2 (1) .6 Business Combinations - Ifrs Insights

2.
6 Business combinations - IFRS Insights
- IFRS Insights
2.6 Business combinations

(IFRS 3, IAS 38)
Overview of currently effective requirements
• All business combinations are accounted for using the purchase method,
with limited exemptions.
• A business combination is the bringing together of separate entities or

businesses into one reporting entity.
• A business can be an operation managed for the purpose of providing a

return to investors or lower costs. An entity in its development stage can
meet the definition of a business.
• In some cases the legal acquiree is identified as the acquirer for accounting
purposes ("reverse acquisition").
• The acquisition date is the date on which control is transferred to the

acquirer.
• The cost of acquisition is the amount of cash or cash equivalents paid, plus
the fair value of other purchase consideration given, plus any costs directly
attributable to the acquisition.
• The fair value of securities issued by the acquirer is determined at the date
of acquisition.
• A liability for contingent consideration is recognised as soon as payment

becomes probable and the amount can be measured reliably.
• The assets acquired and liabilities and contingent liabilities assumed

generally are recognised at fair value.
• While there is general guidance on measuring fair values, there is no

detailed guidance on valuation methodologies.
• Acquired non-current assets (disposal groups) classified as held for sale

are recognised at fair value less costs to sell.
• An intangible asset is recognised separately from goodwill when it is

identifiable, the entity has control over it, and its fair value can be
measured reliably.
• A restructuring provision is recognised only when it is an existing liability of

the acquiree at the acquisition date.
• Any change in the assessment of the recoverability of the acquirer's

deferred tax assets as a result of the business combination is recognised in
profit or loss.
• Except in respect of goodwill, deferred tax is recognised on temporary

differences arising from fair value adjustments recognised as part of the
purchase accounting.
• Subject to limited exceptions, adjustments to goodwill can be made only

within 12 months of the acquisition.
• If additional deferred tax assets of the acquiree that were not recognised
at the date of acquisition are realised subsequently, then the adjustment is
© 2008 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the
KPMG network recognised
are affiliated. in the income statement in the income tax line, and goodwill is
adjusted with a corresponding amount recognised in profit or loss. Page 1 / 42
• When the acquirer's interest in the net fair value of the assets acquired and
purchase accounting.
• Subject to limited exceptions, adjustments to goodwill can be made only

2.6 Business combinations - IFRS Insights
within 12 months of the acquisition.
• If additional deferred tax assets of the acquiree that were not recognised
at the date of acquisition are realised subsequently, then the adjustment is
recognised in the income statement in the income tax line, and goodwill is
adjusted with a corresponding amount recognised in profit or loss.
• When the acquirer's interest in the net fair value of the assets acquired and
liabilities and contingent liabilities assumed exceeds the cost of acquisition
(negative goodwill), any excess is recognised in profit or loss immediately
after reassessing the identification and measurement of the assets
acquired.
• "Push down" accounting, whereby fair value adjustments are recognised in

the financial statements of the acquiree, is not permitted.
• When an acquisition is achieved in successive share purchases, the assets

acquired and liabilities and contingent liabilities assumed are recognised at
full fair value when control is obtained, i.e., the share of the identifiable
assets, liabilities and contingent liabilities acquired in previous transactions
is revalued. Each exchange transaction is considered separately in
determining goodwill.
• There is no guidance on accounting for common control transactions,

combinations by contract alone or combinations involving two or more
mutual entities.
Currently effective requirements

This publication reflects IFRSs in issue at 1 August 2008. The currently effective requirements cover annual periods
beginning on 1 January 2008. The requirements related to this topic are derived mainly from IFRS 3 Business Combinations.
Previously effective requirements, forthcoming requirements and future

developments
When a currently effective requirement is significantly different from the previously effective requirement, it is marked
with a † and the previously effective requirement is explained in the accompanying boxed text. In respect of this topic no
previously effective requirements are noted.
The forthcoming requirements related to this chapter are derived from the:
• revised version of IFRS 3 Business Combinations, which supersedes the current version of the
standard and is effective for business combinations for which the acquisition date is in annual
periods beginning on or after 1 July 2009; earlier application is permitted in annual periods
beginning on or after 30 June 2007 as long as the amendments to IAS 27 Consolidated and
Separate Financial Statements also are applied. The revised version of IFRS 3 is the subject of
chapter 2.6A. Therefore these forthcoming requirements are not added to each section of this
chapter.
• Amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards and

IAS 27 Consolidated and Separate Financial Statements - Cost of an Investment in a
Subsidiary, Jointly Controlled Entity or Associate, which are effective for annual periods
beginning on or after 1 January 2009; earlier application is permitted. The amendments to IAS
27 Consolidated and Separate Financial Statements apply prospectively; if an entity applies the
requirements for the formation of a new parent prior to the effective date, then all later such
reorganisations should be restated. When a currently effective requirement will be changed by
the amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards
and IAS 27, it is marked with a # as a forthcoming requirement. A brief outline of the impact of
the amendments to IFRS 1 and IAS 27 on this topic is given in 2.6.135 and 2.6.1015.
When a significant change to the currently effective or forthcoming requirements is expected, it is marked with a * as an
area that may be subject to future developments, and a brief outline of the relevant project is given in 2.6.1060.
KPMG network are affiliated.
2.6.10 Scope Page 2 / 42
reorganisations should be restated. When a currently effective requirement will be changed by
the amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards
and IAS 27, it is marked with a # as a forthcoming requirement. A brief outline of the impact of
the amendments to IFRS 1 and IAS2.627Business
on thiscombinations - IFRS
topic is given Insights and 2.6.1015.
in 2.6.135
When a significant change to the currently effective or forthcoming requirements is expected, it is marked with a * as an
area that may be subject to future developments, and a brief outline of the relevant project is given in 2.6.1060.
2.6.10 Scope
2.6.20 Exclusions
2.6.20.10 IFRS 3 deals with the accounting for all business combinations except:
• transactions among entities under common control;
• the formation of joint ventures (see 3.5.530);
• business combinations involving two or more mutual entities; and
• business combinations in which separate entities or businesses are brought together to form a
reporting entity by contract alone without obtaining an ownership interest. [IFRS 3.3]
2.6.20.20 The scope exclusion in respect of joint ventures applies only to transactions that give rise to the formation of a
joint venture. Accordingly, the requirements of IFRS 3 are applied to a business combination entered into by a joint venture
after its formation.
2.6.20.30 The accounting for common control transactions is discussed in detail in 2.6.900 - .1030.
2.6.20.40 The definition of a business combination by contract alone makes reference to "form[ing] a reporting entity by
contract alone". Therefore, in our view a business combination by contract alone always will result in the establishment of a
new economic, i.e., virtual entity, which is created as a result of a contractual arrangement in terms of which the
stakeholders do not have ownership interests. We do not believe that the term encompasses all parent-subsidiary
relationships in which control is established via a contract, e.g., a situation in which an investor has a 50 percent interest in
an investee and obtains control through a shareholders' agreement. (see 2.5.50). [IFRS 3.3]
2.6.30 Identifying a business combination
2.6.40 Definition of a business combination

2.6.40.10 A business combination is "the bringing together of separate entities or businesses into one reporting entity".
[IFRS 3 A]
2.6.50 Definition of a business

2.6.50.10 A business is an integrated set of activities and assets conducted and managed for the purpose of providing:
• a return to investors; or
• lower costs or other economic benefits directly and proportionately to policyholders or

participants.
2.6.50.20 A business generally consists of inputs, processes applied to those inputs and resulting outputs that are, or will
be, used to generate revenues. If goodwill is present in a transferred set of activities and assets, then the transferred set is
presumed to be a business. [IFRS 3 A]
2.6.50.30 In our view, the reference to goodwill in the definition is intended to mean "core goodwill", which includes the
"going concern" element of goodwill and expected synergies and other benefits from combining the acquiree's net assets
with those of the acquirer, rather than goodwill arising as a consequence of accounting for a business combination. [IFRS
3.BC130- BC131]
2.6.50.40 The definition does not use the term "operation", which is used and defined in relation to discontinued
operations (see 5.4.130). A business and an operation are distinct terms, and a business may not always be an operation,
and vice versa.
2.6.60 Acquisition of a group of assets

2.6.60.10
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Ifare entity obtains control of one or more other entities that are not businesses, then the bringing together of
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those entities is not a business combination. When an entity acquires a group of assets or net assets that do not constitute
business, generally it allocates the cost of acquisition between the individual identifiable assets and liabilities in the group
based on their relative fair values at the date of acquisition. [IFRS 3.4]
2.6.50.40 The definition does not use the term "operation", which is used and defined in relation to discontinued
operations (see 5.4.130). A business and an operation are distinct terms, and a business may not always be an operation,
and vice versa. 2.6 Business combinations - IFRS Insights
2.6.60 Acquisition of a group of assets

2.6.60.10 If an entity obtains control of one or more other entities that are not businesses, then the bringing together of
those entities is not a business combination. When an entity acquires a group of assets or net assets that do not constitute a
business, generally it allocates the cost of acquisition between the individual identifiable assets and liabilities in the group
based on their relative fair values at the date of acquisition. [IFRS 3.4]
2.6.60.20 The following differences in accounting may arise depending on whether an entity acquires a business, or a
group of (net) assets that is not a business:
• Contingent liabilities are recognised at their fair value if acquired in a business combination, but
are not recognised if acquired in an asset purchase.
• The initial recognition exemption relating to deferred tax does not apply to a business
combination(see 3.13.90.10 and 3.13.170.10).
• Goodwill or negative goodwill does not arise in an asset purchase.
• Identifiable assets acquired and liabilities assumed in a business combination generally are
measured at fair value. In an asset purchase the cost of the group of assets is allocated to the
individual identifiable assets and liabilities of the group based on their relative fair values.
2.6.70 Indicators of a business

2.6.70.10 In certain transactions it can be difficult to conclude whether the definition of a business has been met. In our
view, whether or not the acquiree is a legal entity is not relevant in making this determination.
2.6.70.20 All relevant facts and circumstances need to be analysed in assessing whether the definition of a business is
met. Some indicators to be considered are discussed below. [IFRS 3 A]
2.6.80 Integration
2.6.80.10 In our view, a significant characteristic of a business is that the underlying set of activities and assets is
integrated in generating revenues. A collection of assets without connecting activities is unlikely to represent a business.
The assets in a business are integrated and interact in a way that enables an entity to produce and sell goods and services
or to derive income in some other way. An integrated set of assets is likely to include processes that enable these assets to
work together. We believe that a development stage entity also may be a business if it comprises an integrated set of
activities and assets that are being prepared to give it the ability to generate revenues in the future.
2.6.90 Taking over contracts with employees
2.6.90.10 If the acquiree has employees and the related employment contracts are transferred to the acquirer, then this
may be an indicator that a business has been acquired. Indeed, often goodwill in a business is created by skilled,
knowledgeable employees, i.e., in-place workforce. The definition of a business provides that if goodwill is present in a set
of activities and assets, then the transferred set is presumed to be a business.
2.6.90.20 However, in our view, a group of assets acquired could still be a business even if some of the staff employed
formerly by the acquiree are replaced by the acquirer's own staff and those staff will carry out the acquiree's existing
activities and processes necessary to generate revenues. Not taking over all of the employees might be a major part of the
synergies that the acquirer is seeking to achieve by the acquisition. The acquirer's decision not to retain all employees does
not mean that the acquired assets do not comprise a business. [IFRS 3.BC13]
2.6.100 Outsourcing
2.6.100.10 If some of the revenue-generating activities and processes were outsourced by the acquiree before the
acquisition and the related contracts are taken over by the acquirer, then this could indicate that the processes and activities
necessary to generate revenues are in place, and therefore that the group of assets acquired is a business. Conversely, if
none of the processes or activities is in place at the acquisition date, but instead are to be designed and established by the
acquirer, then this could indicate that what was acquired is not a business.
2.6.110 Exclusion of some components of a business

KPMG network In
2.6.110.10 are our
affiliated.
view, the exclusion of some components of a business does not preclude classification of an acquisition
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as a business combination. However, judgement is required in deciding whether an acquired set of activities and assets is a
business. The following examples illustrate this point.
acquisition and the related contracts are taken over by the acquirer, then this could indicate that the processes and activities
necessary to generate revenues are in place, and therefore that the group of assets acquired is a business. Conversely, if
none of the processes or activities is in place at the acquisition date, but instead are to be designed and established by the
acquirer, then this could indicate that what was 2.6acquired is not a business.
Business combinations - IFRS Insights
2.6.110 Exclusion of some components of a business
2.6.110.10 In our view, the exclusion of some components of a business does not preclude classification of an acquisition
as a business combination. However, judgement is required in deciding whether an acquired set of activities and assets is a
business. The following examples illustrate this point.
2.6.110.20 Entity E acquires the operations of entity F except for one of F's patents, which is an important part of F's
business; however, simultaneously the parties enter into an agreement that gives E the right to licence and use F's patent
on a long-term basis. Even if E does not obtain ownership of the patent, we believe that the substance of this arrangement
is that E has acquired a business, which includes the rights to the patent, and accordingly that there is a business
combination.
2.6.110.30 Entity G purchases a production plant together with most of the related processes, i.e., production, storage,
delivery, billing, advertising, post-production servicing, administration etc. G also takes over the contracts with most of the
employees. However, G would like to integrate the acquired business with its own purchasing processes and therefore does
not take over the employees involved in purchasing activities or the purchasing processes. IFRS 3 provides that the acquired
set does not need to be "self-sustaining" in order to be a business. The fact that some elements of a business, such as
purchasing processes and related employees, are not taken over does not mean that what is acquired is not a business. Not
taking over the purchasing processes or employees involved in the purchasing function of the acquiree may be a part of the
synergies that G intends to obtain by entering into the business combination. Therefore we believe that the acquired set of
assets meets the definition of a business in this example. [IFRS 3.BC13]
2.6.110.40 Entity H purchases four investment properties (shopping malls) that are fully rented to tenants. H also takes
over the contract with the property management company, which has unique knowledge relating to investment properties in
the area and makes all decisions both of a strategic nature and related to the daily operations of the malls. Ancillary
activities necessary to fulfil the obligations arising from these lease contracts also are in place, specifically activities related
to maintaining the building and administering the tenants. We believe that in this example a business has been acquired. In
contrast, if property management with unique knowledge is not taken over, then in our view the group of assets might not
be a business. We believe that the acquired set might not represent an integrated set of activities and assets as the key
element of the infrastructure of the business, property management, is not taken over. If so, H would account for the
transaction as the purchase of individual investment properties, and not as the purchase of a business.
2.6.110.50 Entity B acquires a production plant and some inventory from entity C. B integrates its existing production line
into the production plant, but does not take over any of the other elements that make C a business. The elements not
acquired include employees, operational processes and distribution networks. In this case we do not believe that there is a
business combination because the exclusion of these key elements means that what is acquired does not comprise a
business.
2.6.115Call option over components of the business
2.6.115.10 The seller may retain an option to repurchase key components of the business sold. For example, entity S sells
its research and development business to entity T. However, at the same time the parties agree on an option for S to
reacquire the service contracts of the key research personnel in the business, exercisable at any time over the next two
years; without those personnel one of the elements necessary for the group of assets to comprise a business is missing. In
our view, T has not acquired a business; instead T has acquired a group of assets that does not comprise a business.
2.6.120 Management intent
2.6.120.10 In our view, the intentions of the acquirer or the acquirer's management, e.g., how the acquirer intends to use
the business acquired, or whether it intends to continue to operate the business it acquired or, for example, sell assets
included in the business separately, are not relevant in determining whether the acquired set of assets represents a
business.
2.6.130 Substance of a transaction

2.6.130.10 In some cases it may appear that a business combination has occurred, when in fact nothing of substance has
happened. For example, entity G is incorporated in Singapore and wishes to move its operations to Australia. G's shares are
held widely and there is no controlling shareholder or group of shareholders. G incorporates a new entity H in Australia; H
issues one share for every share held in G, with the same rights and interests. Ownership of G's net assets is transferred to
H. Although the legal form of the transaction is that H has acquired G, it is in substance a continuation of the existing entity.
Effectively
KPMG networkG has arranged its own acquisition. In our view, in the consolidated financial statements of H the transaction
are affiliated.
should be recognised at the previously recorded book values of G and not at fair values. Page 5 / 42
2.6.130.20 An alternative approach is to consider the transaction a reverse acquisition. Under this view, although H is the
2.6.130 Substance of a transaction
2.6.130.10 In some cases it may appear that a business combination has occurred, when in fact nothing of substance has
happened. For example, entity G is incorporated2.6 in Singapore
Business and wishes
combinations - IFRSto move its operations to Australia. G's shares are
Insights
held widely and there is no controlling shareholder or group of shareholders. G incorporates a new entity H in Australia; H
issues one share for every share held in G, with the same rights and interests. Ownership of G's net assets is transferred to
H. Although the legal form of the transaction is that H has acquired G, it is in substance a continuation of the existing entity.
Effectively G has arranged its own acquisition. In our view, in the consolidated financial statements of H the transaction
should be recognised at the previously recorded book values of G and not at fair values.
2.6.130.20 An alternative approach is to consider the transaction a reverse acquisition. Under this view, although H is the
legal acquirer, it cannot remeasure assets and liabilities of G at fair value in its consolidated financial statements because G
is the economic acquirer. The accounting would be the same as described above. Reverse acquisition accounting is
discussed further in 2.6.170 and 790-.827.
2.6.130.30 The consolidated financial statements prepared following such a restructuring are issued under the name of H,
but are described in the notes as being a continuation of the financial statements of G. The full year figures of G are
included in the consolidated financial statements of H, together with comparatives.
2.6.130.40 Separate financial statements have a purpose different from consolidated financial statements. Therefore, in
our view it is preferable in H's separate financial statements to measure the investment in G at fair value upon initial
recognition. #
2.6.135 Forthcoming requirements
2.6.135.10 The amendments to IFRS 1 and IAS 27, published in May 2008, specify the accounting in the separate
financial statements of a newly formed entity that becomes the new parent entity of another entity in a group when:
• the new parent entity issues equity instruments as consideration in the reorganisation;
• there is no change in the group's assets or liabilities as a result of the reorganisation; and
• there is no change in the interest of the shareholder, either absolute or relative to one
another, as a result of the reorganisation.
2.6.135.20 In such cases, if the new parent entity elects to measure the cost of the investment in the subsidiary at cost
in accordance with paragraph 38(a) of IAS 27, then cost is equal to its share of total equity shown in the separate
financial statements of the subsidiary at the date of the reorganisation.
2.6.140 Applicability of purchase accounting

2.6.140.10 Purchase accounting is applied to all business combinations within the scope of IFRS 3. The uniting of interests
method cannot be used for transactions within the scope of IFRS 3. [IFRS 3.14]
2.6.150 Purchase accounting
2.6.160 Identifying the acquirer

