IFRS Assignment
IFRS Assignment
IFRS Assignment
Submitted to:
Tahasin Mahmud
Lecturer, BAIUST
STUDENT INFORMATION:
ASSIGNMENT
Course Title: IFRS
Course Code: ACC4811
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Table of Content
Page no
1 4
Introduction
2 6
Background Study for IFRS 3
3 6
Objective of the studies
4 7
Scope of the studies
5 7
Limitation
6 8
Methodology
7 10
Method of accounting for business
combinations
❖ Acquisition method 10
❖ Identifying an acquirer 10
❖ Acquisition date 10
❖ Goodwill 12
❖ Disclosure 17
8 Data sources 18
9 19
Standard History
10 22
Findings
11 23
Recommendation
12 24
Reference
4
Introduction:
Navigating the complex landscape of international accounting standards is critical for increasing financial
transparency and harmonization across varied corporate environments. This paper examines three key
International Financial Reporting Standards (IFRS) - IFRS 1, IFRS 2, and IFRS 3 - each of which
addresses critical areas of financial reporting. While IFRS 1 helps entities through the transition from
their local Generally Accepted Accounting Principles (GAAP) to international standards, IFRS 2 digs into
the complexity of share-based payment transactions. Our primary focus, however, is on IFRS 3, which
takes precedence in accounting for company combinations.
The International Accounting Standards Board (IASB) issued IFRS 3, which provides a structured
framework for firms engaging in mergers, acquisitions, and other business combinations.
In an era of rapidly changing corporate operations, this standard is crucial in establishing how companies
recognize, measure, and present acquired assets and liabilities. The interplay of IFRS 1, IFRS 2, and IFRS
3 lays the groundwork for a thorough understanding of financial reporting obligations, stressing clarity,
comparability, and consistency in accounting standards.
This research seeks to unravel the interrelated dynamics of these standards, examining their consequences
for financial reporting practices and the worldwide accounting profession. It tries to illustrate the cumulative
impact of IFRS 1, IFRS 2, and IFRS 3 on the professional landscape, shaping the outlines of transparent,
reliable, and globally comparable financial reporting.
SL IFRS Title
1. IFRS 1 First-time adoption of International financial Reporting Standards
IFRS 1, also known as the "First-time Adoption of International Financial Reporting Standards," is a
fundamental guideline for organizations moving from local accounting principles to International Financial
Reporting Standards (IFRS). It offers a standardized framework for generating the initial IFRS statement
of financial condition, ensuring a smooth and transparent transition to globally recognized reporting
standards. IFRS 1 tackles the challenges and complexities of this shift by outlining guidelines for
maintaining financial integrity and comparability in the worldwide corporate environment.
IFRS 2, dubbed "Share-based Payment," is a standard that focuses on the accounting treatment for share-
based pay transactions within organizations. It describes the principles for identifying and measuring
equity- and cash-settled share-based payment transactions. IFRS 2 strives to improve openness and
comparability in financial reporting by outlining how to appropriately reflect the cost of employee services
obtained in exchange for share-based payments. The standard is critical for organizations that use stock
instruments as a form of employee remuneration because it ensures consistency and precision in accounting
standards for share-based payment transactions.
IFRS 3 is a comprehensive standard that goes beyond the basic recognition and measurement of business
combinations. It focuses on fair value measures, disclosure obligations, and the subsequent accounting
treatment following a purchase. Key elements include the recording of goodwill as the excess of the
purchase price over the fair value of net assets acquired, which is subject to impairment testing over time.
The standard also covers contingent considerations, establishing rules for their initial recognition and
subsequent adjustments based on fair value changes. Disclosure requirements include extensive information
on the acquired assets and liabilities, the impact of the merger on the acquirer's financials, and information
to assess the merged entity's financial performance and cash flows.
IFRS 3 is critical for investors, analysts, and stakeholders since it increases the openness of financial
information around company combinations, allowing for better informed decision-making and a more
accurate portrayal of an entity's financial situation after acquisition.
Business firms constantly strive to produce economic value added (EVA) for their shareholders. Expansion
has long been regarded as a proper goal of business entities to produce EVA. A business may choose to
expand either internally (building its own facilities) or externally (acquiring control of other firms through
business combinations). In general terms, business combinations unite previously separate business entities.
