BUSINESS COMBINATIONS 1

IFRS 3
 Accounting Literature

IFRS 3 (Part A1)

• Paragraph 01-67
• Appendix A
• Appendix B (B5-B18)
• Chapter 2 Group Statements
• Chapter 9

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 Objective of the Lecture

 Discuss the key principles of IFRS

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• Definition of a business
• Acquisition method

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Business Combination Identification

Does the transaction

meet the definition
of a business
combination in
YES terms of IFRS 3? NO

Account for the Treat the acquisition

transaction in terms as a normal asset
of IFRS 3 acquisition

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Business Combination Identification

 Appendix A important definitions:

• Business combination
• Business
• Acquirer
• Acquiree

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Business Combination Defined

• A transaction or other event in which an

acquirer obtains control of one or more
businesses by the transfer of cash, incurrence
of liabilities, issue of equity interests or by
contract alone.
 Business Defined

• An integrated set of activities and assets (inputs) that is

• capable of being conducted and managed (process) for the
• purpose of providing a return (output) in the form of
dividends, lower costs or other economic benefits directly to
investors or other owners, members or participants.
Business combination Identification

Three main elements in a business

INPUT PROCESS OUTPUT

CLASS EXAMPLE 1
Business Combination
Identification
Is it a
business?
YES NO

Did you gain Asset

control? Acquisition

YES NO
IAS 16
Asset
IFRS 3 IAS 2
Acquisition
IAS 38

No

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consolidation No Goodwill
IAS 32/IFRS 9
Business Combination
Identification

IFRS 3

Assets and
Shares
Liabilities

IFRS 9 Apply IFRS

IFRS 3
Separate 3 Separate
Group AFS
AFS AFS

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 Assets & Liabilities Acquisition
• Journal for the acquisition of assets & liabilities in
separate AFS of acquirer

Dr: Individual assets bought xxx

Dr: Goodwill (or cr – gain) xxx
Cr: Individual liabilities taken over
xxx
Cr: Consideration transferred xxx

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Business Combination
Identification

IFRS 3

Assets and
Shares
Liabilities

IFRS 9 Apply IFRS

IFRS 3
Separate 3 Separate
Group AFS
AFS AFS

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 Acquisition of shares

• Journal for the acquisition of shares in the separate

AFS of acquirer

• Dr: Investment in subsidiary xxx

Cr: Consideration transferred xxx
(Share capital)
(Asset)
(Loan/Payable)
(Bank)

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The acquisition method
Identify the acquirer

Determine the acquisition date

Measure the identifiable assets,

liabilities and non-controlling interest
in the acquiree

Recognise and measure goodwill or a

gain from bargain purchase
Identifying the acquirer
• One of the entities must always be identified as
the acquirer:
• Additional guidance IFRS 3.B13–B18

• Use guidance of IFRS 10 to determine if control

exists:
• Refer to the IFRS 10 lecture

Class example 2

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Acquisition Date
• Acquisition date
o Date on which control of the acquiree is obtained
o Generally the closing date
o Unless contract states differently
• Look out for BC subject to the satisfaction of
certain suspensive legal conditions
o E.g. successful completion of a due diligence
review, competition commission ruling

Class example 3
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 Goodwill/ Gain on Bargain Purchase

• IFRS 3.32
• Recognise goodwill as the excess of (a) over (b)

(a) The aggregate of:

Consideration transferred
Non-Controlling interest

(b) Net of the identified assets and liabilities

assumed in BC
E=A-L 17
Recognising & measuring assets acquired,
liabilities assumed & NCI
General recognition principle in IFRS 3:

• A & L obtained must comply with the definition of assets &

liabilities per the Framework
• May result in additional A & L not previously recognised
• A & L obtained must be part of what the acquirer and
acquiree exchanged in the business combination
transaction rather than the result of separate transactions.