2.6.160.10 An acquirer must be identified for each business combination. An acquirer is the combining entity that obtains
control of the other combining entities or businesses. [IFRS 3.17-23]
2.6.160.20 The relationship between the combining entities and / or businesses determines which entity obtains control.
In most acquisitions identifying the acquirer will be straightforward because it will be clear that one entity took control of
another entity. However, in some cases when shares are issued in order to pay for the acquisition, the process of identifying
an acquirer may be more complex.
2.6.160.25 IFRS 3 refers to the definition of control in IAS 27, which is the power to govern the financial and operating
policies of the other entity or business so as to obtain benefits from its activities (see 2.5.20). However, in our view the IAS
27 guidance should not be the sole focus while ignoring the additional guidance in IFRS 3. Otherwise there is a risk that the
analysis of which party is the acquirer may lead to an answer that conflicts with what we believe is the intention of IFRS 3.
For example, simply applying the IAS 27 definition of control would mean that a reverse acquisition (see 2.6.170) could not
arise as the entity that owns all of the share capital of another entity always will have the power to govern its financial and
operating policies so as to gain benefits from that other entity's activities. [IFRS 3.19]
2.6.160.30 If the fair value of one entity is significantly greater than that of the other, then the larger entity is likely to be
the acquirer; if an acquisition is effected through an exchange of voting ordinary equity instruments for cash or other assets,
then the entity giving up the cash or other assets is likely to be the acquirer; or if one entity can dominate the selection Page of6 / 42
the management team of the combined entity, then the dominant entity normally is the acquirer. [IFRS 3.20]
analysis of which party is the acquirer may lead to an answer that conflicts with what we believe is the intention of IFRS 3.
For example, simply applying the IAS 27 definition of control would mean that a reverse acquisition (see 2.6.170) could not
arise as the entity that owns all of the share capital of another
2.6 Business entity always
combinations will have the power to govern its financial and
- IFRS Insights
operating policies so as to gain benefits from that other entity's activities. [IFRS 3.19]
2.6.160.30 If the fair value of one entity is significantly greater than that of the other, then the larger entity is likely to be
the acquirer; if an acquisition is effected through an exchange of voting ordinary equity instruments for cash or other assets,
then the entity giving up the cash or other assets is likely to be the acquirer; or if one entity can dominate the selection of
the management team of the combined entity, then the dominant entity normally is the acquirer. [IFRS 3.20]
2.6.170 Reverse acquisition

2.6.170.10 IFRSs require the acquirer to be identified on the basis of control. In order to identify the acquirer, the
relationship between the combining entities is considered. The acquirer may be the legal subsidiary in some cases, i.e., a
reverse acquisition. [IFRS 3.21]
2.6.170.20 A reverse acquisition may occur when an entity issues shares in return for acquiring the shares in another
entity. For example, entity S acquires 60 percent of the shares in entity T. As consideration S issues its own shares to T's
shareholders; however, S issues so many shares that T's shareholders obtain an 80 percent interest in S. In this case all
indicators for identifying an acquirer should be considered to determine which entity is the acquirer. If the conclusion is that
T is the acquirer for accounting purposes, then the transaction is referred to as a reverse acquisition. In this case S is
referred to as the legal parent and its consolidated financial statements are prepared as a continuation of the financial
statements of T, with S portrayed as having been acquired by T.
2.6.170.30 The accounting for reverse acquisitions, and related financial reporting issues, are discussed in 2.6.790 - .827.
2.6.180 Creation of a new entity

2.6.180.10 When new entity is created to issue equity instruments to effect a business combination, e.g., to acquire the
shares or net assets of two other entities, one of the combining entities that existed before the combination is identified as
the acquirer. [IFRS 3.22, 3.23]
2.6.180.20 Often this occurs because the new entity will be listed. For example, entity V wishes to acquire the retail
business of entity W and then list the combined retail businesses. V forms a new entity X into which it transfers its own
retail businesses; X then acquires W's retail businesses. Looking at the legal form of the transaction, it appears that X has
made two acquisitions, the retail businesses of V and W, both of which should be treated as acquisitions in its consolidated
financial statements. However, in our view only the retail businesses of W have been acquired. In substance the new entity
X is an extension of V, created in order to hold its retail division.
2.6.180.30 When a new entity is formed to effect a business combination, IFRS 3 deals only with those circumstances in
which a new entity issues equity instruments. A newly formed entity that pays cash rather than issuing shares in a business
combination might be identified as the acquirer. This is because IFRS 3 states that an entity that gives up cash is likely to be
the acquirer. However, in our view, a newly formed entity that pays cash will not always be the acquirer. All facts and
circumstances should be considered in identifying the acquirer in a business combination. [IFRS 3.20, 3.22]
2.6.190 Date of acquisition

2.6.190.10 The date of acquisition is the date on which control is transferred to the acquirer, which will depend on the
facts and circumstances of each case. Determining the date of acquisition is important because it is only from that date that
the results of the subsidiary are included in the consolidated financial statements of the acquirer; it also is the date on which
the fairKPMG
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2.6.190.20 When a business combination is achieved in a single exchange transaction, the date of exchange is the
acquisition date. When a business combination involves more than one exchange transaction, for example when it is
2.6.190 Date of acquisition
2.6.190.10 The date of acquisition is the date 2.6on which combinations
Business control is transferred to the acquirer, which will depend on the
- IFRS Insights
facts and circumstances of each case. Determining the date of acquisition is important because it is only from that date that
the results of the subsidiary are included in the consolidated financial statements of the acquirer; it also is the date on which
the fair values of assets and liabilities acquired, including goodwill, are measured. The date of acquisition is based on the
substance of the transaction rather than its legal form. [IFRS 3.25, .A]
2.6.190.20 When a business combination is achieved in a single exchange transaction, the date of exchange is the
acquisition date. When a business combination involves more than one exchange transaction, for example when it is
achieved in stages by successive share purchases, the date of exchange is the date that each individual investment is
recognised in the financial statements of the acquirer. The date of exchange is used to determine the cost of the acquisition
and goodwill associated with the transaction. [IFRS 3.A]
2.6.190.30 Under IFRSs it is not possible to designate an effective date of acquisition other than the actual date that
control is transferred. However, in some cases it may be acceptable for an acquirer to consolidate a subsidiary from a
period-end date close to the date of acquisition for convenience, as long as the effect thereof is immaterial (see 1.2.80). For
example, a subsidiary acquired on 13 October might be consolidated with effect from 30 September if the effect of the 13
days is not material.
2.6.200 Agreements with retroactive effect

2.6.200.10 In some cases an agreement will provide that the acquisition is effective on a specified date. For example,
entities Y and Z commence negotiations on 1 January 2008 for Y to acquire all of the shares in Z. On 1 March 2008 the
agreement is finalised and Y immediately obtains the power to control Z's operations. The agreement states that the
acquisition is effective as of 1 January 2008 and that Y is entitled to all profits after that date; the purchase price is
determined by reference to Z's net asset position at 1 January 2008.
2.6.200.20 In our view, notwithstanding that the price is based on the net assets at 1 January and Z's shareholders do not
receive any dividends after that date, the date of acquisition for accounting purposes is 1 March 2008.
2.6.210 Control and benefits

2.6.210.10 In determining the date of acquisition, it is important to remember that the definition of control has two
elements - the power to govern the financial and operating policies so as to obtain benefits (see 2.5.10). Both of these
elements must be met at the date of acquisition.
2.6.210.20 Determining the date of acquisition requires a careful analysis of all facts and circumstances. For example,
entity D contracts with vendor V to purchase the shares in entity E. The contract is entered into on 15 September 2008. The
contract states that V will deliver to D its shareholding in E on 1 January 2009 and D will pay the agreed purchase price. The
purchase price is a fixed sum plus the excess, or less the deficit, of the actual fair value of E at 31 October 2008, over an
estimated fair value of E specified in the contract. From 15 September 2008 D is able to run E as it desires, but is prohibited
from arranging dividend payments out of E until 1 January 2009.
2.6.210.30 D is able to govern E from 15 September 2008. However, it does not benefit from E's activities before 31
October 2008 since D pays V for any additional increase in fair value of E between 15 September and 31 October, or is
reimbursed for any decreases. Unless D receives benefits other than those reflected in the fair value of E, the date of
acquisition is 31 October 2008.
2.6.220 Shareholder approval

2.6.220.10 In some cases management may agree on an acquisition subject to receiving shareholder approval,
sometimes referred to as a "revocable" agreement. For example, entity C enters into an agreement with the shareholders
of entity D on 1 March 2008 to acquire a controlling interest in entity D. The agreement provides that the effective date of
transfer is 1 April 2008 and is subject to approval by the shareholders of entity C at a meeting scheduled for 1 May 2008. In
our view, the date of acquisition cannot be prior to C's shareholders approving the transaction when the passing of control
is conditional upon their approval; for example, if the voting rights are not transferred or the board of directors remains
unchanged until the approval of C's shareholders. However, it is necessary to consider the substance of the requirement of
the shareholder approval to assess the impact it has on obtaining the power to control. For example, if the board of
directors also controls the majority of the voting interests in C, then the date of acquisition might be before the date that
shareholder approval is obtained.
2.6.220.20 If the acquirer has paid the purchase price and the date of acquisition is deferred until shareholder approval is
obtained, then in our view C should consider whether it has acquired a financial asset in the period between entering into
the agreement
© 2008 to acquire
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are affiliated.
Page 8 / 42
interest in D, C also paid the required purchase price. Due to the need to obtain shareholder approval, the payment of the
purchase price did not lead to C obtaining significant influence prior to obtaining shareholder approval. Therefore, in its
the shareholder approval to assess the impact it has on obtaining the power to control. For example, if the board of
directors also controls the majority of the voting interests in C, then the date of acquisition might be before the date that
shareholder approval is obtained.
2.6.220.20 If the acquirer has paid the purchase price and the date of acquisition is deferred until shareholder approval is
obtained, then in our view C should consider whether it has acquired a financial asset in the period between entering into
the agreement to acquire D and the date of acquisition (see 3.6.150); this will depend on the nature of C's interests in D
prior to the vote of shareholders. For example, on the date that C entered into the agreement to acquire a controlling
interest in D, C also paid the required purchase price. Due to the need to obtain shareholder approval, the payment of the
purchase price did not lead to C obtaining significant influence prior to obtaining shareholder approval. Therefore, in its
consolidated financial statements, C accounts for its investment in D in accordance with IAS 39 Financial Instruments:
Recognition and Measurement. See also 2.6.345 in respect of business combinations effected through the use of forwards
or options.
2.6.230 Regulatory approval

2.6.230.10 In some cases business combination cannot be finalised prior to regulatory approval being obtained. Although
at the date of acquisition the acquirer should have the ability to govern the financial and operating policies of the acquiree, it
is not necessary for the transaction to be finalised legally. It is necessary to consider the nature of the regulatory approval in
each case and the impact that it has on the passing of control.
2.6.230.20 For example, entities E and F are manufacturers of electronic components for a particular type of equipment. E
makes a bid for F's business and the competition authorities announce that the proposed transaction is to be scrutinised to
ensure that competition laws will not be breached. E and F agree the terms of the acquisition and the purchase price, but
the contracts are made subject to competition authority clearance. In this case the date of acquisition cannot be earlier than
the date that approval is obtained from the competition authority since this is a substantive hurdle that should be overcome
before E is able to control F's operations. In another example, entity G acquires the shares in entity H on 1 April 2008.
However, before the sale of shares becomes binding legally, the transaction should be registered, a process that takes up to
six weeks. The registration of the shares is a formality and there is no risk that the sale could be rejected. In this case the
date of acquisition is 1 April 2008 since the registration of the sale does not prevent the passing of control. If the facts of
this case were different and the registration was not merely a formality because the authorities were required to consider
and accept or reject each transaction, then it is likely that the date of acquisition could not be earlier than the date of
registration.
2.6.240 Public offers

2.6.240.10 When a public offer is made for the acquisition of shares, it is necessary to consider the nature and terms of
the offer and any other relevant laws or regulations. For example, entity J makes an offer to acquire all of the shares in
entity K and each shareholder can decide individually whether to accept or reject the offer; the offer is conditional on at
least 75 percent acceptance. The offer is made on 15 September 2008 and closes on 15 November 2008, at which time
ownership of the shares will be transferred. At 20 October 2008 enough offers have been accepted to give J its minimum 75
percent of the shares of K.
2.6.240.20 Whether or not J has the power to control K at 20 October 2008 will depend on the local laws and regulations
in respect of public offers. If J does not have the power to control K's operations until the public offer has closed and J is not
able to make decisions and impose its will on K's operations, then the date of acquisition could not be earlier than 15
November 2008.
2.6.240.30 In some countries an offer, at a certain minimum price, to buy the shares of all other shareholders must be
made once a shareholder owns a certain percentage of the voting rights in an entity (a "mandatory offer"). Typically the
acquirer obtains the voting rights associated with each share as each individual shareholder accepts the offer.
2.6.250 Acquirer consulted on major decisions

2.6.250.10 In some cases the seller in a business combination agrees to consult the acquirer on major business decisions
prior to completion of the transaction. The requirement to consult with the acquirer does not mean necessarily that control
of the operations has passed to the acquirer from this time. It is necessary to consider all the relevant facts and
circumstances to determine the substance of the agreement between the parties.
2.6.250.20 For example, entity L makes an offer to buy all of the shares in entity M, which is wholly owned by entity N.
The offer is subject to the satisfactory completion of due diligence. In the meantime the parties agree that L should be
consulted on any major business decisions. In our view, L does not have the power to govern M simply because it will be
consulted on major decisions; L does not have the ability to do whatever it likes with M's business and the due diligence is
yet to be completed.
2.6.260 Cost
KPMG network of acquisition
are affiliated.
Page 9 / 42
2.6.260.10 The cost of acquisition is the amount of cash or cash equivalents paid, plus the fair value of the other purchase
2.6.250.20 For example, entity L makes an offer to buy all of the shares in entity M, which is wholly owned by entity N.
The offer is subject to the satisfactory completion of due diligence. In the meantime the parties agree that L should be
consulted on any major business decisions. In 2.6
ourBusiness
view, Lcombinations
does not have theInsights
- IFRS power to govern M simply because it will be
consulted on major decisions; L does not have the ability to do whatever it likes with M's business and the due diligence is
yet to be completed.
2.6.260 Cost of acquisition

2.6.260.10 The cost of acquisition is the amount of cash or cash equivalents paid, plus the fair value of the other purchase
consideration given, plus any costs directly attributable to the acquisition. The cost of acquisition, including the fair value of
any securities issued, is determined at the date of acquisition. [IFRS 3.24, 3.A]
2.6.260.20 If the business combination is achieved in stages, then the costs of the business combination is determined at
the date of each exchange transaction. For example, when it is achieved in stages by successive share purchases, the dates
of exchange are the dates that each individual investment is recognised in the financial statements of the acquirer (see
2.6.630). [IFRS 3.58, 3.A]
2.6.260.30 The cost of an acquisition relates only to cost incurred to obtain control over the acquiree. If other costs are
incurred, then they should be accounted for in accordance with the requirements of other applicable IFRSs.
2.6.260.40 Amounts paid may be made in the form of share-based payments. Share-based payment transactions in which
the entity acquires goods as part of the net assets acquired in a business combination should be accounted for under IFRS
3. A share-based payment transaction to employees of the acquired entity in return for continued service should be
accounted for as employee compensation and not as part of the payment in the business combination (see 4.5.40).
2.6.260.50 In some cases it may be difficult to determine what a payment is for, particularly when the recipient is a
shareholder and a continuing employee of the acquiree. In this regard it is important to understand the role of the employee
within the organisation, the nature of the services they provide, and the reasons for the payment.
2.6.260.60 In our view, the specific factors to consider in determining the substance of the transaction and whether
payments should be classified as part of the cost of acquisition, as employee compensation in future periods, or a
combination thereof, include the following:
• Linkage with continuing employment. An arrangement in which the payments automatically are
forfeited if employment terminates is an indicator that the arrangement is compensation for
post-combination services. Arrangements in which the payments are not affected by
employment may indicate that the payments are additional purchase price.
• Duration of continuing employment. If the length of time of required employment coincides

with or is longer than the period over which payments are made, then that may indicate that
the payments are, in substance, compensation.
• Level of compensation. Situations in which employee compensation other than these payments
is at a reasonable level compared to that of other key employees in the combined entity may
indicate that the payments are additional purchase price rather than compensation.
• Basis of payments. If the payments are linked to earnings or other targets achieved during the
period of required employment, then that may indicate that the payments are, in substance,
compensation.
• Relative amounts of consideration. If selling shareholders who do not become employees

receive lower payments on a per-share basis than payments received by the selling
shareholders who become employees of the combined entity, then this may indicate that the
incremental amount per share of payments to the selling shareholders who become employees
is compensation.
• Relative relationships. The relative number of shares owned by the selling shareholders who
remain as key employees may be an indicator of the substance of the arrangement. For
example, if selling shareholders who owned substantially all of the shares of the acquired entity
continue as key employees, then this may be an indication that the arrangement is, in
substance, a profit-sharing arrangement intended to provide compensation for post-
combination services. Alternatively, if selling shareholders who continue as key employees
owned only a minor number of shares of the acquired entity and all selling shareholders
receive the same amount of consideration on a per-share basis, then this may indicate that the
payments are additional purchase price.
© 2008•KPMG Entity valuation.
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Page 10 / 42
payments relates to that valuation approach, then that may suggest that the payments are
additional purchase price.
substance, a profit-sharing arrangement intended to provide compensation for post-
combination services. Alternatively, if selling shareholders who continue as key employees
owned only a minor number of shares of the acquired
2.6 Business entity
combinations andInsights
- IFRS all selling shareholders
receive the same amount of consideration on a per-share basis, then this may indicate that the
payments are additional purchase price.
• Entity valuation. If the consideration other than the additional payment is based on the low end
of a range established in the valuation of the acquired entity and the basis for the additional
payments relates to that valuation approach, then that may suggest that the payments are
additional purchase price.
• Previous acquisitions. If the entire consideration, including the additional payments, is

consistent with the acquirer's historical approach to similar acquisitions in which shareholders
were not also employees, then that may suggest that the payments are additional purchase
price.
• Pre-acquisition ownership interests. The pre-acquisition ownership interests held by parties

related to selling shareholders who continue as key employees, such as family members, also
should be considered.
2.6.260.70 [Deleted]
2.6.270 Fair value of securities issued