The overriding objective of business combinations must be increasing profitability. However, many firms
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can become more efficient by horizontally or vertically integrating operations or by diversifying their risks
through conglomerate operations.
According to IFRS 3, business combination is a transaction or other event in which an acquirer obtains
control of one or more businesses.
The International Accounting Standards Board (IASB) issued IFRS 3, which recognizes that company
combinations have a substantial influence on financial statements and require a systematic framework for
accurate and transparent reporting. The standard provides guidelines on identifying a business combination,
determining fair values for assets purchased and liabilities assumed, and accounting treatment following
the acquisition.
As the business landscape sees an increase in mergers and acquisitions, IFRS 3 plays an important role in
developing financial reporting methods. This standard's primary components are the recognition of
goodwill, contingent considerations, and the subsequent impairment testing of acquired assets.
Furthermore, IFRS 3 creates disclosure standards to increase openness on the impact of business
combinations on an entity's financial position.
This background study seeks to investigate the evolution and significance of IFRS 3, offering insight on its
crucial role in creating worldwide financial reporting systems. By studying the concepts, problems, and
implications connected with IFRS 3, this study hopes to contribute to a deeper knowledge of how this
standard effect the representation of business combinations in
Objective:
The primary goal of this research is to provide a thorough understanding of the International Financial
Reporting Standard 3 (IFRS 3), titled "Business Combinations," and its implications for financial reporting
procedures. Specific aims include:
1. Examination of IFRS 3 Principles: To deconstruct and analyze the fundamental principles contained in
IFRS 3, including how the standard tackles the recognition, measurement, and subsequent accounting
treatment of assets and liabilities acquired through business combinations.
2. Assessment of Evolution: To trace the evolution of IFRS 3, consider its historical context and identify
important revisions or updates that affected its current form. This includes recognizing how changes in
company environments and accounting processes have changed the standard over time.
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3. The Implications for Stakeholders: To assess the impact of IFRS 3 on various stakeholders, including
as investors, analysts, regulators, and companies involved in business combinations. This includes
examining how the standard promotes transparency, comparability, and informed decision-making.
4. Challenges and implementation issues: To identify the problems and practical issues that entities face
while implementing IFRS 3, as well as potential areas of complexity or ambiguity that may affect the
standard's application in real-world circumstances.
5. Global Harmonization: Investigate how IFRS 3 helps to the larger goal of global accounting
harmonization, including its role in matching financial reporting methods across jurisdictions and
encouraging consistency in business combination accounting.
The acquisition of an asset or group of assets that is not a business, although general guidance is provided
on how such transactions should be accounted for [IFRS 3.2(b)]
Combinations of entities or businesses under common control (the IASB has a separate agenda project on
common control transactions) [IFRS 3.2(c)]
Acquisitions by an investment entity of a subsidiary that is required to be measured at fair value through
profit or loss under IFRS 10 Consolidated Financial Statements. [IFRS 3.2A].
Limitation:
IFRS: Limitations of international accounting standards
Limitations of IFRS include a lack of detail, significant adoption costs, and the perception that IFRS is a
less stringent standard than what is already in place in some countries.
Lack of detail
Investors, regulators, employees, and the general public rely on the financial reporting system which
requires companies to disclose details of their financial condition annually. This information should be
presented in a consistent manner to allow reviewers to compare it to industry standards. To ensure
standardization of financial reporting, the accounting industry in each country adopts GAAP which
determines the appropriate way for accountants to present financial information on behalf of businesses.
IFRS is less detailed than GAAP. In an effort to achieve global standards that are acceptable to all, the
IASB has had to give up a level of detail that national standards currently enjoy due to the process of
developing these standards over time. In addition, GAAP is considered the gold standard for financial
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reporting. In the United States and countries such as Canada, there is little incentive to adopt what some
consider a lower standard for the sake of overall consistency.
Other significant disadvantages of IFRS relate to implementation costs. The accountancy profession in each
country adopting the new standards would have to bear the costs of re-education and training. Businesses
should also invest time and resources in the rehabilitation process. Another problem is the cost for
businesses that operate only at the national level. The transition to IFRS for these businesses far outweighs
the benefits.
