IFRS 3 Business Combinations
IFRS 3 establishes principles and requirements for how an acquirer in a business combination:
- recognises and measures in its financial statements the assets and liabilities acquired, and any interest in the acquiree held by other parties.
- recognises and measures goodwill acquired in the business combination or a gain from a bargain purchase.
- 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 recognises 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.
Standard history
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 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 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.
Other Standards have made minor consequential amendments to IFRS 3.
They include Improvements to IFRSs (issued in May 2010), IFRS 10 Consolidated Financial Statements (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), Annual Improvements to IFRSs 2011–2013 Cycle (issued December 2013), IFRS 15 Revenue from Contracts with Customers (issued May 2014), IFRS 9 Financial Instruments (issued July 2014), IFRS 16 Leases (issued January 2016), IFRS 17 Insurance Contracts (issued May 2017), Annual Improvements to IFRS Standards 2015–2017 Cycle (issued December 2017), Amendments to References to the Conceptual Framework in IFRS Standards (issued March 2018) and Amendments to IFRS 17 (issued June 2020).
Source: IFRS.org
Frequently asked questions
What is a business combination in IFRS 3
IFRS 3 establishes the following principles in relation to the recognition and measurement of items arising in a business combination: Recognition principle. We recognize identifiable assets acquired, liabilities assumed, and non-controlling interests in the acquiree separately from goodwill.
What are the disclosures required for business combination according to IFRS 3
IFRS 3 requires entities to disclose detailed information about non-controlling interests.
This includes:
- the amount of the non-controlling interest (NCI) at the acquisition date
- the fair value of the consideration transferred
- the fair value of the non-controlling interest (NCI)
- the NCI's share of the acquiree's profit or loss and comprehensive income
What is fair value in IFRS 3 business combinations
IFRS 3 requires the acquirer to recognise any contingent consideration as part of the consideration for the acquiree.
It is recognised at its fair value. Which is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction.
What is an example of a business combination
Circular combination. A circular combination is when companies from different industries and with different products merge together. If a cell phone company bought a car manufacturing company, it would be a circular combination.
What is the main purpose of business combination
The main goal of business combination is to stop fierce competition and benefit from producing on a large scale. Another advantage of a business combination is competition between and among the companies will be eliminated.
What are the types of business combinations in accounting
Five commonly referred to types of business combinations exist.
- conglomerate merger
- horizontal merger
- market extension merger
- vertical merger
- product extension merger
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