2.6.270.10 When equity instruments are issued in exchange for control, the cost of acquisition is based on their fair value.
2.6.270.20 When the securities issued are listed, the quoted price at the date of acquisition is used to determine the cost
of acquisition. The quoted price is an unreliable indicator only if it has been affected by the thinness of the market. In such
rare instances, before using an alternative measure of fair value, an entity should demonstrate that the alternative measure
is more reliable. [IFRS 3.27, IAS 39.48, 39.48A]
2.6.270.30 IFRSs are silent in respect of the exact share price to be used in determining fair value; in our view, it should
be the closing bid price on the day that control is transferred, which is consistent with the guidance for measuring the fair
value of financial assets held (see 3.6.940.40). [IAS 39.48, 39.AG72]
2.6.270.40 Securities issued may include share options. In our view, in the absence of an observable market price, the
fair value of share options should be determined using a suitable option-pricing model.
2.6.270.50 Even though the sale of a large block of shares may result in a discount or premium to the quoted price, use of
the actual quoted price is required. Accordingly, any potential discount or premium is ignored. [IFRS 3.27]
2.6.270.60 When a new entity is formed for the purpose of listing subsequent to the business combination, judgement is
required in assessing whether the share price used in determining the cost of acquisition should be that of the newly listed
entity.
2.6.270.70 For example, unlisted entity N acquires entity O's operations in return for issuing shares to O's shareholders; N
lists some months later, which was planned at the time of the acquisition. In valuing the shares issued there are two
choices:
• using the share price of N once listed; or
• on the basis that the acquirer is not listed, estimating the fair value by reference to either the
proportional interest in the fair value of N's operations obtained by O's shareholders, or the
proportional interest in the fair value of O's operations acquired. [IFRS 3.27]
2.6.270.80 In our view, it is preferable in this example to determine the fair value of the shares issued by reference to the
fair value of either N's or O's operations; since a number of months pass prior to N being listed, the eventual share price is
not clearly that of the acquirer at the date of acquisition. However, we believe that N's post -float share price should be
considered if N lists within a short period after the acquisition because it provides relevant and objective information about
the value of the consideration given to O's shareholders.
2.6.280 Liabilities incurred or assumed

2.6.280.10 The cost of a business combination includes liabilities incurred or assumed by the acquirer in exchange for
control of the acquiree. Future losses or other costs expected to be incurred due to the acquisition, such as the costs of
restructuring the acquiree, are not part of the cost of the business combination as they are not liabilities at the date of
acquisition (see 3.12.860). [IFRS 3.28]
2.6.290 Directly attributable costs Page 11 / 42
2.6.290.10 Costs directly attributable to the acquisition are part of the cost of the business combination.
2.6.280 Liabilities incurred or assumed
2.6.280.10 The cost of a business combination includescombinations
2.6 Business liabilities incurred or assumed by the acquirer in exchange for
- IFRS Insights
control of the acquiree. Future losses or other costs expected to be incurred due to the acquisition, such as the costs of
restructuring the acquiree, are not part of the cost of the business combination as they are not liabilities at the date of
acquisition (see 3.12.860). [IFRS 3.28]
2.6.290 Directly attributable costs

2.6.290.10 Costs directly attributable to the acquisition are part of the cost of the business combination.
2.6.290.20 Such costs include, costs include, for example, professional fees incurred, but exclude (1) the costs of issuing
debt, which are deducted from the debt's carrying amount (see 3.6.720); and (2) the costs of issuing equity instruments,
which are recognised directly in equity (see 3.11.350). In our view, costs directly attributable to the acquisition do not
include costs incurred after control has been obtained, for example the cost of determining fair values of the acquiree's
assets and (contingent) liabilities after control is obtained. Such costs are post-acquisition costs because they relate to the
integration of the acquiree, rather than to the acquisition, and should be expensed. [IFRS 3.29-31]
2.6.290.30 Internal costs are included to the extent that they can be attributed directly to the particular acquisition. The
cost of maintaining an acquisitions department cannot be capitalised except for the cost of the work of the department that
is directly attributable to the specific acquisition; rather, the cost of maintaining an acquisitions department is regarded as a
general administrative cost. [IFRS 3.29]
2.6.290.40 In our view, an entity has an accounting policy choice as to whether or not costs directly attributable to an
acquisition should be incremental. For example, a member of an entity's mergers and acquisitions team is assigned to work
full-time on the entity's internal due diligence of the acquiree for a period of six weeks prior to the date of acquisition. If the
entity's accounting policy is that directly attributable costs need not be incremental, then the cost of the employee's benefits
for that six-week period is included in the cost of acquisition even though that salary cost would have been incurred
regardless of the acquisition. However, in our experience, the determination of the cost of acquisition often reflects only
external costs. [IFRS 3.29]
2.6.290.50 IFRSs refer to the cost of acquisition being incurred by the acquirer. In our view, costs incurred by the
acquiree should not be capitalised unless the acquirer reimburses the acquiree for them.
2.6.290.60 In some cases the acquirer may employ a "finder" to identify potential acquisition targets. If the finder is
employed by the acquirer to find a target, then in our view the finder's fee should be expensed, because it does not relate
to a specific acquisition and is similar to the cost of maintaining an acquisitions department. If the acquiree employs the
finder and the acquirer pays the fee only if the deal goes through, then we believe that the fee should be capitalised as part
of the cost of acquisition. However, if the acquirer pays the fee regardless of whether the deal goes through, then we
believe that the fee should be expensed when incurred.
2.6.290.70 Interest incurred on a loan obtained for the purpose of acquiring a subsidiary is not capitalised since IFRSs do
not allow borrowing costs attributable to an investment, other than investment property, to be capitalised, as investments
are assets that are ready for their intended use or sale when acquired (see 4.6.360). [IAS 23.6]
2.6.290.80 In a cash flow hedge of a forecast business combination, the effective portion of the gain or loss arising from
the hedging instrument will be deferred in equity. The accounting for the amount deferred in equity in a business
combination is discussed in 3.7.610.
2.6.290.90 If an entity has chosen to exclude the time value from the hedging relationship in a cash flow hedge of a
forecast business combination, then in our view the time value of the option should not be accounted for as a cost directly
attributable to the acquisition; the changes in the fair value attributable to the time value should be recognised in profit or
loss (see 3.7.530.20). As the time value normally gives rise to hedge ineffectiveness, IAS 39 provides a practical exemption
to exclude the time value of the hedging relationship. Therefore we believe that allowing the time value to be capitalised
effectively would result in capitalising ineffectiveness.
2.6.300 Deferred consideration

2.6.300.10 When payment in a business combination is deferred, the amount payable is discounted to its present value.
However, the discount rate to be used is not specified. In our view, the amount payable is a financial liability and should be
discounted using a market rate of interest for a similar instrument of an issuer with a similar credit rating. [IFRS 3.26, IAS
39.AG64]
2.6.310 Contingent consideration

© 2008 KPMG Contingent
2.6.310.10 International. KPMG International
consideration is provides no client
recognised services
as soon as and is a Swiss
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becomes with which
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measured reliably. The purchase price subsequently is adjusted against goodwill or negative goodwill as the estimate Page of12
the/ 42
amount payable is revised. When an entity writes a put option or enters into a (synthetic) forward purchase agreement with
minority shareholders on their shares in that subsidiary, the entity recognises a financial liability in respect of that put option
2.6.300.10 When payment in a business combination is deferred, the amount payable is discounted to its present value.
However, the discount rate to be used is not specified. In our view, the amount payable is a financial liability and should be
discounted using a market rate of interest for a similar instrument of an issuer with a similar credit rating. [IFRS 3.26, IAS
39.AG64] 2.6 Business combinations - IFRS Insights
2.6.310 Contingent consideration

2.6.310.10 Contingent consideration is recognised as soon as payment becomes probable and the amount can be
measured reliably. The purchase price subsequently is adjusted against goodwill or negative goodwill as the estimate of the
amount payable is revised. When an entity writes a put option or enters into a (synthetic) forward purchase agreement with
minority shareholders on their shares in that subsidiary, the entity recognises a financial liability in respect of that put option
or forward and, in our view, accounts for such agreement under the anticipated acquisition method or the present access
method as described in 2.5.461 and 2.5.463. Under the anticipated acquisition method, if the exercise or forward price is
variable, then the entity has an accounting policy election that should be applied consistently: to treat the changes in the
carrying amount of the obligation as contingent consideration; or to treat the obligation as a financial liability measured at
amortised cost, with an embedded derivative measured at fair value through profit or loss (see 2.5.461). Under the present
access method, if the exercise or forward price is variable, then the entity should treat the obligation as a financial liability
measured at amortised cost, with an embedded derivative measured at fair value through profit or loss (see 2.5.463). [IFRS
3.32]
2.6.310.15 In our view, payment by an acquirer of additional consideration dependent on increases in its share price
generally should be treated as contingent consideration. This is in contrast to the situation in which a payment is made by
an acquirer as a guarantee of the value of its shares, which does not increase the cost of acquisition (see 2.6.340). For
example, entity X acquired entity Y in June 2006 and in addition to the consideration paid at the date of acquisition, X
agreed to pay an additional 39 million if X's share price rose above 20 per share for a 30-day period at any time between
June 2006 and 31 December 2009. For three months in 2008 X's share price traded at above 20 per share. Therefore we
believe that X should recognise the additional payment of 39 million as an adjustment to goodwill.
2.6.310.20 There is no time limit on the adjustment of contingent consideration. Adjustments may arise as a result of
changes in estimates, or when an amount becomes probable and can be measured reliably. [IFRS 3.33, 3.34, 3.63]
2.6.310.30 In estimating the amount of contingent consideration, IFRSs accept that there will be some uncertainty and
conclude that this uncertainty does not impair the reliability of the information. For example, entity P acquires entity Q's
operations and pays 120,000. P agrees to pay an additional amount equal to five percent of the first year's profits following
the acquisition. Q historically has made profits of 20,000 to 30,000 each year. P's forecasts and plans, as well as industry
trends, would be considered in assessing the expected profits in the first year. If P expects profits of 20,000 in the first year,
then an additional payment of 1,000 would be required. In our view, the 1,000 should be recognised immediately as a
liability and additional purchase price since the payment is probable, even though the exact level of future profits is
uncertain. [IFRS 3.33]
2.6.310.40 Continuing this example, suppose that the contingent payment is five percent of the first year's profits that are
in excess of those being earned currently by Q. Again, P's forecasts and plans, as well as industry trends, would be
considered in assessing whether excess profits are probable.
2.6.310.50 Care should be taken to ensure that amounts characterised as contingency payments actually are contingent
rather than representing either deferred consideration that should be recognised immediately (see 2.6.300), or payments
for other reasons related to ongoing operations that should be expensed as incurred.
2.6.310.60 For example, entity R acquires entity S's operations and pays 100,000. R also agrees to pay an additional
amount that is the higher of 2,000 and five percent of the first year's profits following the acquisition. In this case the
minimum additional amount payable is 2,000, which is known. Accordingly, this amount should be recognised as deferred
rather than contingent consideration. In addition, R should assess whether any additional amount of contingent
consideration is probable.
2.6.310.70 IFRSs are silent on whether contingent consideration should be discounted in the same way as deferred
consideration (see 2.6.300). In our view, when the payment of contingent consideration is deferred, any amount recognised
should be discounted to its present value. The cost of the business combination is not adjusted for the subsequent effect of
any discounting; instead unwinding of the discount is recognised as interest expense.
2.6.310.80 A business combination agreement may provide for an adjustment to the cost of the combination contingent
upon future events that cannot be included in the cost of the combination at the time of the initial accounting, either because
it is not probable or because it cannot be measured reliably. If that adjustment subsequently becomes probable or can be
measured reliably, then the additional consideration should be treated as an adjustment to the cost of the combination.
[IFRS 3.32, 3.34]
2.6.310.90 When contingent consideration is recognised or adjusted after the date of acquisition, the amount of the
© 2008 KPMG
purchase International.
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value as at the acquisition date, resulting in recognition of interest expense for the period from acquisition date to the date
that the adjustment is recognised; or (2) determined as the present value as at the date at which the recognition criteria
upon future events that cannot be included in the cost of the combination at the time of the initial accounting, either because
it is not probable or because it cannot be measured reliably. If that adjustment subsequently becomes probable or can be
measured reliably, then the additional consideration should be treated as an adjustment to the cost of the combination.
[IFRS 3.32, 3.34]
2.6.310.90 When contingent consideration is recognised or adjusted after the date of acquisition, the amount of the
purchase price, including goodwill, will change. A question arises as to whether, at the time that the recognition criteria are
first met, the estimated amount of the adjustment to the cost of the combination should be (1) discounted to the present
value as at the acquisition date, resulting in recognition of interest expense for the period from acquisition date to the date
that the adjustment is recognised; or (2) determined as the present value as at the date at which the recognition criteria
are met, i.e., without recognition of any interest expense prior to that date. In our view, accounting treatment (2) is the
appropriate approach.
2.6.310.100 For example, entity B acquired entity C on 30 September 2007. Consideration of 1,330 was contingent upon
the acquiree meeting a profit target by 30 September 2009. At the date of acquisition it was not considered probable that C
would meet the profit target. However, at 30 September 2008 it becomes probable the profit target will be met. At a
discount rate of 10 percent, determined on 30 September 2008, the present value of the contingent consideration is 1,100
at 30 September 2008 (1,000 at 30 September 2007). At 30 September 2008 B recognises the full amount of the present
value of the liability as an adjustment to goodwill as follows: [IFRS 3.34]
2.6.310.110 In our view, the whole amount of the adjustment of 1,100 should be treated as an adjustment to the cost of
the combination because in accordance with IFRS 3 any additional contingent consideration is treated as an adjustment to
the cost of the combination when it becomes probable and can be measured reliably.
2.6.310.120 These requirements apply equally to contingent consideration payable in the form of shares. However, when
shares are issued subsequent to the date of acquisition, it is not clear whether the share price used to measure the
additional consideration should be that at the date of acquisition or at the date that the shares are issued. In our view,
either treatment is acceptable as long as the entity makes an accounting policy election in this regard, which is applied
consistently to all acquisitions.
2.6.310.130 In some cases it may be appropriate for contingent consideration to be classified as employee compensation
rather than as additional purchase price (see 2.6.260.50 - .60).
2.6.320 Specific indemnities in a business combination

2.6.320.10 Purchase agreements sometimes provide that the seller indemnifies the buyer against a specific contingent
liability outstanding at the date of acquisition. A contingent liability could relate, for example, to a legal case of the acquiree
relating to environmental pollution. The seller agrees to reimburse the acquirer if the outcome of the legal case requires
payment by the acquiree. The question arises as to how the acquirer should account for the indemnity in accounting for the
business combination.
2.6.320.20 Our preferred approach is for the acquirer to account for the indemnity received in a business combination as
a reimbursement right, separately from the accounting for the business combination. This approach views the transaction
as a multiple-element arrangement that includes a business combination and a purchase of the reimbursement right. The
acquirer paid a higher price in the business combination in which it also acquired a reimbursement right; consequently, part
of the consideration paid for the business combination relates to the acquisition of the reimbursement right by the acquirer.
The reimbursement right is viewed as a separate asset of the acquirer to protect it against any costs arising from the legal
case of the acquiree and is recognised initially at fair value, with a corresponding reduction in the cost of the business
combination. Subsequent to initial recognition, the indemnity is accounted for separately in accordance with IAS 37
Provisions, Contingent Liabilities and Contingent Assets (see 3.12.150), and is not part of the accounting for the business
combination. The contingent liability relating to the legal case is remeasured through profit or loss in accordance with IFRS
3 (see 2.6.500). As a result, the subsequent accounting results in a symmetrical recognition of gains and losses arising from
remeasurement of the indemnity and the contingent liability relating to the legal case. However, a small mismatch may
occur when the fair value of the indemnity, which takes into account the credit risk of the vendor, differs from the fair value
of the contingent liability, which takes into account the credit risk of the acquiree. [IFRS 3.48, IAS 37.53]
2.6.320.30 Alternatively, the indemnity related to a contingent liability could be viewed as contingent consideration in the
© 2008 KPMG International.Under
KPMGthis approach
International the acquirer
provides will receive
no client services and isback part
a Swiss of the purchase
cooperative with whichconsideration
the independentpaid if the
member firms of the
outcome of the
KPMG network arelegal case is unfavourable. Therefore the acquirer would account for the indemnity as part of the accounting
affiliated.
for the business combination. As a result, the contingent liability is remeasured through profit or loss while the subsequent Page 14 / 42
accounting for the indemnity results in an adjustment to the purchase accounting and therefore to goodwill. [IFRS 3.32,
3 (see 2.6.500). As a result, the subsequent accounting results in a symmetrical recognition of gains and losses arising from
remeasurement of the indemnity and the contingent liability relating to the legal case. However, a small mismatch may
occur when the fair value of the indemnity, which takes into account the credit risk of the vendor, differs from the fair value
2.6 Business
of the contingent liability, which takes into account combinations
the credit - IFRS
risk of the Insights[IFRS 3.48, IAS 37.53]
acquiree.
2.6.320.30 Alternatively, the indemnity related to a contingent liability could be viewed as contingent consideration in the
business combination. Under this approach the acquirer will receive back part of the purchase consideration paid if the
outcome of the legal case is unfavourable. Therefore the acquirer would account for the indemnity as part of the accounting
for the business combination. As a result, the contingent liability is remeasured through profit or loss while the subsequent
accounting for the indemnity results in an adjustment to the purchase accounting and therefore to goodwill. [IFRS 3.32,
3.48]
2.6.320.40 These approaches apply to indemnities related to a specific asset or a specific liability or contingent liability of
the acquiree. They would not apply in accounting for general warranties provided by the seller to the acquirer in a business
combination that do not create a specific right of reimbursement.
2.6.330 Contingent consideration in the financial statements of the seller

2.6.330.10 A receivable relating to contingent consideration in the seller's financial statements should be accounted for
under IAS 39 if the receivable meets the definition of a financial instrument. The scope exclusion in paragraph 2(f) of IAS 39
applies only to contingent consideration in the acquirer's financial statements. In our view, the fact that the amount
receivable is contingent upon future events does not preclude recognition. We believe that a contingent element embedded
in a financial instrument is a measurement issue rather than a recognition issue; this is the case, for example, for all
options as they have a contingent element embedded in them. [IAS 32.AG8, 39 IGC4]
2.6.330.20 Contingent consideration receivable should be accounted for as a contingent asset in accordance with IAS 37 if
the contingent consideration is a non-financial asset, e.g., property. This means that the seller will recognise such non-
financial contingent consideration only when settlement becomes virtually certain.
2.6.340 Guarantee of value