Capital markets and the standards are not the same in different countries
One of the disadvantages of adopting a single standard is that capital markets are not the same in different
countries. Businesses in a country may depend primarily on bank financing to raise capital; their financial
statements may want to emphasize prudence and a strong balance sheet, as banks only want repayment with
interest; they do not speculate.
In other countries, the main source of capital is the sale of shares. A company in such a country may want
to maximize its financial profitability relative to its balance sheet.
Methodology:
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.
Acquisition method
The acquisition method (called the 'purchase method' in the 2004 version of IFRS 3) is used for all business
combinations. [IFRS 3.4]
• Identification of the 'acquirer' Determination of the 'acquisition date' Recognition and measurement
of the identifiable assets acquired, the liabilities assumed and any non-controlling interest (NCI,
formerly called minority interest) in the acquiree Recognition and measurement of goodwill or a
gain from a bargain purchase
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Identifying an acquirer
The guidance in IFRS 10 Consolidated Financial Statements is used to identify an acquirer in a business
combination, i.e. the entity that obtains 'control' of the acquiree. [IFRS 3.7]
If the guidance in IFRS 10 does not clearly indicate which of the combining entities is an acquirer, IFRS 3
provides additional guidance which is then considered:
• The acquirer is usually the entity that transfers cash or other assets where the business combination
is effected in this manner [IFRS 3.B14] The acquirer is usually, but not always, the entity issuing
equity interests where the transaction is effected in this manner, however the entity also considers
other pertinent facts and circumstances including: [IFRS 3.B15]
• Relative voting rights in the combined entity after the business combination the existence of any
large minority interest if no other owner or group of owners has a significant voting interest the
composition of the governing body and senior management of the combined entity the terms on
which equity interests are exchanged
• The acquirer is usually the entity with the largest relative size (assets, revenues or profit) [IFRS
3.B16] For business combinations involving multiple entities, consideration is given to the entity
initiating the combination, and the relative sizes of the combining entities. [IFRS 3.B17]
Acquisition date
An acquirer considers all pertinent facts and circumstances when determining the acquisition date, i.e. the
date on which it obtains control of the acquiree. The acquisition date may be a date that is earlier or later
than the closing date. [IFRS 3.8-9]
IFRS 3 does not provide detailed guidance on the determination of the acquisition date and the date
identified should reflect all relevant facts and circumstances. Considerations might include, among others,
the date a public offer becomes unconditional (with a controlling interest acquired), when the acquirer can
effect change in the board of directors of the acquiree, the date of acceptance of an unconditional offer,
when the acquirer starts directing the acquiree's operating and financing policies, or the date competition
or other authorities provide necessarily clearances.
IFRS 3 establishes the following principles in relation to the recognition and measurement of items arising
in a business combination:
Identifying an acquirer
The guidance in IFRS 10 Consolidated Financial Statements is used to identify an acquirer in a business
combination, i.e. the entity that obtains 'control' of the acquiree. [IFRS 3.7]
If the guidance in IFRS 10 does not clearly indicate which of the combining entities is an acquirer, IFRS 3
provides additional guidance which is then considered:
• The acquirer is usually the entity that transfers cash or other assets where the business combination
is effected in this manner [IFRS 3.B14]
• The acquirer is usually, but not always, the entity issuing equity interests where the transaction is
effected in this manner, however the entity also considers other pertinent facts and circumstances
including: [IFRS 3.B15]
• Relative voting rights in the combined entity after the business combination
• The existence of any large minority interest if no other owner or group of owners has a significant
voting interest
• The composition of the governing body and senior management of the combined entity
• The terms on which equity interests are exchanged
• The acquirer is usually the entity with the largest relative size (assets, revenues or profit) [IFRS
3.B16]
• For business combinations involving multiple entities, consideration is given to the entity initiating
the combination, and the relative sizes of the combining entities. [IFRS 3.B17]
Acquisition date
An acquirer considers all pertinent facts and circumstances when determining the acquisition date,
i.e. the date on which it obtains control of the acquiree. The acquisition date may be a date that is
earlier or later than the closing date. [IFRS 3.8-9]
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IFRS 3 does not provide detailed guidance on the determination of the acquisition date and
the date identified should reflect all relevant facts and circumstances. Considerations might
include, among others, the date a public offer becomes unconditional (with a controlling
interest acquired), when the acquirer can effect change in the board of directors of the
acquiree, the date of acceptance of an unconditional offer, when the acquirer starts directing
the acquiree's operating and financing policies, or the date competition or other authorities
provide necessarily clearances.
