IFRS 3 (2008); Deloitte Guide to IFRS 3 and IAS 27 (PDF 647k)

1 July 2009 Effective date of IFRS 3 (2008)6 May 2010 IFRS 3 amended for 

Annual Improvements to IFRSs 2010

1 July 2010 Effective date of May 2010 amendment to IFRS 3

BUSINESS COMBINATION

• A transaction or event in which an acquirer obtains control of one or more businesses.• It maybe:• Acquisition of net assets (merger or consolidation)• Acquisition of control (parent-subsidiary relationship)

CONTROL

• Control is defined as the power to govern the financial and operating policies of an entity or business so as to obtain benefits from its activities. • A number of factors may influence which entity

has control, including:• equity shareholding• control of the board • control agreements.

CONTROL

• there is a presumption of control if an entity owns more than 50 per cent of the equity shareholding in another entity.

All business combinations are accounted for using theacquisition method.

ACQUISITION METHOD

• Identify the acquirer.• Determine the acquisition date.• Recognize and measure the identifiable

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

ACQUISITION METHOD

• Recognize and measure the consideration transferred for the acquiree.• Recognize and measure goodwill or a gain

from a bargain purchase.

IDENTIFYING THE ACQUIRER

12© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

• The acquirer is the company transferring cash/other assets/equity securities in exchange for the net assets of the other entity or to gain controlling interest in the voting shares of the acquiree.

DETERMINING THE ACQUISITION DATE

• The acquisition date is the date on which the acquirer obtains control• often the date the consideration is

transferred, assets are acquired and liabilities assumed—closing date• may be other dates (earlier or later

than the closing date) at which control is assumed

13© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

RECOGNITION AND MEASUREMENT

• Recognition principle (IFRS 3.10–17):• separate recognition of identifiable assets

acquired, liabilities and contingent liabilities assumed

• Measurement principle (IFRS 3.18–20):• assets and liabilities that qualify for

recognition are measured at their acquisition-date fair values• measurement at fair value provides relevant

information that is more comparable and understandable (IFRS 3.BC198)

14© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

CONSIDERATION TRANSFERRED The consideration transferred is measured at the fair

value of the sum of assets transferred and liabilities assumed

acquisition-related costs are excluded Direct and indirect cost = expense Cost to issue debt or equity = deducted from carrying

amount of the equity or liability. contingent consideration is included

at its fair value at acquisition date

15© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

CONTINGENT CONSIDERATION

• It is the obligation of the buyer to transfer additional assets or equity interests to the seller of the business (usually cash or shares) if future events occur or conditions are met.

• It is classified as a liability or equity and is measured at fair value on the acquisition date.

SUBSEQUENT ACCTG FOR CONTINGENT CONSIDERATION

• Change in the fair value of contingent consideration resulting from additional information about conditions at the acquisition date which arises within the measurement period (within 12 months of the acquisition date. Such change should be related back to the acquisition date, with a possible effect on the goodwill acquired.

SUBSEQUENT ACCTG FOR CONTINGENT CONSIDERATION

• Changes resulting from events after the acquisition date, such as meeting an earnings target, reaching a specified share price or reaching a milestone on a research and development project, are not measurement period adjustments and must be accounted as follows:• Contingent consideration classified as equity shall not

be measured and its subsequent settlement shall be accounted for within equity.

SUBSEQUENT ACCTG FOR CONTINGENT CONSIDERATION

• Contingent consideration classified as liability that:• is a financial instrument and is within the scope of

IAS 39 shall be measured at fair value, with any resulting gain or loss recognized either in profit or loss or in other comprehensive income in accordance with that IFRS

• Is not within the scope of IAS 39 shall be accounted for in accordance with IAS 37 or other IFRs as appropriate.

GOODWILL

Goodwill (an asset) is measured initially indirectly as the difference between the consideration transferred excluding transaction costs in exchange for the acquiree’s identifiable assets, liabilities and contingent liabilities

20© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

GOODWILL CONTINUED

• If the value of acquired identifiable assets and liabilities exceeds the consideration transferred, the acquirer immediately recognizes a gain (bargain purchase)

• If less than 100% of the equity interests of another entity is acquired in a business combination, non-controlling interest is recognized.

21© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

GOODWILL CONTINUED

• Choice in each business combination to measure non-controlling interest either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s identifiable net assets.

22© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

ACQUISITION OF NET ASSETS

Acquirer

stockholders

Acquiree

Cash/other assets/equity

securities

Assets & Liabilities Cash/

other assets/equity

securities