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PFRS 3 Business Combinations PDF
PFRS 3 Business Combinations PDF
PFRS 3
Business Combinations (Revised)
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Definitions
Acquiree
The business or businesses that the acquirer obtains
control of in a business combination.
Acquirer
The entity that obtains control of the acquiree.
Acquisition Date
The date on which the acquirer obtains control of the
acquiree.
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Definitions
Business
An integrated set of activities and assets that is
capable of being conducted and managed for the
purpose of providing a return in the form of
dividends, lower costs or other economic benefits
directly to investors or other owners, members or
participants.
Business Combination
A transaction or other event in which an acquirer
obtains control of one or more businesses.
Control
The power to govern the financial and operating
policies of an entity so as to obtain benefits from its
activities.
Definitions
Contingent consideration
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Definitions
Equity interests
For the purposes of this PFRS, equity interests is used
broadly to mean ownership interests of investor-owned
entities and owner, member or participant interests of
mutual entities.
Fair value
The amount for which an asset could be exchanged, or a
liability settled, between knowledgeable, willing parties
in an arm's length transaction.
Definitions
Identifiable
An asset is identifiable if it either:
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Definitions
Goodwill
An asset representing the future economic benefits
arising from other assets acquired in a business
combination that are not individually identified and
separately recognized.
Non-controlling interest
The equity in a subsidiary not attributable, directly or
indirectly, to a parent.
Definitions
Mutual Entity
An entity, other than an investor-owned entity, that
provides dividends, lower costs or other economic
benefits directly to its owners, members or participants.
For example, a mutual insurance company, a credit
union and a co-operative entity are all mutual entities.
Parent
An entity that has one or more subsidiaries.
Subsidiary
An entity, including an unincorporated entity such as a
partnership, that is controlled by another entity (known
as the parent).
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Key Changes
v PFRS 3 requires any non-controlling interest in
an acquiree to be recognized, but provides a choice
of two methods in measuring non-controlling
interests arising in a business combination:
qOption 1: to measure the non-controlling interest
at its acquisition-date fair value (consistent with the
measurement principle for other components of the
business combination
qOption 2: to measure the non-controlling interest
at the proportionate share of the value of net
identifiable assets acquired
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Key Changes
v Step acquisitions
qIf the acquirer holds a non-controlling equity investment
in the acquiree immediately before obtaining control, the
acquirer remeasures that previously held equity investment
at its acquisition-date fair value and recognizes any
resulting gain or loss in profit or loss.
qIn prior reporting periods, the acquirer may have
recognized changes in the value of its equity interest in the
acquiree in other comprehensive income (for example,
because the investment was classified as available for
sale). If so, the amount that was recognized in other
comprehensive income shall be recognized on the same
basis as would be required if the acquirer had disposed
directly of the previously held equity interest.
Key Changes
v Contingent consideration
qContingent consideration is defined in PFRS 3 as
'Usually, an obligation of the acquirer to transfer
additional assets or equity interests to the former
owners of an acquiree as part of the exchange for
control of the acquiree if specified future events occur
or conditions are met. ‘
qThe acquirer recognizes the acquisition-date fair
value of any contingent consideration as part of the
consideration transferred in exchange for the acquiree.
üThis is a significant change from the practice under the
previous version of PFRS 3 of recognizing contingent
consideration obligations only when the contingency was
probable and could be measured reliably.
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Key Changes
v Acquisition-related costs
qwith the exception of the costs of registering and
issuing debt and securities that are recognized in
accordance with PAS 32 and PAS 39, i.e. as a
reduction of the proceeds of the debt or securities
issued, PFRS 3 requires that acquisition-related
costs are to be accounted for as expenses in the
periods in which the costs are incurred and the
related services are received.
Key Changes
v Contingent liabilities
qPAS 37 defines a contingent liability as:
ü(a) a possible obligation that arises from past events and
whose existence will be confirmed only by the occurrence or
non-occurrence of one or more uncertain future events not
wholly within the control of the entity; or
ü(b) a present obligation that arises from past events but is
not recognized because:
Ø(i) it is not probable that an outflow of resources
embodying economic benefits will be required to settle
the obligation; or
Ø(ii) the amount of the obligation cannot be measured
with sufficient reliability.
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Key Changes
v Contingent liabilities
qPFRS 3 requires that for contingent liabilities assumed in a
business combination, the acquirer recognizes a liability at its fair
value if there is a present obligation arising from a past event that
can be reliably measured, even if it is not probable that an
outflow of resources will be required to settle the obligation.
qHowever, for a contingent liability that only represents a possible
obligation that arises from a past event, whose existence will be
confirmed only by the occurrence or non-occurrence of one or more
uncertain future events not wholly within the control of the entity,
no liability is to be recognized under PFRS 3.
qSimilarly, no liability is recognized in respect of a contingent
liability that represents a present obligation arising from a past
event but whose acquisition-date fair value cannot be measured
reliably.
Key Changes
v PFRS 3 requires that at the acquisition date, the acquirer
must classify or designate the identifiable assets and
liabilities assumed as necessary in order to apply other
PFRSs subsequently.
vSuch classifications and designations made by the
acquirer are to be based on the contractual terms, economic
conditions, the operating and accounting policies of the
acquirer, and any other pertinent conditions as they exist at
the acquisition date.
vThe standard provides two exceptions to this principle:
qclassification of leases in accordance with PAS 17;
qclassification of a contract as an insurance contract in
accordance with PFRS 4.
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Key Changes
v If the assets of the acquiree include a right
previously granted to it allowing use of the
acquirer's assets (a reacquired right), PFRS 3
requires it to be recognized as an identifiable
intangible asset.
Key Changes
v Indemnification assets - the acquirer
recognizes an indemnification asset at the same
time that it recognizes the indemnified item
measured on the same basis as the indemnified
item, subject to the need for a valuation
allowance for uncollectible amounts.
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Key Changes
Transition
PFRS 3 must be applied prospectively to
business combinations occurring after the
effective date. If the standard is applied before
the effective date, the amendments to PAS 27,
Consolidated and Separate Financial
Statements must also be applied at the same
date. This standard includes consequential
amendments to other standards and
interpretations.
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