Liabilities and contingent liabilities within the scope of IAS 37 or IFRIC 21 – for transactions and
other events within the scope of IAS 37 or IFRIC 21, an acquirer applies IAS 37 or IFRIC 21 (instead
of the Conceptual Framework) to identify the liabilities it has assumed in a business combination
[IFRS 3.21A-21B]
Contingent liabilities and contingent assets – the requirements of IAS 37 Provisions, Contingent
Liabilities and Contingent Assets do not apply to the recognition of contingent liabilities arising in a
business combination; an acquirer does not recognize contingent assets acquired in a business
combination [IFRS 3.22-23A]
Income taxes – the recognition and measurement of income taxes is in accordance with IAS
12 Income Taxes [IFRS 3.24-25]
Employee benefits – assets and liabilities arising from an acquiree's employee benefits arrangements
are recognized and measured in accordance with IAS 19 Employee Benefits (2011) [IFRS 2.26]
Indemnification assets - an acquirer recognises indemnification assets at the same time and on the
same basis as the indemnified item [IFRS 3.27-28]
Share-based payment transactions - these are measured by reference to the method in IFRS
2 Share-based Payment
Assets held for sale – IFRS 5 Non-current Assets Held for Sale and Discontinued Operations is
applied in measuring acquired non-current assets and disposal groups classified as held for sale at the
acquisition date.
In applying the principles, an acquirer classifies and designates assets acquired and liabilities assumed on
the basis of the contractual terms, economic conditions, operating and accounting policies and other
pertinent conditions existing at the acquisition date. For example, this might include the identification of
derivative financial instruments as hedging instruments, or the separation of embedded derivatives from
host contracts.[IFRS 3.15] However, exceptions are made for lease classification (between operating and
finance leases) and the classification of contracts as insurance contracts, which are classified on the basis
of conditions in place at the inception of the contract. [IFRS 3.17]
Acquired intangible assets must be recognised and measured at fair value in accordance with the principles
if it is separable or arises from other contractual rights, irrespective of whether the acquiree had recognised
the asset prior to the business combination occurring. This is because there is always sufficient information
to reliably measure the fair value of these assets. [IAS 38.33-37] There is no 'reliable measurement'
exception for such assets, as was present under IFRS 3 (2004).
Goodwill
Goodwill is measured as the difference between:
• the aggregate of (i) the value of the consideration transferred (generally at fair value), (ii) the
amount of any non-controlling interest (NCI, see below), and (iii) in a business combination
achieved in stages (see below), the acquisition-date fair value of the acquirer's previously-held
equity interest in the acquire.
• the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed
(measured in accordance with IFRS 3). [IFRS 3.32]
If the difference above is negative, the resulting gain is a bargain purchase in profit or loss, which may arise
in circumstances such as a forced seller acting under compulsion. [IFRS 3.34-35] However, before any
bargain purchase gain is recognised in profit or loss, the acquirer is required to undertake a review to ensure
the identification of assets and liabilities is complete, and that measurements appropriately reflect
consideration of all available information. [IFRS 3.36]
The choice in accounting policy applies only to present ownership interests in the acquiree that entitle
holders to a proportionate share of the entity's net assets in the event of a liquidation (e.g. outside holdings
of an acquiree's ordinary shares). Other components of non-controlling interests at must be measured at
acquisition date fair values or in accordance with other applicable IFRSs (e.g. share-based payment
transactions accounted for under IFRS 2 Share-based Payment). [IFRS 3.19]
Example
P pays 800 to acquire an 80% interest in the ordinary shares of S. The aggregated fair value
of 100% of S's identifiable assets and liabilities (determined in accordance with the
requirements of IFRS 3) is 600, and the fair value of the non-controlling interest (the
remaining 20% holding of ordinary shares) is 185.
