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IFRS 3 Business Combinations

IFRS 3 Business Combinations provides guidance on the accounting treatment on the acquisition of a business.

Revised January 2008. Effective 1 July 2009.

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*UK qualifying parents and subsidiaries can take advantage of FRS 101 Reduced Disclosure Framework. Find out more on which entities qualify and the criteria to be met.

Synopsis

IFRS 3

  • Business combinations are accounted for using the acquisition method
  • Goodwill is measured as the excess of the aggregate of:
    • consideration transferred,
    • the non-controlling (minority) interest, and
    • fair value of any previously held equity interest in acquiree,

over the identifiable net assets of the acquiree.

The non-controlling (minority) interest is measured at acquisition either at fair value or as a proportion of the fair value of the net assets of the acquiree.

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Recent amendments

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1. IFRS 9 amendment to IFRS 3

Effective for annual periods beginning on or after 1 January 2018. Earlier application is permitted.

IFRS 9 amends IFRS 3 to:

  • Delete reference to IAS 39 classifications of financial instruments.
  • Require that in a business combination achieved in stages, any gain or loss on the re-measurement of a previously held equity interest to fair value is recognised in profit or loss or other comprehensive income as appropriate.
  • Replace references to IAS 39 with references to IFRS 9.
  • Require that contingent consideration that is not equity is measured at fair value at each reporting date and changes that are not measurement period adjustments are recognised in profit or loss.

 

2. Annual improvements 2010-2012

To be applied to periods beginning on or after 1 January 2014 (1 February 2015 for EU preparers). Earlier application is permitted.

As part of the annual improvements 2010-2012 cycle, IFRS 3 is amended to clarify that contingent consideration that is classified as an asset or liability is measured at fair value at each reporting date.

3. Annual improvements 2011-2013

To be applied to annual periods beginning on or after 1 July 2014 (1 January 2015 for EU preparers). Earlier application is permitted.

As part of the annual improvements 2011-2013 cycle, IFRS 3 is amended to clarify that IFRS 3 excludes from its scope the accounting for the formation of a joint arrangement in the financial statements of the joint arrangement itself.

4. IFRS 15 Revenue from Contracts with Customers amendments to IFRS 3

Effective for annual periods beginning on or after 1 January 2018. Earlier application is permitted.

As a result of the issue of IFRS 15, IFRS 3 is amended to refer to income recognised in accordance with the principles of IFRS 15 rather than amortisation recognised in accordance with IAS 18 in the context of the measurement of contingent liabilities.

5. IFRS 16 Leases amendments to IFRS 3

To be applied to annual periods beginning on or after 1 January 2019. Earlier application is permitted.

IFRS 3 is amended to:

  • Remove guidance relating to operating leases in which the acquiree is the lessee.
  • Add guidance on the recognition of right-of-use assets and lease liabilities for leases in which the acquiree is the lessee.
6. IFRS 17 Insurance Contracts amendment to IFRS 3*

To be applied to periods beginning on or after 1 January 2021. Earlier adoption is permitted.

IFRS 3 is amended to:

  • Delete the exception to the requirement to classify or designate identifiable assets and liabilities at the acquisition date in relation to insurance contracts.
  • Add an exception to the recognition and measurement principles relating to insurance contracts.
7. Annual Improvements 2015-17*

To be applied to annual periods starting on or after 1 January 2019. Earlier application is permitted.

An amendment to IFRS 3 clarifies that when an entity obtains control of a business that is a joint operation, and had rights to the assets and obligations for the liabilities relating to that joint operation immediately before the acquisition date, the transaction is a business combination achieved in stages.

8. Amendments to References to the Conceptual Framework in IFRS Standards – amendment to IFRS 3*

Effective for annual periods beginning on or after 1 January 2020. Earlier application is permitted, if at the same time an entity also applies the amendments to other IFRS Standards.

A footnote is added to IFRS 3 to clarify that for the purposes of applying the Standard, the definitions of asset and liability contained within the 2001 Framework for the Preparation and Presentation of Financial Statements apply rather than those in the 2018 Conceptual Framework.

*Not EU endorsed as at 20 April 2018. Read more on EU Endorsement.

The following interpretations refer to IFRS 3

Current proposals

  1. The IASB issued ED/2016/1 Definition of a Business and Accounting for Previously Held Interests in June 2016. The proposed amendments relating to previously held interests were incorporated into Annual Improvements 2015-17 cycle (see recent amendments). The proposed amendments to the definition of a business are now the subject of a separate project. These amendments would clarify the definition of a business in order to help distinguish between a business and a group of assets. To be considered a business, it is proposed that an acquired set of activities and assets:
    • Must not have a fair value that is concentrated in a single identifiable asset (or group of similar identifiable assets), and
    • Must include an input and a substantive process that together contribute to the ability to create outputs.
  2. As a result of the post-implementation review of IFRS 3 the IASB has initiated a project to consider:
    • whether changes should be made to the existing impairment test for non-current non-financial assets including goodwill.
    • The accounting treatment applied to goodwill after initial recognition.
    • The extent to which other intangibles should be separated from goodwill.

A discussion paper or exposure draft is expected in the first half of 2018.

UK reduced disclosures

UK qualifying parents and subsidiaries can take advantage of FRS 101 Reduced Disclosure Framework. Find out more on which entities qualify and the criteria to be met.

Amendments to the standard

Where an entity applies FRS 101, it is preparing Companies Act accounts rather than IAS accounts. Therefore the following amendments must be made to IFRS 3 in order to achieve compliance with the Companies Act and related Regulations:

  1. In the case of a bargain purchase, the excess is recognised on the face of the statement of financial position. Subsequently the excess is measured in profit or loss over a specified period.

  2. Where the cost of a business combination may be adjusted due to consideration which is contingent on future events, the estimated amount of the adjustment is included in the cost of the business combination at the acquisition date if the adjustment is probable and can be measured reliably. If the potential adjustment is not recognised at the acquisition date but later becomes probable and can be measured reliably, the additional consideration is treated as an adjustment to the cost of the business combination. From 1 January 2016 this guidance on contingent consideration is amended to require that contingent consideration balances arising from acquisitions before SI 2015/980 is applied (usually 1 January 2016) are not adjusted as a result of changes in company law and the company’s previous accounting policy continues to apply. Contingent consideration balances arising from acquisitions after SI 2015/980 is applied are accounted for in accordance with IFRS 3, without amendment to the standard.

Disclosure exemptions

FRS 101 paragraph 8(b) states that a qualifying entity is exempt from most of the IFRS 3 disclosure requirements in respect of business combinations during the period or after the end of the period provided that equivalent disclosures are made in the consolidated financial statements of the group in which the entity is consolidated. The following basic disclosures are still required:

  • The name and a description of the acquiree;
  • The acquisition date and percentage of voting equity interests acquired;
  • The acquisition date fair value of consideration transferred, in total and by class;
  • Amounts recognised at acquisition for each major class of assets and liabilities;
  • The gain recognised in a bargain purchase;
  • The non-controlling interest recognised at acquisition and measurement basis applied;
  • The revenue and profit or loss of the combined entity for the current period as though the acquisition date for any mid-period business combination was the start of the period.

IFRS 3 paragraphs for which exemption is available: 62, B64(d), B64(e), B64(g), B64(h), B64(j)-(m), B64(n)(ii), B64(o)(ii), B64(p), B64(q)(ii), B66, B67. 

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This page was last updated 20 April 2018