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SUMMARY OF IFRS 3

Background
IFRS 3 (2008) replaced IFRS 3 (2004). Click for IASB Press Release on IFRS 3 (2008) (PDF
60k). IFRS 3 (2008) resulted from a joint project with the US Financial Accounting Standards
Board. FASB issued a similar standard in December 2007 (SFAS 141(R)) - see our News Story of
5 December 2007. The revisions will result in a high degree of convergence between IFRSs and
US GAAP in these areas, although some potentially significant differences remain.

Scope
Definition of a business combination. A business combination is a transaction or event in which
an acquirer obtains control of one or more businesses. A business is defined as an integrated set of
activities and assets that is capable of being conducted and managed for the purpose of providing
a return directly to investors or other owners, members or participants. [IFRS 3.Appendix A]
Acquirer must be identified. Under IFRS 3, an acquirer must be identified for all business
combinations. [IFRS 3.6]
Scope changes from IFRS 3(2004). IFRS 3(2008) applies to combinations of mutual entities and
combinations without consideration (dual listed shares). These are excluded from IFRS 3(2004).
Scope exclusions. IFRS 3 does not apply to the formation of a joint venture, combinations of
entities or businesses under common control. The IASB added to its agenda a separate agenda
project on Common Control Transactions in December 2007. Also, IFRS 3 does not apply to the
acquisition of an asset or a group of assets that do not constitute a business. [IFRS 3.2]
Method of Accounting for Business Combinations
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]
Steps in applying the acquisition method are: [IFRS 3.5]
1. Identification of the 'acquirer' – the combining entity that obtains control of the acquiree
[IFRS 3.7]
2. Determination of the 'acquisition date' – the date on which the acquirer obtains control of
the acquiree [IFRS 3.8]
3. Recognition and measurement of the identifiable assets acquired, the liabilities assumed
and any non-controlling interest (NCI, formerly called minority interest) in the acquiree
4. Recognition and measurement of goodwill or a gain from a bargain purchase
Measurement of acquired assets and liabilities. Assets and liabilities are measured at their
acquisition-date fair value (with a limited number of specified exceptions). [IFRS 3.18]
Measurement of NCI. IFRS 3 allows an accounting policy choice, available on a transaction by
transaction basis, to measure NCI either at:
• fair value (sometimes called the full goodwill method), or
• the NCI's proportionate share of net assets of the acquiree (option is available on a
transaction by transaction basis).
Example: P pays 800 to purchase 80% of the shares of S. Fair value of 100% of S's
identifiable net assets is 600. If P elects to measure noncontrolling interests as their
proportionate interest in the net assets of S of 120 (20% x 600), the consolidated
financial statements show goodwill of 320 (800 +120 - 600). If P elects to measure
noncontrolling interests at fair value and determines that fair value to be 185, then
goodwill of 385 is recognised (800 + 185 - 600). The fair value of the 20%
noncontrolling interest in S will not necessarily be proportionate to the price paid by P
for its 80%, primarily due to control premium or discount as explained in paragraph
B45 of IFRS 3. [IFRS 3.19]
Acq1uired intangible assets. Must always be recognised and measured at fair value. There is no
'reliable measurement' exception.
Goodwill
Goodwill is measured as the difference between:
• the aggregate of (i) the acquisition-date fair value of the consideration transferred, (ii) the
amount of any NCI, 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 acquiree;
and
• 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 recognised as a bargain purchase in profit
or loss. [IFRS 3.34]
Business Combination Achieved in Stages (Step Acquisitions)
Prior to control being obtained, the investment is accounted for under IAS 28, IAS 31, or IAS 39,
as appropriate. On the date that control is obtained, the fair values of the acquired entity's assets
and liabilities, including goodwill, are measured (with the option to measure full goodwill or only
the acquirer's percentage of goodwill). Any resulting adjustments to previously recognised assets
and liabilities are recognised in profit or loss. Thus, attaining control triggers remeasurement.
[IFRS 3.41-42]
Provisional Accounting
If the initial accounting for a business combination can be determined only provisionally by the
end of the first reporting period, account for the combination using provisional values.