The measurement of the non-controlling interest, and its resultant impacts on the
determination of goodwill, under each option is illustrated below:
985 920
(1) The fair value of the 20% non-controlling interest in S will not necessarily be proportionate to the
price paid by P for its 80% interest, primarily due to any control premium or discount [IFRS 3.B45]
(2) Calculated as 20% of the fair value of the net assets of 600.
The accounting treatment of an entity's pre-combination interest in an acquiree is consistent with the view
that the obtaining of control is a significant economic event that triggers a remeasurement. Consistent with
this view, all of the assets and liabilities of the acquiree are fully remeasured in accordance with the
requirements of IFRS 3 (generally at fair value). Accordingly, the determination of goodwill occurs only at
the acquisition date. This is different to the accounting for step acquisitions under IFRS 3(2004).
Measurement period
If the initial accounting for a business combination can be determined only provisionally by the end of the
first reporting period, the business combination is accounted for using provisional amounts. Adjustments
to provisional amounts, and the recognition of newly identified asset and liabilities, must be made within
the 'measurement period' where they reflect new information obtained about facts and circumstances that
were in existence at the acquisition date. [IFRS 3.45] The measurement period cannot exceed one year from
the acquisition date and no adjustments are permitted after one year except to correct an error in accordance
with IAS 8. [IFRS 3.50]
In general:
• transactions that are not part of what the acquirer and acquiree (or its former owners) exchanged in
the business combination are identified and accounted for separately from business combination.
• the recognition and measurement of assets and liabilities arising in a business combination after the
initial accounting for the business combination is dealt with under other relevant standards, e.g.
acquired inventory is subsequently accounted under IAS 2 Inventories. [IFRS 3.54]
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When determining whether a particular item is part of the exchange for the acquiree or whether it is separate
from the business combination, an acquirer considers the reason for the transaction, who initiated the
transaction and the timing of the transaction. [IFRS 3.B50]
Contingent consideration
Contingent consideration must be measured at fair value at the time of the business combination and is
taken into account in the determination of goodwill. If the amount of contingent consideration changes as
a result of a post-acquisition event (such as meeting an earnings target), accounting for the change in
consideration depends on whether the additional consideration is classified as an equity instrument or an
asset or liability: [IFRS 3.58]
• If the contingent consideration is classified as an equity instrument, the original amount is not
remeasured
• If the additional consideration is classified as an asset or liability that is a financial instrument, the
contingent consideration is measured at fair value and gains and losses are recognised in either
profit or loss or other comprehensive income in accordance with IFRS 9 Financial
Instruments or IAS 39 Financial Instruments: Recognition and Measurement
• If the additional consideration is not within the scope of IFRS 9 (or IAS 39), it is accounted for in
accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets or other IFRSs
as appropriate.
Note: Annual Improvements to IFRSs 2010–2012 Cycle changes these requirements for business
combinations for which the acquisition date is on or after 1 July 2014. Under the amended requirements,
contingent consideration that is classified as an asset or liability is measured at fair value at each reporting
date and changes in fair value are recognised in profit or loss, both for contingent consideration that is
within the scope of IFRS 9/IAS 39 or otherwise.
Where a change in the fair value of contingent consideration is the result of additional information about
facts and circumstances that existed at the acquisition date, these changes are accounted for as measurement
period adjustments if they arise during the measurement period (see above). [IFRS 3.58]
Acquisition costs
Costs of issuing debt or equity instruments are accounted for under IAS 32 Financial Instruments:
Presentation and IAS 39 Financial Instruments: Recognition and Measurement/IFRS 9 Financial
Instruments. All other costs associated with an acquisition must be expensed, including reimbursements to
the acquiree for bearing some of the acquisition costs. Examples of costs to be expensed include finder's
fees; advisory, legal, accounting, valuation and other professional or consulting fees; and general
administrative costs, including the costs of maintaining an internal acquisitions department. [IFRS 3.53]
consideration transferred to the vendor which effectively represents a 'settlement' of the pre-existing
relationship. The amount of the gain or loss is measured as follows:
• for pre-existing non-contractual relationships (for example, a lawsuit): by reference to fair value
• for pre-existing contractual relationships: at the lesser of
(a) the favourable/unfavourable contract position and
(b) any stated settlement provisions in the contract available to the counterparty to whom the
contract is unfavourable. [IFRS 3.B51-53]
However, where the transaction effectively represents a reacquired right, an intangible asset is recognised
and measured on the basis of the remaining contractual term of the related contract excluding any renewals.