2.6.340.10 Any consideration given by the acquirer under a guarantee of the value of its shares or debt issued as
consideration does not increase the cost of acquisition. If equity instruments are issued as consideration, then the debit side
of the entry is to equity, thus reducing the premium in respect of the share issue for the acquisition. If debt instruments are
issued as consideration, then no accounting entry is necessary since both the debit and credit side of the entry are to the
liability. However, this has the effect of increasing the discount on initial recognition, or reducing any premium, because the
face value of the liability would have increased, which will be made up over the life of the debt using the effective interest
method (see 4.6.40). [IFRS 3.35]
2.6.345 Business combination effected through derivatives

2.6.345.10 IAS 39 does not apply to contracts between the acquirer and the vendor in a business combination to buy an
acquiree at a future date. Therefore, when an entity effects a business combination by entering into a forward contract, an
issue arises as to whether the contract to acquire the target should be recognised as a derivative in accordance with IAS 39
or as an unrecognised executory contract (see 1.2.60) prior to the date of acquisition (see 3.6.90). [ IAS 39.2(g)]
2.6.345.20 In our view, the scope exemption in IAS 39 should be interpreted narrowly, so that its application is limited to
situations in which the acquisition will occur subject only to the passage of time in order to allow administrative -type tasks
to be completed, e.g., registration with the authorities, and any approval from a third party, e.g., regulatory approval. For
example, entity F enters into a forward contract with entity H to acquire the shares of entity G in 60 days' time. In the
industry in which G operates, 60 days generally is the time required to complete the administrative tasks associated with
such a business combination. Therefore, in this example we believe that IAS 39 does not apply and that the forward
contract to acquire G should be treated as an executory contract.
2.6.345.30 If a forward contract in respect of a business combination does not qualify for the scope exemption, then it
should be accounted for in accordance with IAS 39, i.e., as a derivative prior to the date of acquisition. In such cases the
derivative will be measured at fair value through profit or loss, and the cost of acquisition should include the fair value of the
derivative at the date of acquisition.
2.6.345.40 In our view an option to acquire a business is a derivative that falls within the scope of IAS 39 (see 3.6.60.30);
the scope exemption discussed in 2.6.345.10 does not extend to options because with an option an acquisition is conditional
upon the option being exercised. Therefore the option will be measured at fair value through profit or loss, and the cost of
acquisition should include the fair value of the derivative at the date of acquisition.
2.6.345.50 For example, on 1 January 2007 entity S purchased a European-style call option for 60 percent of the shares in
entity
© 2008 T, which
KPMG was exercisable
International. on 1 January
KPMG International 2008.
provides S paid
no client a premium
services and is a of 50 cooperative
Swiss for the option, which
with which thehad a strikemember
independent price for theof the
firms
KPMG network
entire are affiliated.
underlying of 1,000. The fair value of the call option at 31 December 2007 was 80, and therefore 30 (80 - 50) was
Page 15 / 42
recognised in profit or loss. On 1 January 2008 the option became exercisable and S became the parent of T because of
these potential voting rights (see 2.5.130); S also exercised the call option at that date. In this case we believe that the cost
2.6.345.40 In our view an option to acquire a business is a derivative that falls within the scope of IAS 39 (see 3.6.60.30);
the scope exemption discussed in 2.6.345.10 does not extend to options because with an option an acquisition is conditional
upon the option being exercised. Therefore the option will be measured at fair value through profit or loss, and the cost of
acquisition should include the fair value of the 2.6 Businessat
derivative combinations
the date of- IFRS Insights
acquisition.
2.6.345.50 For example, on 1 January 2007 entity S purchased a European-style call option for 60 percent of the shares in
entity T, which was exercisable on 1 January 2008. S paid a premium of 50 for the option, which had a strike price for the
entire underlying of 1,000. The fair value of the call option at 31 December 2007 was 80, and therefore 30 (80 - 50) was
recognised in profit or loss. On 1 January 2008 the option became exercisable and S became the parent of T because of
these potential voting rights (see 2.5.130); S also exercised the call option at that date. In this case we believe that the cost
of acquisition at 1 January 2008 is 1,080 (cash of 1,000 plus the fair value of the derivative of 80).
2.6.350 Fair value of assets, liabilities and contingent liabilities acquired

2.6.350.10 The identifiable assets, liabilities and contingent liabilities of the acquiree that exist at the date of acquisition
are recognised in the consolidated financial statements (and / or separate or individual financial statements when net
assets, as opposed to shares, are acquired) and measured at fair value.
2.6.350.20 If the acquirer does not obtain all of the ownership interests in the acquiree, then the minority's portion of the
recognised fair value of the acquiree's identifiable assets, liabilities and contingent liabilities is assigned to minority interests.
An entity is not permitted to measure the minority interest based on the historical cost of assets and liabilities of the
acquired entity. [IFRS 3.40]
2.6.350.30 For example, entity T acquires 80 percent of the shares in entity V. V's assets include property with a carrying
amount of 100 and a fair value of 150. When the assets are recognised at full fair value in the consolidated financial
statements, the carrying amount of the property will be 150, with 30 (150 x 20 percent) being credited to minority interests.
The 30 allocated to minority interests includes 10 relating to the increase in the value of the property (50 x 20 percent).
2.6.350.40 IFRSs provide general guidelines on the determination of fair values for various assets, liabilities and
contingent liabilities, although there is no detailed guidance on valuation methodologies. This section discusses some of the
issues that may arise. [IFRS 3.B16, 3.17]
2.6.350.50 To the extent that the fair value adjustments recognised as part of the purchase accounting give rise to
temporary differences, deferred tax is recognised. However, a deferred tax liability in respect of the initial recognition of
goodwill is not recognised. The recognition of deferred tax in respect of business combinations is discussed in more detail in
3.13.470.
2.6.360 General recognition and measurement requirements

2.6.360.10 In determining whether an asset or liability should be recognised as part of the purchase accounting, only
assets, liabilities and contingent liabilities of the acquiree that existed at the date of acquisition may be recognised. [IFRS
3.41]
2.6.360.20 Identifiable assets, liabilities and contingent liabilities are recognised only if they satisfy the initial recognition
criteria set out in IFRS 3. These recognition criteria generally are consistent with the criteria that would apply if the asset or
liability was acquired or incurred outside of a business combination. [IFRS 3.37]
2.6.360.30 The liabilities recognised as part of the purchase accounting exclude those that arise from the acquirer's
intentions or future actions, e.g., costs of restructuring the acquiree. They also exclude future losses and other costs that
will be incurred as a result of the acquisition. [IFRS 3.41]
2.6.360.40 Special criteria are included in respect of intangible assets and contingent liabilities that may result in assets
and liabilities being recognised as acquired items that would not be recognised if generated internally.
2.6.360.50 Guidance is provided on how different categories of assets, liabilities and contingent liabilities are measured at
fair value at the date of the acquisition for purposes of allocating the cost of the business combination. In our view, fair
value measurement is based on market assumptions, because the definition of fair value excludes buyer-specific synergies
and buyer-specific facts and circumstances.
2.6.370 Inventories of finished goods and work-in-progress

2.6.370.10 Inventories of finished goods are valued at selling prices less the costs of disposal and a reasonable profit
margin for the selling effort of the acquirer. Similarly, inventories of work-in-progress are valued at selling prices less the
costs to complete, including the costs of disposal and a reasonable profit margin for the completion and selling effort of the
acquirer. [IFRS 3.B16(d)]
2.6.370.20
© 2008 KPMG Judgement is required
International. KPMG in determining
International a reasonable
provides no client amount
services and of profit
is a Swiss attributable
cooperative with whichtothe
the effort incurred
independent memberby theof the
firms
acquiree pre-acquisition,
KPMG network are affiliated. and the profit attributable to the effort that is likely to be incurred by the acquirer post-acquisition.
Page 16 / 42
In our view, the analysis should take into account the current profitability of the product at the date of acquisition, even if
conditions were different when the inventory was manufactured.
2.6.370 Inventories of finished goods and work-in-progress
2.6.370.10 Inventories of finished goods are valued at selling prices less the costs of disposal and a reasonable profit
margin for the selling effort of the acquirer. Similarly, inventories
2.6 Business of work-in-progress
combinations - IFRS Insights are valued at selling prices less the
costs to complete, including the costs of disposal and a reasonable profit margin for the completion and selling effort of the
acquirer. [IFRS 3.B16(d)]
2.6.370.20 Judgement is required in determining a reasonable amount of profit attributable to the effort incurred by the
acquiree pre-acquisition, and the profit attributable to the effort that is likely to be incurred by the acquirer post-acquisition.
In our view, the analysis should take into account the current profitability of the product at the date of acquisition, even if
conditions were different when the inventory was manufactured.
2.6.370.30 For example, the acquiree has finished goods measured at a cost of 100; the expected selling price is 150.
The inventory is specialised and there are very few potential customers; this inventory already has been earmarked for one
of those customers. Distribution costs are estimated at 20. In the absence of any additional factors indicating that market
participants would arrive at a different estimate of the fair value of the inventory, in our view the fair value of the inventory
would be close to 130 (150 - 20) because the selling effort to be incurred by the seller is minimal.
2.6.380 Land and buildings

2.6.380.10 Land and buildings buildings are measured at market value. Although not defined specifically for the purpose of
accounting for a business combination, market value has a meaning similar to fair value. This means that disposal costs are
not deducted in determining market value. [IFRS 3.B16(e)]
2.6.380.20 In our view, market value is the price that could be obtained for the land and buildings without regard to their
existing use. For example, an acquiree owns offices situated in a prime residential location. The value of the property as
residential real estate exceeds its value as an office building. Accordingly, market value generally should be determined
based on its value as residential real estate. See 3.2.310 for further discussion about determining the fair value of property.
2.6.390 Intangible assets

2.6.390.10 An intangible asset is recognised separately from goodwill when it meets the definition of an intangible asset
(see 3.3.30) and its fair value can be measured reliably.
2.6.390.20 In order to meet the definition of an intangible asset the item must be identifiable and the entity must have
control over it. An intangible asset is considered identifiable if it arises from contractual or legal rights or is separable. [IFRS
3.46, IAS 38.10]
2.6.390.30 The concept of control requires that an entity be able to obtain the economic benefits from the asset and
restrict the access of others to those benefits. Although control normally is evidenced by a legal right, such a right is not a
requirement to demonstrate control.
2.6.390.40 An acquiree's workforce generally cannot be recognised as a separate asset because there is insufficient
control. The same applies to items such as market share. [IAS 38.15, 38.16]
2.6.390.50 A customer list is controlled by the entity and should be valued as part of the purchase accounting if it is
separable. A customer list normally is separable, unless terms of confidentiality etc. prohibit the entity from selling or
otherwise exchanging information about its customers. Any valuation performed should be of the list itself, excluding any
value in respect of the customer relationship. [IFRS 3.IEB]
2.6.390.60 In-process research and development that meets the definition of an intangible asset, and that can be
measured reliably, is recognised separately from goodwill. It is capitalised as an intangible asset with a finite life;
amortisation starts when the asset is ready for use, i.e., when development is completed. [IFRS 3.45, IAS 38.34, 38.35,
38.42, 38.43]
2.6.390.70 The fair value of an intangible asset acquired in a business combination normally can be measured reliably.
[IAS 38.35-41]
2.6.390.80 In most cases the fair value of an intangible asset cannot be determined by reference to an active market
because it is unique; examples include trademarks, brands and newspaper mastheads. As a result, the fair value of many
acquired intangibles will have to be measured based on valuations that estimate what the price of the asset would be in an
arm's length transaction. [IFRS 3.B16(g), IAS 38.78]
2.6.390.85 When an intangible asset is traded in an active market, e.g., emission rights in some jurisdictions, in our view
the fair value of the asset should be equal to the traded price at the date of acquisition unless there is evidence to suggest
that the traded price at that date is not appropriate, e.g., due to the thinness of the market. However, in our view, no
adjustment should be made to the traded price to take into account a block discount or premium; this is consistent with the
© 2008 KPMG
guidance International.
in IAS KPMG International
39 for determining provides
the fair valuenoofclient services
financial and is [IAS
assets. a Swiss cooperative with which the independent member firms of the
39.E2.]
Page 17 / 42
2.6.390.90 The acquirer's acquirer's interest in the net fair value of identifiable assets, liabilities and contingent liabilities
may exceed the cost of acquisition. The existence or creation of an excess generally does not restrict the fair value allocated
acquired intangibles will have to be measured based on valuations that estimate what the price of the asset would be in an
arm's length transaction. [IFRS 3.B16(g), IAS 38.78]
2.6.390.85 When an intangible asset is traded 2.6in an active
Business market, e.g.,
combinations - IFRSemission
Insights rights in some jurisdictions, in our view
the fair value of the asset should be equal to the traded price at the date of acquisition unless there is evidence to suggest
that the traded price at that date is not appropriate, e.g., due to the thinness of the market. However, in our view, no
adjustment should be made to the traded price to take into account a block discount or premium; this is consistent with the
guidance in IAS 39 for determining the fair value of financial assets. [IAS 39.E2.]
2.6.390.90 The acquirer's acquirer's interest in the net fair value of identifiable assets, liabilities and contingent liabilities
may exceed the cost of acquisition. The existence or creation of an excess generally does not restrict the fair value allocated
to intangible assets (see 2.6.610). [IFRS 3.56]
2.6.390.100 Goodwill recognised by the acquiree prior to the date of acquisition is not an identifiable asset of the acquiree
when accounting for the business combination.
2.6.400 Customer -related intangible assets
2.6.400.10 Customer relationships assets are identifiable if they arise from contractual or legal rights, or are separable.
2.6.400.20 For example, example, an acquiree has a practice of using purchase orders when entering into transactions
with its customers. At the acquisition date the acquiree (1) has a backlog of open purchase orders relating to 75 percent of
its recurring customers; and (2) does not have open purchase orders, or other contracts, with the other 25 percent of its
recurring customers. Since the acquiree has a practice of establishing customer relationships with customers through
purchase orders, these customer relationships, with recurring customers with whom the acquiree does not have open
purchase orders, also meet the contractual-legal criterion. Therefore the customer relationship assets for both the recurring
customers that have open purchase orders and the recurring customers that do not have open purchase orders at the time
of acquisition should be recognised at fair value, separately from goodwill. [IFRS 3.IE(B) Example 3]
2.6.400.30 A customer relationship also is identifiable if it is separable. Separability is demonstrated if the entity has the
ability to dispose of and receive proceeds for the asset, or for the asset to be disposed of as a package with another asset,
liability or related contract, but not as part of a business combination. Therefore we believe that if an asset is capable of
being divided from the entity, then separability should be demonstrated by the following:
• There is a market for the same or similar assets to be exchanged in transactions that are not
business combinations. There is a market if there are exchange transactions for similar assets.
• The entity has access access to this market, i.e., the entity would be able to sell its own
customer relationship in that market.
2.6.400.40 In our view, for a customer relationship to be recognised the acquiree should have a minimum amount of
information about its customers and also the ability to contact its customers. For example, a department store that runs a
loyalty programme is likely to have access to relevant customer information and the ability to contact customers
participating in the loyalty programme. In this situation we believe that the customer relationship generally should be
recognised as an intangible asset. However, a department store without a loyalty programme is likely to have only short-
term contracts with its customers and is unlikely to have information about individual customers or the ability to contact
them specifically. In this situation generally we do not believe that a customer relationship should be recognised as an
intangible asset.
2.6.400.50 In our view, purchased legal relationships with customers may meet the criteria to be recognised as contract-
based intangible assets even if the entity does not have a direct contract with its customers and only limited or no
information about their identity, as long as the relationship nonetheless is established through contractual or other legal
rights. For example, a fund management company is acquired in a business combination. This company has a portfolio of
customers (investors) who invest their money in the funds run by the company and pay a management fee to the fund
manager. There is no contact between the company and its investors, and the company does not have any information
about its investors. Rather, several banks act as intermediaries by advertising the company's funds to their customers and
enabling them to invest in the funds. By doing so, the investors agree to the terms and conditions included in a prospectus
that is issued by the fund, which includes all relevant provisions, including those applying to the management fee. We
believe that in this situation the acquirer of the fund management company should recognise a contract-based intangible
asset as part of the purchase accounting (see 2.6.390), based on the terms and conditions contained in the prospectus. In
this case the intangible asset effectively is the right of the entity to receive management fees.
2.6.405 Pre-existing relationships

2.6.405.10 IFRSs do not address specifically the recognition of pre-existing relationships between the acquirer and the
acquiree in a business combination. For example, entity D acquires all of the shares of and control over entity E. For the
© 2008
past KPMG
two International.
years D and E have KPMGbeen
International
partiesprovides no client services
to an agreement thatand is a Swiss
allows cooperative
E to use one ofwith
D'swhich the exclusively
brands independent member firms of the
in certain
countries. From D's perspective, the fact that E holds a right with D as a counterparty represents the reacquisitionPage of a right.
18 / 42
In the absence of specific guidance, in our view D has an accounting policy choice, which should be applied consistently, as
to whether or not to recognise an asset in respect of reacquired rights in a business combination:
asset as part of the purchase accounting (see 2.6.390), based on the terms and conditions contained in the prospectus. In
this case the intangible asset effectively is the right of the entity to receive management fees.
2.6.405 Pre-existing relationships 2.6 Business combinations - IFRS Insights
2.6.405.10 IFRSs do not address specifically the recognition of pre-existing relationships between the acquirer and the
acquiree in a business combination. For example, entity D acquires all of the shares of and control over entity E. For the
past two years D and E have been parties to an agreement that allows E to use one of D's brands exclusively in certain
countries. From D's perspective, the fact that E holds a right with D as a counterparty represents the reacquisition of a right.
In the absence of specific guidance, in our view D has an accounting policy choice, which should be applied consistently, as
to whether or not to recognise an asset in respect of reacquired rights in a business combination:
• Under the first view D recognises E's right with respect to D's brand as a separate intangible
asset and measures it at fair value. Through the business combination D has purchased
incremental benefits with respect to the brand by now being able to use its brand in the
countries that were subject to the agreement with E, which D was not able to do before.
• Under the second view no asset is recognised separately from goodwill on the basis that it
results from a contract that, from the acquisition date, represents an intra -group transaction
that should be eliminated on consolidation. In addition, by recognising the reacquired right the
acquirer effectively recognises an asset that it owns already, i.e., the brand, which is not an
asset of the acquiree.
2.6.405.20 However, in our view, an acquirer should not recognise a customer relationship with itself. For example, entity
Y acquires entity Z, one of its suppliers, in a business combination. One of the strategic reasons for acquiring Z is to gain
access to its customer base; one of Z's customers is Y. In our view, it would not be appropriate to recognise an intangible
asset for a customer relationship that the acquiree has with the acquirer because the asset cannot be disposed of and there
are no future economic benefits from the customer relationship that the consolidated entity could realise with parties
outside of the group. In addition, from the perspective of the consolidated group, the definition of an asset is not met.
2.6.410 Valuation of an acquiree's investment in an associate

