IFRS 3 – Business Combinations, Scope and Disclosure Requirements

Overview

IFRS 3 Business Combinations describes how an acquirer accounts for the purchase of control of a business (e.g. an acquisition or merger).

These business combinations are accounted for using the ‘acquisition method,’ which usually requires the purchase of assets and the assumption of liabilities to be valued at their fair values at the acquisition date.

In January 2008, a new version of IFRS 3 was released. It applies to business combinations that occur in an entity’s first year period commencing on or after 1 July 2009.

Background

IFRS 3 (2008) aims to improve the relevance, trustworthiness, and comparability of information concerning business combinations (such as acquisitions and mergers) and their impacts. It establishes the rules for recognising and measuring acquired assets and liabilities, determining goodwill, and making required disclosures.

Scope

IFRS 3 must be used to account for business combinations, however, it does not apply to the following:

• Joint venture creation
• Acquisition of a non-business asset or collection of assets, while broad guidance is provided on how such transactions should be accounted for
• Combinations of companies or enterprises controlled by the same person (the IASB has a separate agenda item for transactions with shared control)
• Acquisitions of a subsidiary by an investment firm that are required to be reported at fair value through profit or loss under International Financial Reporting Standards (IFRS) 10 Consolidated Financial Statements.

Disclosure Requirements

Disclosure of information about current business combinations

An acquirer is required to provide information that enables users of its financial statements to assess the nature and financial impact of a business combination that happens during the current reporting period or after the period ends but before the financial statements are authorised for release.

Among the disclosures required to meet the foregoing objective are the following: [IFRS 3.B64-B66]

• 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 about any transactions that are recognised separately from the acquisition of assets and assumption of liabilities in the business combination
• information about a bargain purchase
• information about the measurement of non-controlling interests
• 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

An acquirer is required to provide information that enables users of its financial statements to assess the financial effects of adjustments recognised in the current reporting period for business combinations that occurred during the period or earlier reporting periods.

Among the disclosures required to meet the foregoing objective are the following:

• details when the initial accounting for a business combination is incomplete for particular assets, liabilities, non-controlling interests or items of consideration
• 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.

Disclosure requirements under IFRS 3 include providing information about the nature and financial effects of a business combination. This includes disclosing information about significant factors that contributed to recognizing goodwill and any amounts classified as provisional in relation to a past business combination.

In addition to disclosure requirements specific to business combinations, entities are also required to comply with other relevant IFRS standards when accounting for aspects such as income taxes, impairment testing, contingent liabilities, and intangible assets acquired in a business combination.