IFRS in Practice — #3: IFRS 3
Business Combinations
Company A buys Company B.
Is the accounting simply: Purchase price = investment?
Not quite.
IFRS 3 establishes how an acquirer accounts for a business combination.
The acquisition method
A qualifying business combination is generally accounted for using acquisition method..
The process involves:
1. Identifying the acquirer
Which entity obtains control?
2. Determining the acquisition date
When did the acquirer actually obtain control?
3. Recognizing and measuring identifiable assets acquired and liabilities assumed
These are generally recognized separately from goodwill and measured at their acquisition-date fair values,subject to specific IFRS 3 requirements and exceptions.
This can include assets that were not previously recognized by the acquired company — for example, certain identifiable intangible assets.
4. Recognizing goodwill or, in some cases, a bargain purchase gain
Example
Suppose Company A pays $5 million to acquire Company B.
At the acquisition date
the fair value of Company B’s identifiable assets is: $7 million
and the fair value of identifiable liabilities assumed is: $3 million
Simplified identifiable net assets:
$7M − $3M = $4M
If we ignore non-controlling interests, previously held interests and other complications for illustration:
Purchase consideration: $5M
Identifiable net assets: $4M
Goodwill = $1M
That $1 million may represent economic benefits associated with elements that cannot be individually identified and separately recognized.
An important point
Goodwill is not routinely amortized under IFRS..
Instead, it is subject to impairment testing under IAS 36..
Why does IFRS 3 matter?
An acquisition can substantially change a company’s financial statements.
Fair-value adjustments, newly recognized intangible assets and goodwill can all affect the post-acquisition balance sheet and future financial results.
In short: Buying a business is not simply recording what you paid. IFRS 3 requires you to identify and measure what you actually acquired..
Next: IFRS 4 — and why IFRS 17 replaced it.
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