2.6.410.10 Goodwill attributable to an investment in an associate is included in the carrying amount of the associate (see
3.5.280.20). Accordingly, when an entity acquires a group that includes an investment in an associate, the goodwill
attributable to the associate should be identified separately and measured at the date of the business combination based on
the total purchase price paid for the group.[IAS 28.23]
2.6.410.20 For example, entity W acquires entity X, whose assets include an investment in associate Y. In our view, W
should determine the cost of acquisition for Y as part of the cost of the business combination. W would measure the fair
value of the acquired investment in Y as if W had acquired this investment in an associate directly. Any difference between
the fair value of the investment in Y at the date that W acquired X, and X's book value of the investment in Y, is a purchase
price adjustment recognised on consolidation. This purchase price adjustment may result in recognition in W's consolidated
group financial statements of goodwill related to Y. This goodwill is included as part of the investment in Y in the
consolidated financial statements of W. However, it is measured as goodwill.
2.6.410.30 When the acquiree's assets include an investment in an associate, and the associate's shares are actively
traded on a stock exchange, then the fair value of the investment in the associate should be determined as its current
market value. However, IFRS 3 does not provide guidance regarding the valuation of shares in unlisted associates. In our
view, the fair value of an investment in an unlisted associate should be determined by analogy to the guidance in IAS 39 for
determining the fair value of a financial asset (see 3.6.710). [IFRS 3.B.16(a), IAS 39.9, 39.48, 39.48A, 39.AG69-82]
2.6.420 Deferred tax assets

2.6.420.10 Acquired deferred tax assets are recognised at the probable amount of the tax benefit that will be recovered,
assessed from the point of view of the acquirer and the enlarged group. The general recognition and measurement
guidance for income taxes is applied to determine which deferred tax assets are probable of recovery (see 3.13.170).
Specific application issues that cause difficulties in practice in accounting for deferred tax related to business combinations
are discussed in 3.13.480. [IFRS 3.B16(i)]
2.6.420.20 Deferred tax assets of the acquirer should be recognised if their recovery becomes probable due to the
business combination. However, the revision of that estimate of recovery is not part of the cost of the business combination,
and instead is recognised in profit or loss. [IAS 12.67]
2.6.420.30 The subsequent recognition of deferred tax assets is discussed in more detail in 2.6.590.
2.6.430 Defined benefit plans

2.6.430.10 Pension surpluses to the extent recoverable and deficits are recognised at the full present value of the Page 19 / 42
obligation less the fair value of any plan assets i.e., all actuarial gains and losses and past service costs are recognised (see
4.4.490 and .600). The valuation should be performed using actuarial assumptions that do not take into account the
2.6.420.20 Deferred tax assets of the acquirer should be recognised if their recovery becomes probable due to the
business combination. However, the revision of that estimate of recovery is not part of the cost of the business combination,
and instead is recognised in profit or loss. [IAS 12.67]
2.6.420.30 The subsequent recognition of deferred tax assets is discussed in more detail in 2.6.590.
2.6.430 Defined benefit plans

2.6.430.10 Pension surpluses to the extent recoverable and deficits are recognised at the full present value of the
obligation less the fair value of any plan assets i.e., all actuarial gains and losses and past service costs are recognised (see
4.4.490 and .600). The valuation should be performed using actuarial assumptions that do not take into account the
acquirer's intentions or future actions, such as an intention to change the terms of the plan to conform to the acquirer's
existing plan. [IFRS 3.B.16(h), IAS 19.108]
2.6.430.20 In our view, constructive obligations generated by the acquiree's historical practice in respect of employee
benefits that exist at the date of acquisition should be included in the fair value of the pension asset or liability acquired. For
example, entity S, which is acquired by entity T, has a well-established practice of indexing its pension benefits to retirees
on an annual basis. In our view, since IAS 19 considers past practices of indexing benefits to inflation as a constructive
obligation under that standard (see 4.4.290.10), the constructive obligation that S has to index its pension assets and
liabilities should be reflected in the actuarial assumptions used to value the acquired pension asset or liability on acquisition.
This is regardless of whether T will continue this practice in the future. [IAS 19.83, 85]
2.6.440 Modification of employee benefits triggered by the acquisition

2.6.440.10 In some cases a pre-existing employee contract may provide that the employee is entitled to an additional
benefit if there is a change of control. For example, a key executive's contract may provide that they will receive a lump sum
payment if the entity is taken over. A payment that an entity contractually is required to make in the event of a business
combination is a contingent liability of that entity. The business combination makes an outflow of resources to settle the
obligation probable. Therefore a liability is recognised as an identifiable liability on acquisition. See also 4.5.305.17 for the
accounting for modifications to share-based payment awards. [IFRS 3.42]
2.6.440.20 The above example should be distinguished from the situation in which the acquirer decides to alter an
employee's contract on its own initiative. For example, a number of the acquiree's employees are entitled to a company car.
The acquirer renegotiates the contracts and the employees receive a lump sum cash bonus in lieu of the car scheme, which
is terminated. No liability in respect of the lump sum payment should be recognised as part of the purchase accounting since
it results from a post-acquisition action by the acquirer. [IFRS 3.42]
2.6.450 Liability for which there is no known exposure

2.6.450.10 Liabilities and contingent liabilities are measured at their fair value on acquisition. However, a general
provision on the basis that it is probable that actual or contingent liabilities will be identified in the future is not recognised
as part of the allocation of the cost of a business combination. [IFRS 3.47-50]
2.6.450.20 For example, an entity that makes regular acquisitions in a particular industry may know that, based on its past
experience, further liabilities always arise after the initial fair values have been assigned, and it may be able to estimate the
amount of further liabilities that are likely to arise. However, unless a specific liability or contingent liability can be identified
at the date of acquisition, no liabilities should be recognised in the initial purchase accounting.
2.6.460 Operating leases in which the acquiree is a lessee

2.6.460.10 The acquirer recognises an intangible asset or a lease payable in respect of operating leases of the acquiree
that are not priced at market rates at the date of acquisition.
2.6.460.20 For example, an entity may have entered into a lease agreement in the past. The rent that is fixed for the next
five years is now substantially lower than market rates. The contract has a fair value above zero and therefore is
recognised separately in the purchase accounting. [IFRS 3.IE(D)]
2.6.460.30 Similarly, an acquiree may have entered into a lease agreement that, at the date of acquisition, is
unfavourable because the entity is contractually obliged to pay an above-market rate compared to the market conditions at
that date. In our view, the acquirer should recognise a liability reflecting the unfavourable element in the purchase
accounting.
2.6.460.40 If an acquired lease is onerous, e.g., for office space that will not be used and cannot be sublet, then an
onerous contract exists and a provision should be recognised on acquisition (see 3.12.630).
2.6.460.50 See also 2.6.530 dealing with the redesignation, reclassification or reassessment for separation of contracts of
the acquiree
© 2008 upon a business
KPMG International. KPMG combination.
International provides no client services and is a Swiss cooperative with which the independent member firms of the
Page 20 / 42
2.6.470 Finance leases
accounting.
2.6.460.40 If an acquired lease is onerous, e.g., for office space that will not be used and cannot be sublet, then an
onerous contract exists and a provision should2.6
beBusiness combinations - IFRS Insights
recognised on acquisition (see 3.12.630).
the acquiree upon a business combination.
2.6.470 Finance leases

2.6.470.10 The acquirer recognises the assets acquired and liabilities assumed arising in respect of finance leases of the
acquiree.
2.6.470.20 In accounting for finance leases in which the acquiree is a lessee, the acquirer recognises the fair value of
both the asset held under the finance lease and the related liability. Depending on the terms of the lease, the fair value of
the leased asset may be less than the fair value of the asset itself. This is because the acquirer purchases as part of the
business combination the right to use an asset over the remaining term of the lease, which could be shorter than the
economic life of the asset. In other words, although the asset is accounted for according to its type, e.g., property, plant
and equipment, the acquirer measures the fair value of the asset based on the fair value of the leasehold interest acquired
rather than on the underlying asset itself.
the acquiree upon a business combination.
2.6.480 Deferred income / revenue

2.6.480.10 The acquirer in a business combination should recognise a liability in respect of deferred income / revenue of
the acquiree only if the acquiree has an obligation to perform subsequent to the acquisition. The obligation to perform is
measured at fair value at the date of acquisition.
2.6.480.20 For example, pharmaceutical entity B sells a five-year non-exclusive licence to entity C to use certain
technology. C makes an upfront payment for the licence. Although B is obligated to inform C of new developments to the
technology, B is not required to continue developing the technology, and C has no right to request repayment of all or a
portion of the upfront payment if B ceases developing the technology. After two years entity D acquires B in a business
combination. Because further development of the technology is solely at the discretion of B, it has no obligation to perform,
and no liability exists. In our view, D (the acquirer) recognises no liability in respect of the upfront payment for the licence
when it allocates the cost of the combination to the acquired identifiable assets, liabilities and contingent liabilities,
irrespective of whether deferred revenue was recognised by B under its previous accounting policies. Therefore D will not
recognise any post-acquisition revenue, or income, in respect of the acquired contract with C.
2.6.480.30 In contrast, telecommunications entity X has built a fibre optic network. A five-year right to specified amounts
of capacity and routes is sold to large corporations for an upfront payment. X accounts for the upfront payments as deferred
revenue and recognises the revenue over the five-year term of the contracts. The legal obligation of X under the contracts
relates to the provision of services, i.e., X should provide the capacity and routes to the customers. Y acquires X in a
business combination. In our view, Y recognises at fair value a liability for the obligation of X to perform under the
contracts.
2.6.480.40 The fair value of the obligation to fulfil the contracts is the amount at which the liability could be settled
between knowledgeable, willing parties in an arm's length transaction. If no observable market prices exist for the effort of
fulfilling the contract, then alternative methods are used to determine fair value. In our view, one method that might reflect
fair value is an approach based on the incremental cost, including a normal profit margin, of fulfilling the contract. We
believe that a normal profit margin would be computed on a cost accumulation basis on the effort that remains for providing
this service. This excludes the profit margin for the effort of selling the service contract. Profit margins on fulfilment are
industry specific and may depend on the infrastructure that an entity has to maintain in order to fulfil a contract.
2.6.490 Government grants

2.6.490.10 The acquiree may have received a government grant that has been either deducted from the cost of the
related asset or recognised separately as deferred income (see 4.3.130). In our view, any remaining unamortised portion of
the government grant should not be recognised as an assumed liability as part of the purchase accounting if there is no
present or possible obligation associated with the grant. Instead:
• If the government grant was deducted from the carrying amount of the related asset, then the
asset will be recognised at fair value. There is no basis in IFRSs for the unamortised portion of
the grant to be deducted from that fair value.
Ifare
KPMG•network theaffiliated.
government grant was recognised as deferred income, then the amount does not meet
the definition of a liability and therefore should not be recognised as part of the purchase Page 21 / 42
accounting.
related asset or recognised separately as deferred income (see 4.3.130). In our view, any remaining unamortised portion of
the government grant should not be recognised as an assumed liability as part of the purchase accounting if there is no
present or possible obligation associated with the grant. Instead:
• If the government grant was deducted from the carrying amount of the related asset, then the
asset will be recognised at fair value. There is no basis in IFRSs for the unamortised portion of
the grant to be deducted from that fair value.
• If the government grant was recognised as deferred income, then the amount does not meet
the definition of a liability and therefore should not be recognised as part of the purchase
accounting.
2.6.500 Contingent liabilities and assets

2.6.500.10 Contingent liabilities are recognised at fair value on acquisition. [IFRS 3.47, B16(l)]
2.6.500.20 For example, at the date of acquisition the acquiree, entity D, is subject to legal action by a disgruntled
customer who is claiming 1,000 for rectification costs resulting from allegedly faulty goods. D accepts the amount of costs
claimed, but believes that the probability of it being considered liable to be only 10 percent. If not liable, then D will incur no
costs. At the date of acquisition the acquirer concurs with the assessment of the acquiree and recognises the contingent
liability measured at 100 ((1,000 x 10 percent) + (0 x 90 percent)) as part of the purchase accounting, even though D had
not recognised a provision for this contingent liability. As illustrated in this example, the fair value of the contingent liability is
estimated based on the expected value approach whereby all potential outcomes are weighted according to their respective
probabilities. Therefore the fair value of the contingent liability is unlikely to equal the maximum exposure or the actual
outcome of the legal case. [IFRS 3.B16(l)]
2.6.500.30 If after initial recognition the contingent liability becomes a liability and the provision required (see 3.12.110) is
higher than the fair value recognised at acquisition, then the liability is increased. The additional amount is recognised as a
current period expense, i.e., in profit or loss. If after initial recognition the provision required is lower than the amount
recognised at acquisition, then the liability continues to be recognised at the fair value on acquisition and is only decreased
when the contingency no longer exists or, if appropriate, for the amortisation of the contingent liability under the revenue
recognition guidance (see 4.2). [IFRS 3.48]
2.6.500.40 The usual recognition criteria apply to acquired contingent assets. Recognition as an asset is not allowed until
receipt is virtually certain (see 3.14.40). [IAS 37.33]
2.6.510 Restructuring provisions

2.6.510.10 Restructuring liabilities recognised as part of the cost of an acquisition are limited to those liabilities that, under
the normal recognition criteria for provisions, would be recognised by the acquiree at the acquisition date (see 3.12.230).
[IFRS 3.41]
2.6.510.20 A restructuring plan that is conditional upon a future business combination is not, immediately before the
business combination, a present obligation of the acquiree; nor is it a contingent liability. Therefore a provision for the
acquiree's planned restructuring of the acquired business cannot be recognised as part of the business combination, and
also is not recognised in the financial statements of the acquiree.
2.6.520 Assets held for sale

2.6.520.10 Subsidiaries and certain other assets, or asset groups, acquired solely with the intention of disposal in the
short term are consolidated but are classified separately as non-current assets, or disposal groups, held for sale when they
meet the criteria for classification as held for sale. Such assets, or disposal groups, classified as held for sale are measured
at fair value less costs to sell (see 5.4.40). [IFRS 3.36]
2.6.520.20 For example, the fair value of an acquiree's owner-occupied property used as a head office is 800. The
acquirer has surplus space in its own head office nearby and the acquiree's property will be vacated and sold after the
business combination. Disposal costs, e.g., marketing and legal fees, would be approximately 50. Assuming that the
property meets the criteria to be classified as held for sale at the date of the combination, the property should be
recognised at its fair value less costs to sell of 750 in the purchase accounting.
2.6.530 Redesignation, reclassification or reassessment for separation of contracts of the

acquiree upon a business combination
2.6.530.10 IFRS 3 is silent as to whether a business combination triggers a redesignation or a reclassification of contracts
of the acquiree by the acquirer or whether the acquirer continues with the original assessments or designations by the
acquiree. This
© 2008 KPMG question is
International. relevant
KPMG in particular
International providesfor
no the:
client services and is a Swiss cooperative with which the independent member firms of the
• classification of leases (operating versus finance lease); Page 22 / 42
• classification of contracts as insurance contracts;
2.6.530 Redesignation, reclassification or reassessment for separation of contracts of the
acquiree upon a business combination
2.6.530.10 IFRS 3 is silent as to whether a business combination triggers a redesignation or a reclassification of contracts
of the acquiree by the acquirer or whether the acquirer continues with the original assessments or designations by the
acquiree. This question is relevant in particular for the:
• classification of leases (operating versus finance lease);
• classification of contracts as insurance contracts;
• reassessment of embedded derivatives for separation;
• continuation or de-designation of hedge relationships; and
• voluntary designation of financial instruments as held-to-maturity, available-for-sale or at fair

value through profit or loss
2.6.530.20 Reassessing or re-designating contracts upon a business combination in the financial statements of the
acquirer significantly affects the subsequent accounting for, and measurement of, these contracts and, in some cases, their
initial presentation in the balance sheet.
2.6.530.30 In our view, in the absence of any specific guidance in IFRSs, an entity uses the specific guidance in the
literature relevant to the contract or hedge relationship under consideration, i.e., the respective standard(s) that would
apply for classifying / designating such a contract, hedging relationship or financial instrument outside the context of a
2.6.540 Leases and insurance contracts
2.6.540.10 The relevant literature for leases and insurance contracts provides, either explicitly or implicitly, that
classification should be made at inception of the contracts. Both standards, IAS 17 Leases and IFRS 4 Insurance Contracts
preclude reassessment of the initial classification unless the terms of the contract are modified (lease) or extinguished
(insurance contracts). IFRS 4.14, 4.B30 , [IAS 17.13]
2.6.540.20 In our view, a contract, and therefore the terms and provisions therein, can exist only with the mutual
agreement of both parties. In a business combination typically there is no mutually agreed validation or modification of the
terms of the original contract, as the counterparty is not consulted and has no opportunity to exit the contract, except when
anticipated explicitly in the terms of the contract. Therefore upon a business combination typically there is no modification of
the terms of the contract.
2.6.540.30 In our view, since both IAS 17 and IFRS 4 preclude any reconsideration of classification unless the contract is
modified or extinguished, the classification of the acquiree's leases and insurance contracts should not be reassessed by the
acquirer upon a business combination unless the previous classification was an error. [IFRS 4.14, IAS 17.13]
2.6.550 Embedded derivatives
2.6.550.10 IAS 39 provides guidance on embedded derivatives in hybrid instruments and requires their separation from
host contracts and recognition as derivatives when the criteria in IAS 39 are met (see 3.6.260). IFRIC 9 Reassessment of
Embedded Derivatives provides that any reassessment is prohibited unless there is a substantive change in the terms of the
contract. However, IFRIC 9 explicitly excludes from its scope the question of reassessment upon a business combination.
[IFRIC 9.5, 7 ]
2.6.550.20 In our view, in the absence of any further guidance in IFRSs, the reassessment upon a business combination
for separation of an embedded derivative in an acquiree's hybrid contract is neither required nor prohibited. An entity should
make an accounting policy election and apply it consistently to all hybrid contracts with embedded derivatives acquired in
business combinations.
2.6.560 Voluntary designation of financial instruments and hedge relationships
2.6.560.10 Contrary to IAS 17 and IFRS 4, which refer to "inception" of the contract in determining classification, IAS 39
refers to the designation of a hedging relationship or the initial recognition of a financial instrument. In our view, from the
acquirer's perspective in a business combination, the identifiable assets and liabilities of the acquiree are recognised initially
in the consolidated financial statements of the acquirer at the acquisition date.
2.6.560.20 Further, in respect of the designation of hedge relationships and the classification of financial instruments,
there is a clear reference to management's intent or management's objective and strategy. Upon a business combination,
as in any
© 2008 direct
KPMG acquisition
International. of assets
KPMG and provides
International / or liabilities that
no client do not
services andconstitute a business,
is a Swiss cooperative withthe objectives
which and strategy
the independent member of theof the
firms
acquiree cannot
KPMG network be presumed to be "adopted" by the acquirer; rather, the acquirer is presumed to have its own objectives
are affiliated.
or strategy. [IAS 39.88(a), 39.9]
Page 23 / 42
2.6.560.30 Therefore, in our view, for the purpose of the consolidated financial statements, an acquirer in a business
refers to the designation of a hedging relationship or the initial recognition of a financial instrument. In our view, from the
acquirer's perspective in a business combination, the identifiable assets and liabilities of the acquiree are recognised initially
in the consolidated financial statements of the acquirer at the acquisition date.
2.6.560.20 Further, in respect of the designation of hedge relationships and the classification of financial instruments,
there is a clear reference to management's intent or management's objective and strategy. Upon a business combination,
as in any direct acquisition of assets and / or liabilities that do not constitute a business, the objectives and strategy of the
acquiree cannot be presumed to be "adopted" by the acquirer; rather, the acquirer is presumed to have its own objectives
or strategy. [IAS 39.88(a), 39.9]
2.6.560.30 Therefore, in our view, for the purpose of the consolidated financial statements, an acquirer in a business
combination should go through the process of voluntarily designating financial instruments as hedging instruments and
designating any hedge relationship of the acquiree at acquisition date. This means that in its consolidated financial
statements the acquirer cannot automatically continue to apply the hedge accounting model to the hedge relationship
designated previously by the acquiree. Rather, the acquirer has to designate a new hedge relationship. This might involve
the same financial instruments and hedged items, but the inception of the hedge relationship will be no earlier than the
acquisition date.
2.6.560.40 For example, entity B acquires entity C on 1 January 2008. On 1 January 2002 C had obtained a loan of 3
million, paying interest at a floating rate equal to Euribor, which was repayable in 10 years. At the same time C entered into
an interest rate swap (receive Euribor on 3 million, pay five percent) with other terms similar to the terms of the loan, e.g.,
maturity, notional etc., to hedge its exposure to variability in the cash flows on the loan. The fair value of the swap at 1
January 2002 was zero. C had applied cash flow hedge accounting and, as the hedge was effective, the fair value changes
of the derivative were recognised in equity.
2.6.560.50 At the date of acquisition of C, the loan has a remaining life of four years and B wishes to apply cash flow
hedge accounting to this loan and swap in its consolidated financial statements. However, the earliest date at which B can
designate a hedging instrument and hedging relationship is the date of acquisition, i.e., 1 January 2008. Designation can be
made only if the hedging relationship meets all hedging requirements in IAS 39 and can be made prospectively only. This
requires B to assess whether the hedge will be effective over the designated period. If the hedging instrument has a
significant fair value at the designation date, then the hedge may fail the prospective effectiveness test (see 3.7.460).
Accordingly, we believe that meeting the hedge accounting criteria for some cash flow hedges, in particular for cash flow
hedges of interest risk, may be problematic.
2.6.570 Fair value adjustments
2.6.580 Provisional accounting