The asset is then subsequently amortised over the remaining contractual term, again excluding any
renewals. [IFRS 3.55]
Contingent liabilities
Until a contingent liability is settled, cancelled or expired, a contingent liability that was recognised in the
initial accounting for a business combination is measured at the higher of the amount the liability would be
recognised under IAS 37 Provisions, Contingent Liabilities and Contingent Assets, and the amount less
accumulated amortisation under IAS 18 Revenue. [IFRS 3.56]
Where share-based payment arrangements of the acquiree exist and are replaced, the value of such awards
must be apportioned between pre-combination and post-combination service and accounted for
accordingly. [IFRS 3.B56-B62B]
Indemnification assets
Indemnification assets recognised at the acquisition date (under the exceptions to the general recognition
and measurement principles noted above) are subsequently measured on the same basis of the indemnified
liability or asset, subject to contractual impacts and collectibility. Indemnification assets are only
derecognised when collected, sold or when rights to it are lost. [IFRS 3.57]
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Other issues
In addition, IFRS 3 provides guidance on some specific aspects of business combinations including:
Business combinations achieved without the transfer of consideration, e.g. 'dual listed' and 'stapled'
arrangements [IFRS 3.43-44]
Disclosure
Disclosure of information about current business combinations
An acquirer is required to disclose information that enables users of its financial statements to evaluate the
nature and financial effect of a business combination that occurs either during the current reporting period
or after the end of the period but before the financial statements are authorised for issue. [IFRS 3.59]
Among the disclosures required to meet the foregoing objective are the following: [IFRS 3.B64-B66]
Among the disclosures required to meet the foregoing objective are the following: [IFRS 3.B67]
▪ Details when the initial accounting for a business combination is incomplete for particular
assets, liabilities, non-controlling interests or items of consideration (and the amounts
recognised in the financial statements for the business combination thus have been determined
only provisionally)
▪ follow-up information on contingent consideration
▪ follow-up information about contingent liabilities recognised in a business combination
▪ a reconciliation of the carrying amount of goodwill at the beginning and end of the reporting
period, with various details shown separately
▪ the amount and an explanation of any gain or loss recognised in the current reporting period
that both:
▪ relates to the identifiable assets acquired or liabilities assumed in a business combination that
was effected in the current or previous reporting period, and
▪ is of such a size, nature or incidence that disclosure is relevant to understanding the combined
entity's financial statements.
Data Sources:
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.
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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).
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Improvements to IFRSs issued in May 2010 amended paragraphs 19, 30 and B56 and added paragraphs
B62A and B62B. An entity shall apply those amendments for annual periods beginning on or after 1 July
2010. Earlier application is permitted. If an entity applies the amendments for an earlier period it shall
disclose that fact. Application should be prospective from the date when the entity first applied this IFRS.
Paragraphs 65A–65E were added by Improvements to IFRSs issued in May 2010. An entity shall apply
those amendments for annual periods beginning on or after 1 July 2010. Earlier application is permitted. If
an entity applies the amendments for an earlier period it shall disclose that fact. The amendments shall be
applied to contingent consideration balances arising from business combinations with an acquisition date
prior to the application of this IFRS, as issued in 2008.
IFRS 10, issued in May 2011, amended paragraphs 7, B13, B63(e) and Appendix A. An entity shall apply
those amendments when it applies IFRS 10.
IFRS 13 Fair Value Measurement, issued in May 2011, amended paragraphs 20, 29, 33, 47, amended the
definition of fair value in Appendix A and amended paragraphs B22, B40, B43–B46, B49 and B64. An
entity shall apply those amendments when it applies IFRS 13.
Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27), issued in October 2012, amended
paragraph 7 and added paragraph 2A. An entity shall apply those amendments for annual periods beginning
on or after 1 January 2014. Earlier application of Investment Entities is permitted. If an entity applies these
amendments earlier it shall also apply all amendments included in Investment Entities at the same time.
