This blog provides an overview of IFRS 3 Business Combinations, highlighting its core principles, key definitions, recognition and measurement criteria, and specific exceptions.

1. Core Principle: The Acquisition Method

IFRS 3 mandates the use of the acquisition method for accounting for business combinations. The pooling of interests method is no longer permitted.

• “The acquisition method is the only method of accounting for business combinations (BCs).”
• “IFRS 3 requires an acquirer to apply the acquisition method for each business combination.”

2. Identifying a Business Combination and a Business

The first step is determining whether a transaction qualifies as a business combination. This requires assessing if a business has been acquired.

• “The acquisition date determines when the acquirer recognises and measures the consideration transferred, assets acquired, and liabilities assumed.”
• “The acquisition of a ‘shell’ or ‘shelf’ company is not a business combination as defined in IFRS 3 if no business is being acquired.”
• A business generally consists of “inputs, processes, and outputs.” The acquisition of investment property with minimal services is typically treated as an asset purchase.

3. Identifying the Acquirer and Acquisition Date

Identifying the acquiring entity and the exact acquisition date is crucial for financial reporting.

• “Consider the date when the acquirer begins directing the acquiree’s operating and financing policies.”
• “The acquirer is the entity that obtains control as a result of a transaction or an event.”

4. Recognition and Measurement of Assets and Liabilities

The acquirer must recognize the identifiable assets acquired and liabilities assumed at fair value as of the acquisition date.

• This includes the identification and valuation of intangible assets and contingent liabilities.

5. Intangible Assets

IFRS 3 requires the separate recognition of identifiable intangible assets apart from goodwill.

• An intangible asset is identifiable if it meets either the contractual-legal criterion or the separability criterion.
• Examples include operating licenses, technology patents, trademarks, customer lists, and databases.

6. Goodwill

Goodwill is the excess of the consideration transferred, non-controlling interest, and previously held interest over the net identifiable assets acquired. It is not amortized but must be tested annually for impairment.

7. Exceptions to Recognition and Measurement

Certain exceptions apply to the recognition and measurement principles:

• Contingent liabilities: Recognized only if they are present obligations at the acquisition date.
• Reacquired rights: Recognized as intangible assets; settlement of pre-existing relationships may result in gains or losses.
• Leases: Recognized as assets/liabilities only if lease terms are off-market.
• Indemnification assets: Recognized separately.

8. Consideration Transferred

The consideration transferred in a business combination is measured at fair value and can include cash, assets, equity interests, and contingent consideration.

9. Non-Controlling Interests (NCI)

NCI can be measured either at fair value or as a proportionate share of the acquiree’s net identifiable assets.

10. Reverse Acquisitions and Common Control Transactions

• Reverse acquisitions of non-business shell companies are treated as share-based payments, not business combinations.
• Transactions under common control fall outside IFRS 3 and may use the pooling of interests method.

11. Post-Implementation Review (PIR)

The IASB’s PIR of IFRS 3 highlighted concerns such as:

• The impact of goodwill not being amortized.
• Changes in financial covenants due to IFRS 3 amendments.

12. IFRS for SMEs Standard

• Research and development costs are expensed, affecting intangible asset recognition.
• Goodwill is amortized over its useful life (maximum 10 years if a reliable estimate is unavailable).

13. Interaction with Other Standards

IFRS 3 interacts with several IFRS standards, including:

• IFRS 9 (Financial Instruments)
• IFRS 10 (Consolidated Financial Statements)
• IAS 12 (Income Taxes)
• IAS 27 (Separate Financial Statements)
• IAS 36 (Impairment of Assets)
• IAS 37 (Provisions, Contingent Liabilities, and Contingent Assets)
• IAS 38 (Intangible Assets)
• IFRS 2 (Share-based Payment)
• IFRS 5 (Non-current Assets Held for Sale and Discontinued Operations)
• IFRS 16 (Leases)

Conclusion

This briefing outlines key IFRS 3 requirements, including the acquisition method, business identification, recognition principles, and exceptions. The standard’s interaction with other IFRS regulations is also essential for accurate financial reporting.