2.6.580.10 Recognition of assets or liabilities as part of the cost of a business combination is not allowed if those items
meet the recognition criteria of IFRSs only after the date of acquisition. The only exceptions to this prohibition are for
contingent consideration and deferred tax assets of the acquiree.
2.6.580.20 However, IFRSs allow provisional estimation of fair values for recognised assets, liabilities and contingent
liabilities as well as the cost of the combination at the date of acquisition. When an entity accounts for a business
combination provisionally, the time period for recognition of additional items or adjustment to the fair values assigned to
recognised assets, liabilities and contingent liabilities against goodwill is limited to 12 months from the date of acquisition.
[IFRS 3.62]
2.6.580.30 In order for such an adjustment to be made, the acquirer should demonstrate that the new information
provides better evidence of the item's fair value at the date of acquisition. That is, the new information should provide
better evidence about facts and circumstances that existed at that date that, if known, would have impacted the recognition
and / or measurement of the item in the purchase accounting. Therefore new information that reflects events after the date
of acquisition does not result in changes to the initial accounting.
2.6.580.40 For example, at the date of acquisition the fair value of the acquiree's head office is estimated at 4,000. Two
months after the acquisition the real estate market declines significantly due to an unexpected change in land -use laws and
the value of the property falls to 2,500. The fall in value relates to a post-acquisition event and accordingly no adjustment to
the value of the land acquired, or to goodwill, is made. Instead, the property is assessed for impairment and any resulting
loss is recognised in profit or loss (see 3.10).
2.6.580.50 Another example would be an ongoing examination of damages, e.g., environmental contamination, to
property acquired in a business combination. If the examination still is ongoing at the end of the period in which the
property was acquired, then its fair value may be determined only provisionally. In such instances the acquirer recognises
any adjustments to the provisionally determined fair value arising from finalisation of measurement of existing damage at
the acquisition date, as long as these adjustments are made within 12 months of the date of acquisition. These adjustments
are reflected
© 2008 as an adjustment
KPMG International. to the purchase
KPMG International providesaccounting.
no client services and is a Swiss cooperative with which the independent member firms of the
2.6.580.60 If the fair values of identifiable assets, liabilities or contingent liabilities are adjusted, then goodwill orPage 24 / 42
"negative goodwill" is adjusted with effect from the date of acquisition. Accordingly, the acquirer restates the comparative
loss is recognised in profit or loss (see 3.10).
2.6.580.50 Another example would be an ongoing examination of damages, e.g., environmental contamination, to
property acquired in a business combination. If2.6
the examination
Business still is- ongoing
combinations at the end of the period in which the
IFRS Insights
property was acquired, then its fair value may be determined only provisionally. In such instances the acquirer recognises
any adjustments to the provisionally determined fair value arising from finalisation of measurement of existing damage at
the acquisition date, as long as these adjustments are made within 12 months of the date of acquisition. These adjustments
are reflected as an adjustment to the purchase accounting.
2.6.580.60 If the fair values of identifiable assets, liabilities or contingent liabilities are adjusted, then goodwill or
"negative goodwill" is adjusted with effect from the date of acquisition. Accordingly, the acquirer restates the comparative
financial information as if the accounting for the business combination had been completed at the date of acquisition. [IFRS
3.62]
2.6.580.70 If an entity can determine the fair values of an acquiree's identifiable assets and liabilities only on a provisional
basis by the end of the period in which a business combination occurs, then it should disclose that fact and an explanation.
[IFRS 3.69]
2.6.590 Adjustments after completing the provisional accounting

2.6.590.10 Adjustments to the fair value of assets, liabilities and contingent liabilities and the cost of the combination after
finalising the provisional accounting are recognised only in respect of adjustments to contingent purchase consideration (see
2.6.310), to correct errors (see 2.8.40), or to adjust deferred tax assets of the acquiree that did not meet the criteria for
separate recognition at the date of acquisition (see 2.6.590.30). [IFRS 3.63, 3.65]
2.6.590.20 Other adjustments are recognised prospectively as changes in estimates.
2.6.590.30 When deferred tax assets of the acquiree are realised in excess of the amount recognised at the date of
acquisition as part of the purchase accounting:
• the additional tax benefit is recognised in the income statement in the income tax line; and
• goodwill is adjusted to the amount that would have been recognised if the tax benefit had been
recognised as part of the purchase accounting, with the corresponding entry recognised in
profit or loss. [IFRS 3.65]
2.6.590.35 However, the above adjustment must not result in negative goodwill (see 2.6.610) being recognised. [IFRS
3.65]
2.6.590.40 For example, entity C acquired entity D on 1 March 2007 giving rise to goodwill of 100. As part of the purchase
accounting a deferred tax asset relating to D of 20 was recognised. At 30 June 2008 C concludes that a deferred tax asset
of 60 can now be recognised in respect of D. If a deferred tax asset of 60 had been recognised, then goodwill would have
been reduced by 40. C accounts for the additional tax benefit as follows:
2.6.600 Goodwill
2.6.600.10 The accounting for goodwill is discussed in 3.3.200. In summary, goodwill arising on a business combination
for which the agreement date is on or after 31 March 2004 is recognised at cost less accumulated impairment losses after
initial recognition. Such goodwill is not amortised, but instead is subject to impairment testing at least annually. [IFRS 3.51-
55]
2.6.610 Negative goodwill

2.6.610.10 IFRSs no longer include explicitly the concept of negative goodwill. If there is an excess of the acquirer's
interest in the net fair values of the identifiable assets, liabilities and contingent liabilities acquired over the cost of the
© 2008 KPMGthen
acquisition, International. KPMG should:
the acquirer International provides no client services and is a Swiss cooperative with which the independent member firms of the
• reassess the identification and measurement of identifiable assets, liabilities and contingent
Page 25 / 42
liabilities, and the measurement of the cost of acquisition; and
initial recognition. Such goodwill is not amortised, but instead is subject to impairment testing at least annually. [IFRS 3.51-
55]
2.6.610 Negative goodwill 2.6 Business combinations - IFRS Insights
2.6.610.10 IFRSs no longer include explicitly the concept of negative goodwill. If there is an excess of the acquirer's
interest in the net fair values of the identifiable assets, liabilities and contingent liabilities acquired over the cost of the
acquisition, then the acquirer should:
• reassess the identification and measurement of identifiable assets, liabilities and contingent
liabilities, and the measurement of the cost of acquisition; and
• recognise any remaining excess in profit or loss immediately on acquisition. [IFRS 3.56, 3.57]
2.6.620 Push down accounting

2.6.620.10 "Push down" accounting, whereby fair value adjustments recognised in the consolidated financial statements
are "pushed down" into the financial statements of the subsidiary is not addressed by, and has not been used under, IFRSs.
However, some fair value adjustments could be reflected in the acquiree as revaluations if permitted by the relevant
standards, as long as the revaluations are kept up to date subsequently.
2.6.620.20 For example, on 31 December 2008 entity E acquires all of the shares in entity F and as part of the purchase
accounting recognises land and buildings at 500 (the previous cost-based carrying amount was 300), and a trademark at
150 (not recognised previously). In our view, F could recognise the fair value adjustment of 200 in respect of land and
buildings in its own financial statements for the period ended 31 December 2008 if it changed its accounting policy to one of
revaluation and complied with all the revaluation requirements, including the need to keep revaluations up to date (see
3.2.300). However, we believe that F could not revalue the trademark in its own financial statements since this is prohibited
by IAS 38 Intangible Assets (see 3.3.280). [IAS 16.31-42, 38.78]
2.6.630 Business combination achieved in stages

2.6.630.10 When control is obtained in successive share purchases (a "step acquisition"), each significant transaction is
accounted for separately and the identifiable assets, liabilities and contingent liabilities acquired are stated at fair value
when control is obtained. [IFRS 3.58]
2.6.630.20 As with an acquisition achieved in a single transaction, minority interests are measured at the minority's
proportion of the net fair value of the identifiable assets, liabilities and contingent liabilities.
2.6.630.30 For example, entity P acquires a 10 percent interest in entity S and an additional 60 percent some years later.
Assuming that P did not have significant influence over S, the business combination requirements of IFRSs will apply only at
the date that the additional 60 percent is acquired since this is when control is obtained. Prior to the acquisition of the
additional 60 percent, the 10 percent interest would be accounted for as a financial asset (see 3.6).
2.6.630.40 IFRSs require the share of the identifiable assets, liabilities and contingent liabilities acquired in previous
transactions to be revalued, with the adjustment recognised directly in equity. This fair value adjustment does not require
the acquirer to apply a policy of revaluing those items after initial recognition in accordance with, for example, the
revaluation alternative for property, plant and equipment (see 3.2.300). [IFRS 3.59]
2.6.640 Worked example

2.6.640.10 The following example illustrates purchase accounting for a step acquisition.
2.6.640.20 Entity L acquired 20 percent of entity M for 300 on 1 January 2005 and obtained significant influence over M
from that date. L applied the equity method in accounting for its interest in M. L acquired an additional 40 percent and
obtained control of M for 600, including directly attributable costs of 20, on 1 January 2008. Income taxes are ignored in this
example.
Page 26 / 42
2.6.640.30 In this case:
• the acquired identifiable assets and liabilities assumed are recognised at their fair value at the
acquisition date, which is the date on which control passes to the acquirer;
• minority interests are measured using the fair value of the acquiree's net assets at the date of
acquisition, i.e., a portion of the 150 excess of the fair value over book value of net assets is
recognised in respect of minority interests; and
• previously acquired interests are revalued by L when the additional 40 percent interest is
acquired, i.e., a portion of the increase of 50 (150 - 100) in the fair value of the net assets in
excess of their book values since L acquired a 20 percent interest is recognised.
2.6.640.40 It is assumed that the 20 percent interest has been equity accounted in the consolidated financial statements
of L (see 3.5.270). If significant influence did not exist, then the investment would be a financial asset (see 3.6). As a result,
L recognised an increase of 40 in its investment in M ((1,000 - 800) x 20 percent).
2.6.640.50 The consolidation entries comprise the following (see calculations below):
Page 27 / 42
2.6.640.50 The consolidation entries comprise the following (see calculations below):
2.6.640.60 The credit to minority interests is the minority share of the fair values of M's assets and liabilities, i.e., 1,150 x
40 percent.
2.6.640.70 The credit to investment is the sum of the consideration paid (300 + 600), plus L's share of the increase in M's
equity between 1 January 2005 and 1 January 2008 when L accounted for its investment in M in accordance with the equity
method ((1,000 - 800) x 20 percent).
2.6.640.80 The revaluation reserve is the increase in the fair value of M's net assets from L's previously acquired interest,
i.e., (150 - 100) x 20 percent.
2.6.650 Obtaining fair value information

2.6.650.10 In many cases when previously acquired interests did not constitute an associate or jointly controlled entity
(see 3.5), it will be difficult to obtain fair value information in respect of the acquiree's identifiable assets and liabilities at
the date of the previous acquisitions. However, the requirements for successive share purchases are based on the
assumption that such fair value information can be obtained.
2.6.650.20 For example, entity P acquired a 10 percent interest in entity S in 2001. In March 2008 P acquired an additional
70 percent interest in S. Even though the 10 percent investment is accounted for at fair value as a financial asset (see 3.6),
P has no information about the fair value of S's identifiable assets and liabilities in 2001.
2.6.650.30 In our view, in this example it would be acceptable to assume that the goodwill attributable to the first
acquisition is the difference between the amount paid for the 10 percent interest and the book values of S's net assets at
that date. Another alternative would be to compare the total cost of both acquisitions, the 10 percent plus the 70 percent, to
the fair values of S's net assets at the date of the second acquisition; however, this is not our preferred method because
different acquisitions are combined as if they were one. In determining an appropriate short-cut method for measuring
goodwill, the materiality of the transactions also should be considered.
2.6.660 Transactions with minority shareholders

2.6.660.10 Changes in a parent's ownership interest in a subsidiary after control is obtained, that do not result in a loss of
control, are discussed in 2.5.380 - .540.
2.6.670-780 [Deleted]
2.6.785 De-merger / Spin-off*

2.6.785.10 An individual owns 55 percent of group B and has control of it. B operates hotels and restaurants via its two
subsidiaries, X and Y, respectively. The individual would like to separate these businesses into two groups via a de-merger
(spin-off) transaction. B will distribute the shares in Y to the individual and the other shareholders in proportion to their
ownership interests in B.
2.6.785.20 Accounting for a de-merger is not addressed specifically in IFRSs. Therefore the accounting policy for the de-
merger transaction should be developed using the hierarchy for the selection of accounting policies (see 1.1.140).
2.6.785.30 Economically a de-merger represents a division of an entity into separate parts. The result of a de-merger is
that the same shareholders own the same group of businesses; the shareholders' structure and their ownership interests
are identical both before and after the de-merger. However, the businesses that are being separated are no longer part of
the same group, as defined in IAS 27 (see 2.5.10). A de-merger transaction represents a transaction with shareholders
(see 1.2.110.10), and in our view it should be accounted for accordingly. In the above example, the de-merger represents a
distribution
© 2008 KPMGto shareholders
International. of International
KPMG the restaurant business
provides no clientinservices
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is ashares in Y.
Swiss cooperative with which the independent member firms of the
2.6.785.40 Assume that the carrying amount of the restaurant business of Y in the financial statements of B is 100 Page
and28 / 42
that the fair value of that business is 130. We believe that B could account for the in specie distribution to shareholders
merger transaction should be developed using the hierarchy for the selection of accounting policies (see 1.1.140).
2.6.785.30 Economically a de-merger represents a division of an entity into separate parts. The result of a de-merger is
that the same shareholders own the same group of businesses;
2.6 Business the shareholders'
combinations - IFRS Insights structure and their ownership interests
are identical both before and after the de-merger. However, the businesses that are being separated are no longer part of
the same group, as defined in IAS 27 (see 2.5.10). A de-merger transaction represents a transaction with shareholders
(see 1.2.110.10), and in our view it should be accounted for accordingly. In the above example, the de-merger represents a
distribution to shareholders of the restaurant business in the form of shares in Y.
2.6.785.40 Assume that the carrying amount of the restaurant business of Y in the financial statements of B is 100 and
that the fair value of that business is 130. We believe that B could account for the in specie distribution to shareholders
using either book values or fair values. If book values are used, then B would credit the carrying amount of the net assets of
the business of Y being spun off and debit equity to recognise a capital distribution to shareholders:
2.6.785.50 The use of book values is based on the notion that this is a transaction with the shareholders in their capacity
as shareholders.
2.6.785.55 In using book values to account for the de-merger, in our view it would not be appropriate for B to revise its
comparatives as if the de-merger had occurred prior to the start of the comparative period. Accordingly, the de -merger is
not reflected until the date that it occurs.
2.6.785.60 Alternatively, B could recognise the distribution to shareholders at fair value. This approach views the
distribution as a two-step transaction with an implicit sale to third parties and then a distribution to shareholders. In this
case B would credit the carrying amount of the net assets of the business of Y being spun off, credit profit or loss for the
difference between that carrying amount and its fair value, and debit equity for the fair value of the business to recognise a
capital distribution to shareholders:
2.6.785.70 The business of Y that will be disposed of by distribution to the shareholders cannot be classified as held for
sale, as no sale will occur. However, the business of Y could be classified as a discontinued operation once B has disposed
of Y by way of distribution (see 5.4.120).
2.6.785.80 We believe that the de-merger should not result in the remeasurement of Y's assets and liabilities in the
financial statements of Y. It is a transaction between parent B and the shareholders of group B, one level above Y.
2.6.790 Reverse acquisitions - worked example with minority interests