General measurement principle in IFRS 3:

• Measure identifiable A & L at their acquisition-date fair values

Chapter 2 - Example 2.17 & 2.18 (pg 64 & 70 17 th edition)

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Recognising & measuring assets
acquired, liabilities assumed & NCI
At acquisition date acquirer must recognise
(separately from goodwill) identifiable assets
acquired, liabilities assumed and any NCI in acquiree

Classification & designation of A & L obtained:

• General rule: acquirer classifies/designates based on
conditions at acquisition date
• Exceptions:
• Classification of lease contract – acquiree is the lessor
classifies as either operating or finance lease based on
conditions at inception of lease contract (or modification
date)
• Insurance Contract (Not for Acc300/ BCTA)

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Recognising & measuring assets
acquired, liabilities assumed & NCI
Example – application of general rule (classification/
designation)
• Co A purchases a controlling interest in Co B
• Co B owns an investment property that it has
rented out to Co A (and will continue to do so
after the acquisition)

At acquisition date Co A should classify the

building as:
• PPE
• IP?
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Exceptions to recognition and/ or
measurement principles
Recognition Measurement Recognition and
measurement
Contingent Reacquired rights Income taxes
liabilities

Share-based payment Employee benefits

awards

Leases in which the

acquiree is the lessee
Assets held for sale Indemnification assets

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Contingent Liability

Contingent Liability

No present
Present obligation
obligation exists.
exists but one or
Definition of
more recognition
Liability NOT met
criteria NOT met
(Possible Obligation)
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 Contingent Liability

• Contingent liability assumed in a business

combination shall be recognised by the acquirer at
the acquisition date if:
• It is a present obligation that arises from past events; and
• It has a fair value that can be reliably measured.
• The contingent liability is therefore recognised by
the acquirer, even if it is not probable that an
outflow of economic benefits will be required to
settle the obligation.

• CLASS EXAMPLE 4A

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Assets held for sale

• Acquirer to measure acquired

NCAHFS at fair value less cost to
sell
oNot lower of CA and FVLCTS

• Class example 4B

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 Deferred tax

• Acquirer to measure deferred tax assets/

liabilities in accordance with IAS 12
• Remember
o The initial recognition exemption in IAS 12
does not apply to assets acquired/ liabilities
assumed in a business combination

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Employee benefits

• Acquirer to measure employee benefit

liabilities (or assets) in accordance
with IAS 19

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Leases in which the ACQUIREE is the lessee

• Acquirer shall recognise the right of use assets

and lease liabilities in terms of IFRS 16

• The acquirer shall not recognise right of use

assets and lease liabilities for the following:
• Leases for which the lease term ends within
12 months of the acquisition date or
• Leases for which the underlying asset is of
low value

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Guidance on intangible assets
Definition (IAS 38):
An intangible asset is a non-monetary asset without
physical substance, and must be identifiable.
• To be identifiable, the intangible asset must be:
• Separable (capable of being separated/divided
from the entity and sold, transferred, rented,
exchanged), or
• Arise out of a contractual or other legal right

 Intangible assets will be recognised if they meet the

above definition, and the fair value can be measured
reliably.
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Guidance on intangible assets
• Measure intangibles at their at-acquisition date fair values
• The fair value reflects market expectations about the probability
that future economic benefits will flow to the entity
• Thus probability criteria always assumed to be met in a BC!
• If the intangible asset has a finite useful life
• Rebuttable presumption that fair value can be measured reliably.
• Recognise irrespective of whether acquiree recognised the
intangible before (e.g. internally generated goodwill).
• You need a thorough knowledge of IAS 38 in IFRS 3!

CLASS EXAMPLE 4C

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Assets that acquirer intends
to use differently

• Acquirer may intend to use certain assets

acquired in a different manner to acquiree, or
not at all
o E.g. acquire a patent that it plans to
discontinue
• None-the-less the acquirer shall measure the
asset at FV as a market participant would value
it

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Consideration transferred

• The consideration transferred in a business

combination shall be measured at fair value,
i.e. the sum of the acquisition-date fair
values of:
o the assets transferred by the acquirer;
o the liabilities incurred by the acquirer to
former owners of the acquiree; and
o equity interests issued by the acquirer.