Adjustments to provisional values within one year relating to facts and circumstances that existed
at the acquisition date. [IFRS 3.45] No adjustments after one year except to correct an error in
accordance with IAS 8. [IFRS 3.50]
Cost of an Acquisition
Measurement. Consideration for the acquisition includes the acquisition-date fair value of
contingent consideration. Changes to contingent consideration resulting from events after the
acquisition date must be recognised in profit or loss. [IFRS 3.58]
Acquisition costs. . Costs of issuing debt or equity instruments are accounted for under IAS 32
and IAS 39. All other costs associated with the 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]
Contingent consideration. Contingent consideration must be measured at fair value at the time
of the business combination. 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 an equity instrument or cash or
other assets paid or owed. If it is equity, the original amount is not remeasured. If the additional
consideration is cash or other assets paid or owed, the changed amount is recognised in profit or
loss. If the amount of consideration changes because of new information about the fair value of
the amount of consideration at acquisition date (rather than because of a post-acquisition event)
then retrospective restatement is required. [IFRS 3.58]
Pre-existing Relationships and Reacquired Rights
If the acquirer and acquiree were parties to a pre-existing relationship (for instance, the acquirer
had granted the acquiree a right to use its intellectual property), this must must be accounted for
separately from the business combination. In most cases, this will lead to the recognition of a gain
or loss for the amount of the 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]
Other Issues
In addition, IFRS 3 provides guidance on some specific aspects of business combinations
including:
• business combinations achieved without the transfer of consideration [IFRS 3.43-44]
• reverse acquisitions [IFRS 3.B19]
• identifying intangible assets acquired [IFRS 3.B31-34]
• the reassessment of the acquiree's contractual arrangements at the acquisition date [IFRS
3.15]
Parent's Disposal of Investment or Acquisition of Additional Investment in Subsidiary
Partial disposal of an investment in a subsidiary while control is retained. This is accounted
for as an equity transaction with owners, and gain or loss is not recognised.
Partial disposal of an investment in a subsidiary that results in loss of control. Loss of control
triggers remeasurement of the residual holding to fair value. Any difference between fair value
and carrying amount is a gain or loss on the disposal, recognised in profit or loss. Thereafter,
apply IAS 28, IAS 31, or IAS 39, as appropriate, to the remaining holding.
Acquiring additional shares in the subsidiary after control was obtained. This is accounted
for as an equity transaction with owners (like acquisition of 'treasury shares'). Goodwill is not
remeasured.
Disclosure
Disclosure of information about current business combinations
The acquirer shall 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-
66]
• name and a description of the acquiree
• acquisition date
• percentage of voting equity interests acquired
• primary reasons for the business combination and a description of how the acquirer
obtained control of the acquiree. description of the factors that make up the goodwill
recognised
• qualitative description of the factors that make up the goodwill recognised, such as
expected synergies from combining operations, intangible assets that do not qualify for
separate recognition
• acquisition-date fair value of the total consideration transferred and the acquisition-date
fair value of each major class of consideration
• details of contingent consideration arrangements and indemnification assets
• details of acquired receivables
• the amounts recognised as of the acquisition date for each major class of assets acquired
and liabilities assumed
• details of contingent liabilities recognised
• total amount of goodwill that is expected to be deductible for tax purposes
• details of any transactions that are recognised separately from the acquisition of assets and
assumption of liabilities in the business combination
• information about a bargain purchase ('negative goodwill')
• for each business combination in which the acquirer holds less than 100 per cent of the
equity interests in the acquiree at the acquisition date, various disclosures are required
• details about a business combination achieved in stages
• information about the acquiree's revenue and profit or loss
• information about a business combination whose acquisition date is after the end of the
reporting period but before the financial statements are authorised for issue
Disclosure of information about adjustments of past business combinations
The acquirer shall disclose information that enables users of its financial statements to evaluate
the financial effects of adjustments recognised in the current reporting period that relate to
business combinations that occurred in the period or previous reporting periods. [IFRS 3.61]
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:
o (i) relates to the identifiable assets acquired or liabilities assumed in a business
combination that was effected in the current or previous reporting period, and
o (ii) is of such a size, nature or incidence that disclosure is relevant to understanding
the combined entity's financial statements.