2.6.790.10 Guidance is provided in IFRS 3 for identifying and accounting for a reverse acquisition (see 2.6.170). [IFRS
3.21]
2.6.790.20 In a reverse acquisition the legal subsidiary becomes the acquirer for accounting purposes, and the legal
parent becomes the acquired entity for accounting purposes. Therefore it is the identifiable assets and liabilities of the legal
parent that are measured at fair value. [IFRS 3.B7-9]
2.6.790.30 For example, entity S acquires 60 percent of the shares in entity T. As consideration S issues its own shares to
T's shareholders; however, S issues so many shares that T's shareholders obtain an 80 percent interest in S. After
analysing all of the elements of control (see 2.5), it is concluded that T is the acquirer. Therefore S is the legal parent and
the acquiree, and T is the legal subsidiary and the acquirer for accounting purposes.
Page 29 / 42
parent that are measured at fair value. [IFRS 3.B7-9]
2.6.790.30 For example, entity S acquires 60 percent of the shares in entity T. As consideration S issues its own shares to
T's shareholders; however, S issues so many shares that combinations
2.6 Business T's shareholders
- IFRS obtain
Insights an 80 percent interest in S. After
analysing all of the elements of control (see 2.5), it is concluded that T is the acquirer. Therefore S is the legal parent and
the acquiree, and T is the legal subsidiary and the acquirer for accounting purposes.
2.6.790.40 The accounting for a reverse acquisition is illustrated by continuing the example of S and T.
2.6.790.50 Accounting for a reverse acquisition addresses only how to determine the allocation of the cost of a business
combination at the date of the acquisition. It applies only to the consolidated financial statements. In its separate financial
statements the legal parent (S) will account for its investment in the legal subsidiary (T).
2.6.790.60 S acquires 60 percent of the shares in T, and issues 400 shares in itself as consideration. T has 100 shares
outstanding.
2.6.790.70 At the date of acquisition the fair value of each share of S is 4 and the fair value of each share of T is 100.
2.6.790.80 The fair value of S's property, plant and equipment is 200 more than its book value. There are no other fair
value adjustments. Income taxes are ignored in this example.
2.6.800 Step 1 - calculate the cost of acquisition

2.6.800.10 From a legal point of view S's shareholders have obtained a 60 percent interest in T. However, from an
accounting point of view T's shareholders have obtained an 80 percent interest in S; the remaining 20 percent interest is
held by S's shareholders.
2.6.800.20 Assuming that T is the accounting acquirer because its shareholders obtained 80 percent of the legal acquirer,
it is necessary to calculate how many shares T would have issued in order to give the T shareholders an 80 percent interest
in S. In calculating the number of shares that would have been issued, the minority interest is ignored. This is a hypothetical
calculation because T never issued any shares since it is the legal subsidiary.
2.6.800.30 The majority shareholders own 60 shares in T. For this to represent 80 percent, T would have to issue 15
shares ((60 / 0.80) - 60).
2.6.800.40
KPMG network So the cost of acquisition is determined as the number of shares that T would have issued (15) multiplied by
are affiliated.
the fair value of its shares (100). Therefore the cost of acquisition is 1,500. Page 30 / 42
2.6.800.20 Assuming that T is the accounting acquirer because its shareholders obtained 80 percent of the legal acquirer,
it is necessary to calculate how many shares T would have issued in order to give the T shareholders an 80 percent interest
in S. In calculating the number of shares that would have been issued, the minority interest is ignored. This is a hypothetical
calculation because T never issued any shares2.6 Business
since combinations
it is the - IFRS Insights
legal subsidiary.
2.6.800.30 The majority shareholders own 60 shares in T. For this to represent 80 percent, T would have to issue 15
shares ((60 / 0.80) - 60).
2.6.800.40 So the cost of acquisition is determined as the number of shares that T would have issued (15) multiplied by
the fair value of its shares (100). Therefore the cost of acquisition is 1,500.
2.6.810 Step 2 - calculate goodwill

2.6.810.10 The goodwill is calculated by comparing the cost of acquisition, incurred theoretically by T, to the fair value of
the net assets theoretically acquired (of S).
2.6.810.20 The goodwill calculation in a reverse acquisition always assumes that the accounting acquirer (T) acquires 100
percent of the accounting subsidiary (S). This is because the consolidated financial statements are legally those of the legal
parent (explained below), which is S, and legally the minority interests in that group are the T shareholders, i.e., the 40
percent. Accordingly, there are no minority interests in S. Therefore the calculation of goodwill is based on a 100 percent
interest in S.
2.6.820 Step 3 - calculate minority interests

2.6.820.10 As noted in step 2, the minority interest in the transaction is represented by those non -participating
shareholders who decided not to exchange their shares for shares in S; in this example it is the 40 percent held by the T
shareholders. [IFRS 3.B10, 3.11]
2.6.820.20 These shareholders have an interest in the net assets of T.
2.6.820.30 The interests' share of net assets should be calculated using book values because T is the accounting parent
and therefore its assets are not remeasured to fair value.
Page 31 / 42
2.6.820.30 The interests' share of net assets should be calculated using book values because T is the accounting parent
and therefore its assets are not remeasured to fair value.
2.6.820.40 The adjustments comprise the following entries:
2.6.820.50 Normally all of the equity accounts of a legal subsidiary are eliminated on consolidation. In a reverse
acquisition, the consolidated financial statements should be issued in the name of the legal parent (S), but the financial
information included in the consolidated financial statements until the date of acquisition, including the comparatives, should
be that of the legal subsidiary (T). However, because legally the financial statements are those of the legal parent (S), the
number of shares is the number of shares issued by the legal parent (100 plus 400 in this example). In addition, the equity
structure in the consolidated financial statements reflects the equity structure of the legal parent (S).
2.6.820.60 Moreover, in the above example not all shareholders of the legal subsidiary (T) exchanged their shares for
shares in the legal parent (S). Those shareholders that did not would be treated as a minority interest in the consolidated
financial statements. This is because they have an interest only in T, and not in the profit or loss or net assets of S,
although S is considered to be the accounting subsidiary in the reverse acquisition. As a consequence, the minority interest
of 1,040 is determined on the basis of the remaining T shareholders' proportionate interest in the carrying amount of equity
in the legal subsidiary (T) immediately before the reverse acquisition ((2,500 + 100) x 40 percent).
2.6.820.70 In practice, in presenting consolidated financial statements following a reverse acquisition, the legal parent
might change its name to be similar to that of the accounting parent. The financial statements should include full disclosure
of the reverse acquisition, in addition to the general disclosure requirements of both the business combinations and cash
flow standards. [IFRS 3.21.B]
2.6.825 Reverse acquisitions - worked example without minority interests

2.6.825.10
KPMG network The following example illustrates the steps involved in determining the carrying amounts in the consolidated
are affiliated.
financial statements when no minority interests are involved. Page 32 / 42
2.6.825.20 Entity P acquires 100 percent of the shares in entity Q and issues 700 new ordinary shares as consideration. By
2.6.820.70 In practice, in presenting consolidated financial statements following a reverse acquisition, the legal parent
might change its name to be similar to that of the accounting parent. The financial statements should include full disclosure
of the reverse acquisition, in addition to the general disclosure requirements of both the business combinations and cash
flow standards. [IFRS 3.21.B] 2.6 Business combinations - IFRS Insights
2.6.825 Reverse acquisitions - worked example without minority interests

2.6.825.10 The following example illustrates the steps involved in determining the carrying amounts in the consolidated
financial statements when no minority interests are involved.
2.6.825.20 Entity P acquires 100 percent of the shares in entity Q and issues 700 new ordinary shares as consideration. By
issuing 700 ordinary shares of P, the shareholders of Q own 70 percent of the issued shares of the combined entity, i.e.,
700 shares out of 1,000 issued shares; the remaining 30 percent are owned by the shareholders of P. After analysing all of
the elements of control (see 2.5), it is concluded that Q is the acquirer; P is the legal parent and Q is the legal subsidiary.
Therefore it is the identifiable assets and liabilities of the legal parent that are measured at fair value.
2.6.825.30 At acquisition date the fair value of each ordinary share of P is 11 and the fair value of each ordinary share of
Q is 80.
2.6.825.40 The fair values of P's identifiable assets and (contingent) liabilities are the same as their carrying amounts
except for property, plant and equipment, which has a fair value of 3,000 at acquisition date. Income taxes are ignored in
this example.
2.6.826 Step 1 - calculate the cost of acquisition

2.6.826.10 Given that Q is the accounting acquirer because its shareholders obtained 70 percent of the legal acquirer P, it
is necessary to calculate how many shares Q would have issued in order to give the Q shareholders a 70 percent interest in
P, i.e., how many shares need to be issued by Q for the 100 shares owned by Q's shareholders in Q to represent 70 rather
than 100 percent. This is a hypothetical calculation because Q never issued any shares since it is the legal subsidiary. Q
would have had to issue 43 shares in order to have a 70 percent interest in the combined entity ((100 / 0.70) - 100); Q's
shareholders would then own 100 out of 143 issued shares of Q. The cost of acquisition is 3,440 determined as the number
of shares that Q would have issued (43) multiplied by the fair value of its shares (80).
2.6.827 Step 2 - calculate goodwill

2.6.827.10 The cost of acquisition of 3,440 is allocated to P's assets and liabilities as follows, resulting in goodwill of 840:
Page 33 / 42
Presentation and disclosure
Disclosures in Practice (download pdf)

2.6.830 - 890 [Deleted]
2.6.900 Common control transactions

2.6.900.10 A business combination involving entities or businesses under common control is a business combination in
which all of the combining entities or businesses ultimately are controlled by the same party or parties both before and after
the combination, and that control is not transitory. [IFRS 3.10-13A]
2.6.900.20 A group of individuals is regarded as controlling an entity when, as a result of contractual arrangements, they
collectively have the power to govern its financial and operating policies so as to obtain benefits from its activities. In our
view, the requirement for there to be a contractual arrangement should be applied strictly and is not overcome by an
established pattern of voting together. [IFRS 3.11]
2.6.900.30 For example, entities X and Y are owned by shareholders B, C, D and E, who each hold 25 percent of the
shares in each entity. B, C and D have entered into a shareholders' agreement in terms of which they exercise their voting
power jointly. Therefore both X and Y are under the control of the same group of individuals (B, C and D), and are under
common control.
2.6.900.40 In another example, entities Y and Z are owned by members and close relatives of a single family. The father
owns 40 percent of the shares in each entity, each of his two brothers owns another 15 percent of the shares, and his son
owns the remaining 30 percent of the shares. However, there are no agreements between the family members that they
will exercise their voting power jointly. Therefore, notwithstanding that the shares are held within a single family who may
have an established pattern of voting together, this group of individuals does not control either entity, and Y and Z are not
under common control.
2.6.900.50 It is not necessary that an individual, or a group of individuals acting together under a contractual arrangement
to control an entity, be subject to the financial reporting requirements of IFRSs. Also, the entities are not required to be part
of the same consolidated financial statements. [IFRS 3.12]
2.6.900.60 The extent of minority interests in each of the combining entities before and after the business combination is
not relevant in determining whether the combination involves entities under common control. However, transactions that
impact the level of minority interests are discussed, for example, in 2.6.960.60 - .70. [IFRS 3.13]
2.6.910 Associates and jointly controlled entities

2.6.910.10 In our view, the common control exemption in accounting for business combinations applies also to the
transfer of investments in associates and jointly controlled entities between investors under common control. Although
neither IAS 28 Investments in Associates nor IAS 31 Interests in Joint Ventures includes an explicit exemption for common
control transactions, both equity accounting and proportionate consolidation follow the principles of purchase accounting.
Therefore we believe that it is appropriate to extend the application of the common control exemption. [IAS 28.20]
2.6.920 "Transitory" common control

2.6.920.10 The term "transitory" is not defined under IFRSs. In our view, the notion of "transitory" is included in the
common control definition as an anti-abuse measure to deal with so-called "grooming" transactions, i.e., transactions
structured
© 2008 KPMGtoInternational.
achieve a particular accounting
KPMG International treatment.
provides Therefore
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transactions
KPMG networkthat look as though they are combinations involving entities under common control, but which in fact represent
are affiliated.
genuine substantive business combinations with unrelated parties. [IFRS 3.BC28] Page 34 / 42
2.6.920.20 In our view, the requirement that control not be "transitory" should be applied narrowly in order to give effect
Therefore we believe that it is appropriate to extend the application of the common control exemption. [IAS 28.20]
2.6.920 "Transitory" common control

2.6.920.10 The term "transitory" is not defined under IFRSs. In our view, the notion of "transitory" is included in the
common control definition as an anti-abuse measure to deal with so-called "grooming" transactions, i.e., transactions
structured to achieve a particular accounting treatment. Therefore purchase accounting should be applied to those
transactions that look as though they are combinations involving entities under common control, but which in fact represent
genuine substantive business combinations with unrelated parties. [IFRS 3.BC28]
2.6.920.20 In our view, the requirement that control not be "transitory" should be applied narrowly in order to give effect
to its intention. We believe that "transitory" common control is relevant only when there is an intention to avoid applying the
purchase method by sequencing an acquisition to place entities under common control before effecting the business
combination.
2.6.920.30 For example, parent entity P has a subsidiary B. P acquires all of the shares of entity C. Next P combines the
activities of B and C by transferring C into B, and then sells the combined entity as one business. The consolidated financial
statements of B represent the group that is being sold. The question arises as to how the transfer of C into B should be
accounted for in the consolidated financial statements of B.
2.6.920.40 In this example, if B and C had negotiated directly, then B would have been identified as the acquirer. Since B
and C are under common control, it appears that the purchase method would not be required because of the common
control scope exemption. However, since P's control over C is "transitory", B should be identified as the acquirer and should
account for its combination with C using the purchase method. This is because B would have applied purchase accounting
for C if B had acquired C directly rather than through P. The purchase method cannot be avoided in the financial statements
of B simply by placing B and C under the common control of P shortly before the transaction.
2.6.920.50 If a combination involves a newly-formed holding entity (Newco), then it is unclear whether control of Newco
should be viewed as transitory in determining whether purchase accounting is required. In our view, "transitory" should be
considered in respect of substantive operating entities; effecting a combination of entities under common control via a
Newco should not alter the accounting required.
2.6.920.60 For example, parent entity P has a subsidiary G. P acquires all of the shares of entity R. Next P combines the
activities of G and R by putting them into newly-formed entity N; N issues shares to acquire G and R. Then P organises a
sale of shares in N. The question arises as to how the combination of G and R should be accounted for in the consolidated
financial statements of N.
2.6.920.70 Given that P's control over R is "transitory", in our view the business combination (combining G and R by
putting them into N) should be accounted for using the purchase method. The newly formed entity N that issues shares is
ignored in considering whether control is transitory.
2.6.920.80 One of the combining entities that existed before the combination should be identified as the acquirer (see
2.6.160). If G and R had negotiated directly, then G would have been identified as the acquirer. Therefore G should be
identified as the acquirer in the consolidated financial statements of N and should account for the acquisition of R using the
purchase method. Once again, the purchase method cannot be avoided in the financial statements of N simply by placing G
and R under the common control of P shortly before the transaction. [IFRS 3.22]
2.6.920.90 An assessment of whether control is transitory may require consideration of a wider series of transactions of
which the business combination, which looks as though it involves entities under common control, is only one element.
2.6.920.100 Another issue with respect to common control transactions is whether an intention to dispose of a
restructured or internally-created group means that post-combination control is transitory and therefore that common
control accounting does not apply to a restructuring within a group in preparation for disposal. In our view, an intention to
dispose of restructured or internally-created entities does not in itself result in control of the combined entities being
transitory.
2.6.920.110 For example, parent entity P has two subsidiaries, M and V. Both subsidiaries have been part of the group for
many years. P intends to combine the activities of M and V by transferring V into M, and then to sell the combined entity as
one business. In this example, if M and V had negotiated directly, then M would have been identified as the acquirer. We
believe that control by P over M and V is not "transitory" because M and V were part of the group for a long time. Therefore
we believe that the common control exemption applies.
2.6.930 Accounting for common control transactions
2.6.940 Consistency of accounting policies

2.6.940.10
© 2008 KPMG As outlinedKPMG
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Page 35 / 42
2.6.940.20 IFRSs require the application of consistent accounting policies for similar transactions. Accordingly, common
we believe that the common control exemption applies.
2.6.930 Accounting for common control

2.6 Businesstransactions
combinations - IFRS Insights
2.6.940 Consistency of accounting policies

2.6.940.10 As outlined in 2.6.950 - .1010, we believe that there are a number of accounting policy options in accounting
for common control transactions, depending on whether the financial statements are consolidated or separate.
2.6.940.20 IFRSs require the application of consistent accounting policies for similar transactions. Accordingly, common
control transactions should be accounted for using the same accounting policy in the consolidated financial statements to the
extent that the substance of the transaction is similar. Similarly, common control transactions should be accounted for using
the same accounting policy in the separate financial statements, independently of the choice for the entity's consolidated
financial statements ,to the extent that the substance of the transaction is similar. [IAS 8.13]
2.6.940.30 Judgement is required in assessing the substance of a common control transaction to determine whether the
specific facts and circumstances of a case warrant an accounting treatment that differs from that applied to previous
common control transactions. [IAS 8.13]
2.6.940.40 However, in our view the nature of the investee does not impact the choice of accounting policy. For example,
if the acquisition of a subsidiary in a common control transaction was accounted for previously using book value accounting
(see 2.6.960), then we believe that the fact that a subsequent common control transaction involves the acquisition of an
associate is not sufficient in itself to support a different accounting policy being applied.
2.6.950 Common control transactions in the consolidated financial statements of the acquiring
entity
2.6.950.10 In the following group structure, if IP were to transfer its investment in S3 to S2, then S2 would be the
acquiring entity for the purpose of applying the guidance that follows.
2.6.950.20 In our view, the acquiring entity in a common control transaction should make an accounting policy choice in
respect of its consolidated financial statements, which should be applied consistently to all similar common control
transactions (see 2.6.940), to use:
• book value (carry-over basis) accounting on the basis that the investment simply has been
moved from one part of the group to another; or
• fair value accounting on the basis that the acquiring entity is a separate entity in its own right,
and should not be confused with the economic group as a whole.
2.6.950.30 In addition, the accounting policy choice in 2.6.950.20 also applies in the acquiring entity's separate financial
statements when it acquires assets and liabilities constituting a business under IFRS 3 (from an entity under common
control) rather than acquiring shares in that business (see 2.6.980.30).
2.6.960 Book value accounting

2.6.960.10 In our view, in applying book value accounting, the acquiring entity should make an accounting policy choice in
recognising
KPMG networkthe
are assets acquired and liabilities assumed using the book values in the financial statements of:
affiliated.
Page 36 / 42
• the transferor (IP in 2.6.950.10);
statements when it acquires assets and liabilities constituting a business under IFRS 3 (from an entity under common
control) rather than acquiring shares in that business (see 2.6.980.30).
2.6.960.10 In our view, in applying book value accounting, the acquiring entity should make an accounting policy choice in
recognising the assets acquired and liabilities assumed using the book values in the financial statements of:
• the transferor (IP in 2.6.950.10);
• the entity transferred (S3 in 2.6.950.10);
• the ultimate parent (P in 2.6.950.10); or
• any intermediate parent (IP in 2.6.950.10).

