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IFRS 3 Business CombinationsThis standard started in 1988 as IAS 22 and was superseded in 2004 with IFRS 3. In January 2008, IFRS 3, Business Combinations, was revised to bring it more in line with US GAAP. In this first of two articles, we look at the main points of this important standard. Managers have to use considerable judgement when applying IFRS 3, especially when identifying and valuing intangible assets and contingent liabilities and to determine the appropriate assumptions for impairment testing with respect to IAS 36, Definition. A business combination is the bringing together of separate entities or businesses into one reporting entity. Scope exclusions. IFRS 3 applies to all business combinations except combinations of entities under common control, combinations of mutual entities, combinations by contract without exchange of ownership interest, and formations of joint ventures. Method of Accounting for Business Combinations Purchase method. All business combinations within the scope of IFRS 3 must be accounted for using the purchase method. The pooling of interests method is prohibited. Acquirer must be identified. The old IAS 22 had required the pooling method if an acquirer could not be identified. Under IFRS 3, an acquirer must be identified for all business combinations. Identification of an AcquirerControl. The acquirer is the combining entity that obtains control of the other combining entities or businesses. IFRS 3 provides considerable guidance for identifying the acquirer. Cost of a Business Combination Fair value of consideration given plus costs. The acquirer measures the cost of a business combination at the sum of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the acquirer, in exchange for control of the acquiree; plus any costs directly attributable to the combination. If equity is issued as consideration for the acquisition, the market price of the equity at the date of exchange is considered to provide the best evidence of fair value. If a market price does not exist, or is not considered reliable, other valuation techniques are used to measure fair value. Cost adjustments contingent on future events. If the cost is subject to adjustment contingent on future events, the acquirer includes the amount of that adjustment in the cost of the combination at the acquisition date if the adjustment is probable and can be measured reliably. However, if the contingent payment either is not probable or cannot be measured reliably, it is not measured as part of the initial cost of the business combination. If that adjustment subsequently becomes probable and can be measured reliably, the additional consideration is treated as an adjustment to the cost of the combination. |
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