Annual Improvements to IFRSs 2010–2012 Cycle, issued in December 2013, amended paragraphs 40 and
58 and added paragraph 67A and its related heading. An entity shall apply that amendment prospectively
to business combinations for which the acquisition date is on or after 1 July 2014. Earlier application is
permitted. An entity may apply the amendment earlier provided that IFRS 9 and IAS 37 (both as amended
by Annual Improvements to IFRSs 2010–2012 Cycle) have also been applied. If an entity applies that
amendment earlier it shall disclose that fact.
Annual Improvements Cycle 2011–2013 issued in December 2013 amended paragraph 2(a). An entity shall
apply that amendment prospectively for annual periods beginning on or after 1 July 2014. Earlier
application is permitted. If an entity applies that amendment for an earlier period it shall disclose that fact.
IFRS 15 Revenue from Contracts with Customers, issued in May 2014, amended paragraph 56. An entity
shall apply that amendment when it applies IFRS 15.
IFRS 9, as issued in July 2014, amended paragraphs 16, 42, 53, 56, 58 and B41 and deleted paragraphs
64A, 64D and 64H. An entity shall apply those amendments when it applies IFRS 9.
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IFRS 16, issued in January 2016, amended paragraphs 14, 17, B32 and B42, deleted paragraphs B28–B30
and their related heading and added paragraphs 28A–28B and their related heading. An entity shall apply
those amendments when it applies IFRS 16.
IFRS 17, issued in May 2017, amended paragraphs 17, 20, 21, 35 and B63, and after paragraph 31 added a
heading and paragraph 31A. Amendments to IFRS 17, issued in June 2020, amended paragraph 31A. An
entity shall apply the amendments to paragraph 17 to business combinations with an acquisition date after
the date of initial application of IFRS 17. An entity shall apply the other amendments when it applies IFRS
17.
Annual Improvements to IFRS Standards 2015–2017 Cycle, issued in December 2017, added paragraph
42A. An entity shall apply those amendments 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 January 2019. Earlier
application is permitted. If an entity applies those amendments earlier, it shall disclose that fact.
Definition of a Business, issued in October 2018, added paragraphs B7A–B7C, B8A and B12A–B12D,
amended the definition of the term ‘business’ in Appendix A, amended paragraphs 3, B7–B9, B11 and B12
and deleted paragraph B10. An entity shall apply these amendments 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
January 2020 and to asset acquisitions that occur on or after the beginning of that period. Earlier application
of these amendments is permitted. If an entity applies these amendments for an earlier period, it shall
disclose that fact.
Transition
Assets and liabilities that arose from business combinations whose acquisition dates preceded the
application of this IFRS shall not be adjusted upon application of this IFRS.
Contingent consideration balances arising from business combinations whose acquisition dates preceded
the date when an entity first applied this IFRS as issued in 2008 shall not be adjusted upon first application
of this IFRS. Paragraphs 65B–65E shall be applied in the subsequent accounting for those balances.
Paragraphs 65B–65E shall not apply to the accounting for contingent consideration balances arising from
business combinations with acquisition dates on or after the date when the entity first applied this IFRS as
issued in 2008. In paragraphs 65B–65E business combination refers exclusively to business combinations
whose acquisition date preceded the application of this IFRS as issued in 2008.
If a business combination agreement provides for an adjustment to the cost of the combination contingent
on future events, the acquirer shall include the amount of that adjustment in the cost of the combination at
the acquisition date if the adjustment is probable and can be measured reliably.
A business combination agreement may allow for adjustments to the cost of the combination that are
contingent on one or more future events. The adjustment might, for example, be contingent on a specified
level of profit being maintained or achieved in future periods, or on the market price of the instruments
issued being maintained. It is usually possible to estimate the amount of any such adjustment at the time of
initially accounting for the combination without impairing the reliability of the information, even though
some uncertainty exists. If the future events do not occur or the estimate needs to be revised, the cost of the
business combination shall be adjusted accordingly.
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However, when a business combination agreement provides for such an adjustment, that adjustment is not
included in the cost of the combination at the time of initially accounting for the combination if it either is
not probable or cannot be measured reliably. If that adjustment subsequently becomes probable and can be
measured reliably, the additional consideration shall be treated as an adjustment to the cost of the
combination.