2.6.960.20 In our view, in its consolidated financial statements the acquirer is permitted, but not required, to restate its
comparatives and adjust its current year prior to the date of the transaction as if the combination had occurred prior to the
start of the earliest period presented. However, this restatement should not, in our view, extend to periods during which the
entities were not under common control.
2.6.960.30 For example, entity D acquired entity E in a common control transaction on 1 June 2008; D's annual reporting
date is 31 December. Both D and E have been owned by a single shareholder, X, since their incorporation many years ago.
On that basis we believe that D may elect to restate its 2008 consolidated financial statements, including comparatives, as if
the acquisition had occurred prior to 1 January 2007.
2.6.960.40 In another example, entity G acquired entity H in a common control transaction on 1 March 2008; G's annual
reporting date is 31 December. Both G and H are owned by a single shareholder, X; X acquired its investment in G in 2001,
and its investment in H on 1 July 2007. On that basis we believe that G may elect to restate its 2008 consolidated financial
statements, including comparatives, as if the acquisition had occurred on 1 July 2007, but not earlier.
2.6.960.50 In our view, to the extent that the common control transaction involves transactions with minority interests, the
changes in minority interests should be accounted for as acquisitions and / or disposals of minority interests on the date that
the changes occur (see 2.5.380 and .530).
2.6.960.60 For example, using the group structure below, 100 percent of the shares in S1 are transferred to S3 and the
previous minority shareholders in S1 obtain shares in S3; as a result, IP's interest in S3 falls to 90 percent. The following is
the resulting group structure:
2.6.960.70 Therefore IP has sold a 10 percent interest in S3 (100 - 90 percent), which should be accounted for as a
disposal without the loss of control (see 2.5.530); and has acquired a 10 percent interest in S1 (90 - 80 percent), which
should be accounted for as an acquisition of minority interests (see 2.5.380).
2.6.970 Fair value accounting

2.6.970.10 In our view, in applying fair value accounting, IFRS 3 should be applied in its entirety by analogy. This includes,
for example, identifying the acquirer for accounting purposes, measuring the cost of acquisition, allocating that cost to the
assets acquired and (contingent) liabilities assumed, and recognising goodwill.
2.6.980 Common control transactions in separate financial statements # Page 37 / 42
2.6.980.10 When a common control transaction is effected through the acquisition of assets and liabilities constituting a
should be accounted for as an acquisition of minority interests (see 2.5.380).

2.6.970.10 In our view, in applying fair value accounting, IFRS 3 should be applied in its entirety by analogy. This includes,
for example, identifying the acquirer for accounting purposes, measuring the cost of acquisition, allocating that cost to the
assets acquired and (contingent) liabilities assumed, and recognising goodwill.
2.6.980 Common control transactions in separate financial statements #

2.6.980.10 When a common control transaction is effected through the acquisition of assets and liabilities constituting a
business under IFRS 3 (from an entity under common control) rather than by acquiring shares in that business, the
acquiring entity accounts for the transaction in accordance with the guidance in 2.6.950 in respect of consolidated financial
statements.
2.6.980.20 IFRSs do not provide specific guidance on accounting for common control transactions in the separate financial
statements (see 2.1.70). In our view, an entity may apply the common control scope exclusion in IFRS 3 by analogy to the
accounting for these transactions in separate financial statements.
2.6.980.30 In the following group structure, entities O, P and S are under the common control of entity N. If P were to
transfer its investment in S to O, then P would be the transferor and O would be the acquiring entity for the purpose of
applying the guidance that follows. For purposes of the examples that follow, we assume that the book value of P's
investment in S is 100, S's fair value is 130, and O pays 80 to P for the shares of S.
2.6.980.40 In our view, each of the acquiring entity and the transferor in a common control transaction should make an
accounting policy choice in respect of its separate financial statements, which should be applied consistently to all similar
common control transactions (see 2.6.940), to use:
• book value accounting on the basis that the entities are part of a larger economic group, and
the common control transaction has been directed by that larger group;
• fair value accounting on the basis that the parties are separate entities in their own right and
that the accounting for the transaction should be as if it had been carried out on an arm's
length basis; or
• exchange amount accounting on the basis that this reflects the actual terms of the transaction.

2.6.990.10 In our view, in applying book value accounting, the acquiring entity (O in 2.6.980.30) should use the carrying
amount of the investee in the separate financial statements of the transferor. If the above transaction in 2.6.980.30 is
accounted for under this approach, then O would recognise a capital contribution of 20 (100 - 80) directly in equity.
2.6.990.20 In our view, in applying book value accounting, the transferor (P in 2.6.980.30) would credit the investment of
100, record the cash receipt of 80, and recognise the resulting loss of 20 (100 - 80) as a notional capital distribution to
shareholders, i.e., a debit to equity. The concept of a notional capital distribution is based on the assumption that P would
not have
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2.6.990.10 In our view, in applying book value accounting, the acquiring entity (O in 2.6.980.30) should use the carrying
amount of the investee in the separate financial statements of the transferor. If the above transaction in 2.6.980.30 is
accounted for under this approach, then O would recognise a capital contribution of 20 (100 - 80) directly in equity.
2.6.990.20 In our view, in applying book value accounting, the transferor (P in 2.6.980.30) would credit the investment of
100, record the cash receipt of 80, and recognise the resulting loss of 20 (100 - 80) as a notional capital distribution to
shareholders, i.e., a debit to equity. The concept of a notional capital distribution is based on the assumption that P would
not have entered into this transaction unless it was instructed by its shareholder (N). In other words, the transaction could
be considered as a transaction with shareholders.

2.6.1000.10 In our view, in applying fair value accounting, the acquiring entity (O in 2.6.980.30) generally should
recognise any difference between the fair value of the investment acquired and the consideration paid directly in equity. If
the above transaction in 2.6.980.30 is accounted for under this approach, then the excess of the fair value of S over the
consideration paid of 50 (130 - 80) is a notional capital contribution that should be recognised directly in equity.
2.6.1000.20 In our view, in applying fair value accounting, the transferor (P in 2.6.980.30) would recognise a sale with
proceeds equal to the fair value of the investment in S. Under this approach P would recognise a gain of 30 (130 - 100) in
profit or loss. In our view, this does not contradict the general principle that capital transactions with equity participants do
not result in profit or loss. The reason for recording a profit in the described transaction is the principle that O and P are
viewed as separate entities in their own right; therefore a gain would be recognised as if the transaction had been entered
into with a third party. The difference between the fair value of 130 and the proceeds of 80 would be recognised as a
capital distribution in kind, and would be recorded directly in equity (50).
2.6.1010 Exchange amount accounting

2.6.1010.10 In our view, in applying exchange amount accounting, the acquiring entity (O in 2.6.980.30) should recognise
the investment initially at an amount equal to the exchange amount, which is the fair value of the consideration given (e.g.,
cash or shares) to acquire the investment. O would recognise the transaction based on the consideration paid of 80 in the
above example.
2.6.1010.20 In our view, in applying exchange amount accounting, the transferor (P in 2.6.980.30) should recognise any
difference between the exchange amount and the carrying amount of the investee in profit or loss. The exchange amount is
the fair value of the consideration (e.g., cash or shares) received in the transaction. P would recognise the transaction
based on the consideration received of 80 and would recognise a loss of 20 (80 - 100) in profit or loss in the above
example.
2.6.1015 Forthcoming requirements
2.6.1015.10 An amendment to IAS 27, published in May 2008, specifies the accounting in the separate financial
statements of a newly formed entity that becomes the new parent entity of another entity in a group when:
• the new parent entity issues equity instruments as consideration in the reorganisation;
• there is no change in the group's assets or liabilities as a result of the reorganisation; and
• there is no change in the interest of the shareholder, either absolute or relative, as a result
of the reorganisation.
2.6. 1015.20 In such cases, if the new parent entity elects to measure the cost of the investment in the subsidiary at
cost in accordance with paragraph 38(a) of IAS 27, then cost is equal to its share of total equity shown in the separate
financial statements of the subsidiary at the date of the reorganisation.
2.6.1020 Common control transactions in the financial statements of a common controller that
is not a party to the transaction
2.6.1020.10 If the common control transaction does not involve minority interests, then in most cases neither the
consolidated nor the separate financial statements of a common controller that is not a party to the transaction are affected.
Using the group structure below, if IP were to transfer its investment in S3 to S2, then neither the consolidated nor the
separate financial statements of P would be affected by the transaction.
Page 39 / 42
consolidated nor the separate financial statements of a common controller that is not a party to the transaction are affected.
Using the group structure below, if IP were to transfer its investment in S3 to S2, then neither the consolidated nor the
separate financial statements of P would be affected by the transaction.
2.6.1020.20 If the common control transaction involves minority interests and the common controller's interest in the
subsidiary is diluted, then a dilution gain or loss should be calculated in the consolidated financial statements in accordance
with the guidance in 2.5.530.
2.6.1020.30 For example, using the group structure below, 100 percent of the shares in S1 are transferred to S3 and the
previous minority shareholders in S1 obtain shares in IP; as a result, P's interest in IP falls to 98 percent. Therefore P
should calculate a dilution gain or loss in its consolidated financial statements.
2.6.1030 Disclosure
2.6.1030.10 In our view, an entity should disclose its accounting policy for common control transactions. [IAS 1.10(e)]
2.6.1030.20 An entity is required to provide additional disclosures in the financial statements when necessary for users to
understand the impact of specific transactions. In our view, in order to meet this requirement, sufficient information about
common control transactions should be disclosed in the financial statements in order that users can understand the impact
thereof. [IAS 1.15]
2.6.1030.30 In respect of the acquisition of subsidiaries in consolidated financial statements, in our view the disclosures
required by IFRS 3 in respect of business combinations should be followed if fair value accounting is applied. If book value
accounting is applied, then we believe that some of these disclosures still will be relevant to users of the financial
statements, e.g., the amounts recognised at the date of the transaction for each class of assets and liabilities acquired.
[IFRS 3.66-73]
2.6.1040 Legal KPMG

© 2008 KPMG International. mergers and
International amalgamations
provides no client services and is a Swiss cooperative with which the independent member firms of the
2.6.1040.10 For purposes of the discussion that follows, a merger is a transaction that involves the combinationPage of two40
or/ 42
more entities in which one of the legal entities survives and the other ceases to exist, or in which both existing entities
required by IFRS 3 in respect of business combinations should be followed if fair value accounting is applied. If book value
accounting is applied, then we believe that some of these disclosures still will be relevant to users of the financial
statements, e.g., the amounts recognised at the date of the transaction for each class of assets and liabilities acquired.
[IFRS 3.66-73]
2.6.1040 Legal mergers and amalgamations

2.6.1040.10 For purposes of the discussion that follows, a merger is a transaction that involves the combination of two or
more entities in which one of the legal entities survives and the other ceases to exist, or in which both existing entities
cease to exist and a new legal entity comes into existence.
2.6.1040.20 A merger can occur for a number of reasons, including achieving a tax benefit or to facilitate a listing.
2.6.1040.30 For example, parent P forms a new entity (Newco) and acquires entity S from a third party in exchange for
cash. S is a holding entity and the only asset that it holds is a 100 percent investment in operating entity X. Shortly after the
acquisition, Newco and S merge. The following diagram illustrates the structure of the transaction.
2.6.1040.40 A merger can occur in numerous ways. For example, in the above diagram S could merge into Newco, which
commonly is referred to as an upstream merger; in this case S legally disappears and the legal entity that continues to exist
is Newco. Alternatively, Newco could merge into S, which commonly is referred to as a downstream merger; in this case
Newco legally disappears and the legal entity that continues to exist is S.
2.6.1040.50 In some jurisdictions the merger between Newco and S may result in a new entity, different from both
Newco and S, legally surviving after the merger; sometimes this is referred to as an amalgamation. Judgement is required
in assessing whether the form of the merger, which can vary from jurisdiction to jurisdiction, should result in a different
accounting outcome.
2.6.1040.60 Regardless of the nature of the merger, either upstream, downstream, or as a new surviving entity, the
result economically is the same as the merged entity will have identical net assets.
2.6.1040.70 The issue that arises in a merger is determining which entity is the continuing entity for accounting purposes.
Continuing the example in 2.6.1040.30, should the consolidated financial statements of the newly merged entity be
represented by the consolidated financial statements of S, or the consolidated financial statements of Newco?
2.6.1040.80 In our view, the legal form of the transaction is less important for the consolidated financial statements,
because the focus in consolidated financial statements is the economic entity rather than the legal entity. Therefore, based
on the example in 2.6.1040.30, in our view in respect of its consolidated financial statements the merged entity can do
either of the following:
• Use Newco consolidated as the consolidated financial statements of the newly merged entity on
the basis that Newco was the acquirer in the business combination and therefore the newly
merged entity should be a continuation of Newco consolidated. This is our preferred approach.
• Use S consolidated as the consolidated financial statements of the newly merged entity on the
basis that S continues to reflect the operations of the merged entity; from S's point of view
there has simply been a change in shareholding.
2.6.1050 Separate financial statements

2.6.1050.10 Unlike in the consolidated financial statements, in our view the legal form of a merger is more important in
the context
© 2008 KPMGof separate financial
International. statements
KPMG International as these
provides have
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Page 41 / 42
2.6.1050.20 Legal form can have a range of consequences. For example, in certain jurisdictions the form of the merger
(upstream, downstream or a new surviving entity) can result in different tax consequences, which represent different
basis that S continues to reflect the operations of the merged entity; from S's point of view
there has simply been a change in shareholding.
2.6.1050 Separate financial statements

2.6.1050.10 Unlike in the consolidated financial statements, in our view the legal form of a merger is more important in
the context of separate financial statements as these have a different purpose, being the financial statements of a legal
entity.
2.6.1050.20 Legal form can have a range of consequences. For example, in certain jurisdictions the form of the merger
(upstream, downstream or a new surviving entity) can result in different tax consequences, which represent different
economic outcomes. In some jurisdictions, legal requirements mean that only one form of merger is available. Therefore, in
our view, the legal form of the transaction should guide the accounting in the separate financial statements.
2.6.1050.30 Continuing the example in 2.6.1040.30, if the merger of Newco and S takes the legal form of an upstream
merger, then because the legal entity that continues to exist is Newco, in our view it is appropriate for the merged entity's
balance sheet to reflect the carrying amounts of the assets on Newco's balance sheet.
2.6.1050.40 However, if the merger of Newco and S takes the legal form of a downstream merger, then because the
legal entity that continues to exist is S, in our view it is appropriate for the merged entity's balance sheet to reflect the
carrying amounts of the assets on S's balance sheet.
2.6.1050.50 If the merger of Newco and S takes the legal form of a new surviving entity (an amalgamation), then based
on the example in 2.6.1040.30, in our view in respect of its separate financial statements the merged entity can do either of
the following:
• Use Newco as the separate financial statements of the newly merged entity on the basis that
Newco was the acquirer in the business combination and therefore the newly merged entity
should be a continuation of Newco. This is our preferred approach.
• Use S as the separate financial statements of the newly merged entity on the basis that S
continues to reflect the operations of the merged entity; from S's point of view there has simply
been a change in shareholding.
2.6.1060 Future developments
2.6.1060.10 In January 2008 the IFRIC published Draft Interpretation D23 Distributions of Non-cash Assets to Owners.
The draft interpretation proposes that non-cash distributions of assets to owners be accounted for using the fair value
method illustrated in 2.6.785.60. It also proposes that the scope of IFRS 5 Non-current Assets Held for Sale and
Discontinued Operations be expanded to include non-current assets (disposal groups) held for distribution to owners. At
present IFRS 5 applies only if the carrying amount of the asset will be recovered principally through a sale transaction.
Page 42 / 42

2 (1) .6 Business Combinations - Ifrs Insights

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2 (1) .6 Business Combinations - Ifrs Insights

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2.

6 Business combinations - IFRS Insights

2.6 Business combinations

Overview of currently effective requirements

• A business combination is the bringing together of separate entities or

• A business can be an operation managed for the purpose of providing a

• The acquisition date is the date on which control is transferred to the

• A liability for contingent consideration is recognised as soon as payment

• The assets acquired and liabilities and contingent liabilities assumed

• While there is general guidance on measuring fair values, there is no

• Acquired non-current assets (disposal groups) classified as held for sale

• An intangible asset is recognised separately from goodwill when it is

• A restructuring provision is recognised only when it is an existing liability of

• Any change in the assessment of the recoverability of the acquirer's

• Except in respect of goodwill, deferred tax is recognised on temporary

• Subject to limited exceptions, adjustments to goodwill can be made only

• Subject to limited exceptions, adjustments to goodwill can be made only

• "Push down" accounting, whereby fair value adjustments are recognised in

• When an acquisition is achieved in successive share purchases, the assets

• There is no guidance on accounting for common control transactions,

Currently effective requirements

Previously effective requirements, forthcoming requirements and future

• Amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards and

• transactions among entities under common control;

• the formation of joint ventures (see 3.5.530);

• business combinations involving two or more mutual entities; and

2.6.30 Identifying a business combination

2.6.40 Definition of a business combination

2.6.50 Definition of a business

• lower costs or other economic benefits directly and proportionately to policyholders or

2.6.60 Acquisition of a group of assets

2.6.60 Acquisition of a group of assets

• Goodwill or negative goodwill does not arise in an asset purchase.

2.6.70 Indicators of a business

2.6.90 Taking over contracts with employees

2.6.110 Exclusion of some components of a business

2.6.110 Exclusion of some components of a business

2.6.115Call option over components of the business

2.6.120 Management intent

2.6.130 Substance of a transaction

2.6.135 Forthcoming requirements

2.6.140 Applicability of purchase accounting

2.6.150 Purchase accounting

2.6.160 Identifying the acquirer

2.6.170 Reverse acquisition

2.6.180 Creation of a new entity

2.6.190 Date of acquisition

2.6.200 Agreements with retroactive effect

2.6.210 Control and benefits

2.6.220 Shareholder approval

2.6.230 Regulatory approval

2.6.240 Public offers

2.6.250 Acquirer consulted on major decisions

2.6.260 Cost of acquisition

• Duration of continuing employment. If the length of time of required employment coincides

• Relative amounts of consideration. If selling shareholders who do not become employees

• Previous acquisitions. If the entire consideration, including the additional payments, is

• Pre-acquisition ownership interests. The pre-acquisition ownership interests held by parties

2.6.270 Fair value of securities issued

• using the share price of N once listed; or

2.6.280 Liabilities incurred or assumed

2.6.290 Directly attributable costs

2.6.300 Deferred consideration