IFRS 3 Business Combinations - Principles and Requirements
IFRS 3 establishes principles and requirements for how an acquirer in a business combination:
- recognizes and measures in its financial statements the assets and liabilities acquired, and any interest in the acquiree held by other parties;
- recognizes 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.
The core principles in IFRS 3 are that an acquirer measures the cost of the acquisition at the fair value of the consideration paid; allocates that cost to the acquired identifiable assets and liabilities on the basis of their fair values; allocates the rest of the cost to goodwill; and recognizes any excess of acquired assets and liabilities over the consideration paid (a ‘bargain purchase’) in profit or loss immediately.
The acquirer discloses information that enables users to evaluate the nature and financial effects of the acquisition.
History of the IFRS3 Standard
(Standard 2023 Issued by IFRS)
In April 2001 the International Accounting Standards Board (Board) 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 Board replaced IAS 22 and three related Interpretations (SIC‑9 Business Combinations—Classification either as Acquisitions or Uniting's 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 the Standards, including IFRS 3.
In January 2008 the Board issued a revised IFRS 3. Please refer to Background Information in the Basis for Conclusions on IFRS 3 for a fuller description of those revisions.
In October 2018, the Board amended IFRS 3 by issuing Definition of a Business (Amendments to IFRS 3). This amended IFRS 3 to narrow and clarify the definition of a business, and to permit a simplified assessment of whether an acquired set of activities and assets is a group of assets rather than a business.
In May 2020, the Board amended IFRS 3 by issuing Reference to the Conceptual Framework. This updated a reference in IFRS 3 and made further amendments to avoid unintended consequences of updating the reference.
Frequently asked questions
What is a business combination in IFRS 3?
A transaction or other event in which an acquirer obtains control of one or more businesses.
What are the 4 types of business combination?
They include:
Horizontal (lateral) combinations,
Vertical combinations,
Circular combinations,
and Diagonal combinations
How do you identify a business combination?
An entity obtains control of one or more businesses, defining it as a business combination. Businesses often combine by purchasing the assets or ownership of another company. You can do this using cash or shares.
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