Class example 6

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Contingent consideration

• Obligation of the acquirer to transfer additional assets/ equity

instruments if specified future events occur

• A & L that arise from a contingent consideration agreement are

included in the consideration transferred

• The contingent consideration shall be measured at its acquisition-

date fair value

• The obligation to pay the contingent consideration is classified by

the acquirer in terms of IAS 32

• An asset may also be recognised by the acquirer for the right it

has to the return of previously transferred consideration if certain
specified conditions are met. 32
Measuring the NCI
• NCI can be measured at either:
o NCI’s proportionate share of the acquiree’s
identifiable net assets; or
o At fair value

Class example 5

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Goodwill/ gain from bargain purchase

FV of identifiable assets and liabilities

Goodwill /
Gain from
bargain
purchase

Consideration transferred + NCI

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Goodwill/ gain from bargain purchase
• Occasionally a gain on bargain purchase will arise.
• Before such a gain is recognised, the acquirer shall:
o Reassess whether it has correctly identified all Assets
acquired & Liabilities assumed
o Recognise additional assets or liabilities identified;
o Review procedures used to measure amounts that IFRS
3 requires to be recognised @ acquisition date for all of
the following:
1. Identifiable assets acquired and liabilities assumed;
2. Non-controlling interest;
3. For a BC achieved in stages
o Acquirer’s previously held equity interest in the
acquiree; and
4. Consideration transferred.
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 Measurement period

• If initial accounting is incomplete at end of the reporting period

in which BC occurs
o Acquirer to use provisional amounts in AFS
o AFS to state that the amounts are provisional
• During measurement period all provisional amounts will be
adjusted retrospectively to reflect new information obtained
• Measurement period ends as soon as acquirer obtains info
needed.
• Measurement period may not exceed one year from acquisition
date
Class example 7
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Determining what is part of BC
transaction

• Acquirer to recognise only the consideration

transferred/ liabilities assumed to gain control of
acquiree
o Pre-existing relationships/ transactions should be ‘kept
out of’ the acquisition method
• Separate transactions shall be accounted for separately
in terms of the relevant IFRSs
• Look at intentions of both parties!
o Acquiree to benefit from transaction
o Likely to be part of BC
o Acquirer to benefit from transaction
o Likely to be a separate transaction
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Acquisition related costs
• Examples of acquisition related costs
o Professional or consulting fees;
o Administrative costs,
o Registering and issuing debt and equity securities
• These are not part of consideration transferred
o Therefore expensed in the period in which they are
incurred
• Exception:
o Cost to issue debt or equity securities
recognised in accordance with IAS 32 & IFRS 9
• CLASS EXAMPLE 8
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Subsequent measurement

• General rule:
o Measure in accordance with relevant IFRS/ IAS Standard

• Guidance provided in IFRS 3 wrt subsequent

measurement of:
o Contingent liabilities;
o Reacquired rights;
o Indemnification assets and
o Contingent consideration

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•Indemnification assets - an acquirer recognises
indemnification assets at the same time and on the
same basis as the indemnified item [IFRS 3.27-28]

•Reacquired rights – the measurement of

reacquired rights is by reference to the remaining
contractual term without renewals [IFRS 3.29]
Subsequent measurement:
Contingent liabilities

• After initial recognition, measure at higher of:

o Amount recognised i.t.o. IAS 37, and
o Amount initially recognised less (if
appropriate) cumulative amortisation

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 Subsequent measurement:
Contingent consideration
• Changes in FV may be due to additional info obtained
o These are measurement period changes (see par .45 - .49)
• Other changes (reaching specific share price, milestone on
project, meeting earnings target) are not measurement
period changes
• Accounted for as follows:
o Contingent consideration classified as equity:
 not remeasured, settlement accounted for in equity
o Contingent consideration classified as asset/liability:
• If inside scope of IFRS 9
Measure at fair value (P/L to Other Comprehensive Income)
If not inside scope of IFRS 9
Measure in accordance with IAS 37.
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