In some circumstances, the acquirer may be required to make a subsequent payment to the seller as
compensation for a reduction in the value of the assets given, equity instruments issued or liabilities incurred
or assumed by the acquirer in exchange for control of the acquiree. This is the case, for example, when the
acquirer guarantees the market price of equity or debt instruments issued as part of the cost of the business
combination and is required to issue additional equity or debt instruments to restore the originally
determined cost. In such cases, no increase in the cost of the business combination is recognised. In the
case of equity instruments, the fair value of the additional payment is offset by an equal reduction in the
value attributed to the instruments initially issued. In the case of debt instruments, the additional payment
is regarded as a reduction in the premium or an increase in the discount on the initial issue.
An entity, such as a mutual entity, that has not yet applied IFRS 3 and had one or more business
combinations that were accounted for using the purchase method shall apply the transition provisions in
paragraphs B68 and B69.
Income taxes: For business combinations in which the acquisition date was before this IFRS is
applied, the acquirer shall apply the requirements of paragraph 68 of IAS 12, as amended by this IFRS,
prospectively. That is to say, the acquirer shall not adjust the accounting for prior business combinations
for previously recognized changes in recognized deferred tax assets. However, from the date when this
IFRS is applied, the acquirer shall recognize, as an adjustment to profit or loss (or, if IAS 12 requires,
outside profit or loss), changes in recognized deferred tax assets.
Findings on IFRS 3:
"Business Combinations," underscore critical facets integral to the accounting treatment of mergers and
acquisitions. A prominent revelation pertains to the pronounced emphasis placed on fair value
measurements when assessing acquired assets and assumed liabilities. The standard's explicit directive to
recognize goodwill in instances where the acquisition cost surpasses the fair value of identifiable net assets
underscores the imperative of precision in evaluating intangible assets.
Moreover, IFRS 3 introduces nuanced considerations for contingent consideration arrangements, obligating
entities to judiciously account for potential future payments contingent upon specific events. The standard's
substantial emphasis on transparent disclosures further mandates entities to furnish comprehensive
information delineating the nature and financial ramifications of business combinations.
These discernments collectively underscore the critical importance of exactitude in fair value assessments,
astute evaluation of contingent elements, and the implementation of robust disclosure practices for entities
adhering to IFRS 3 in the realm of business combinations.
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The salient findings within IFRS 3, "Business Combinations," delineate critical principles governing the
accounting treatment of mergers and acquisitions:
IFRS 3 underscores the pivotal role of fair value in the accounting process, necessitating the valuation of
acquired assets, liabilities, and non-controlling interests at their market-based values for enhanced financial
reporting accuracy.
• Recognition of Goodwill:
The standard mandates the recognition of goodwill when the cost of acquisition surpasses the fair value of
identifiable net assets acquired. This articulates the acknowledgment of intangible value associated with
the acquired entity.
Comprehensive disclosures are mandated by the standard, requiring entities to furnish transparent and
exhaustive information regarding the nature and financial ramifications of business combinations. This
imperative enhances transparency and facilitates well-informed decision-making by stakeholders.
The standard establishes specific scope limitations, excluding certain transactions—such as those involving
entities under common control. A meticulous understanding and application of these limitations are
imperative to ensure precise compliance.
• Consistency in Application:
IFRS 3 accentuates the importance of consistently applying accounting policies and methodologies,
particularly in the context of fair value measurements. This consistency safeguards the comparability of
financial information across diverse reporting periods.
These findings collectively serve as guiding principles for entities engaged in business combinations,
delineating the imperative of adherence to meticulous accounting practices as mandated by IFRS 3.
To achieve this, entities should continually refine and update their valuation methodologies in accordance
with the evolving market conditions. Engaging proficient valuation professionals and adhering to best
practices will not only bolster the accuracy and reliability of financial reporting but also reinforce the
transparency of information provided to stakeholders.
This proactive stance aligns with the overarching objective of IFRS 3, which seeks to furnish stakeholders
with pertinent and dependable insights into the financial implications of business combinations.
Consequently, entities are encouraged to view adherence to rigorous fair value principles as a strategic
imperative, contributing to the integrity and credibility of their financial disclosures.
Reference:
Barth, M. E., & Schipper, K. (2008). Financial reporting transparency. Journal of Accounting, Auditing &
Finance, 23(2), 173–190.