Notes on IFRS 3 Business Combinations

Introduction

• IFRS 3 deals with groups and consolidation, closely related to IFRS 10.
• Recommended to watch the video on group accounts and IFRS 10 for better understanding.
• Presented by Sylvia, founder of IFRS Box.
• For detailed learning, visit ifrsbox.com for courses and case studies.

Objective of IFRS 3

• Improve relevance, reliability, and comparability of financial statements regarding business combinations.
• Establishes principles for:
  • Recognizing and measuring identifiable assets acquired.
  • Measuring liabilities assumed and non-controlling interest in the acquirer.
  • Recognizing and measuring Goodwill or any gain from a bargain purchase.
  • Disclosing relevant information about the business combination.

Definition of a Business

• A business must consist of three elements:
  1. Inputs: Economic resources that create outputs (e.g., non-current assets, cash).
  2. Processes: Systems or protocols that convert inputs to outputs (e.g., management processes).
  3. Outputs: Results that provide a return to investors (e.g., dividends).
• If all three elements are present, it qualifies as a business combination under IFRS 3.

Accounting for Business Combinations

• Acquisition Method: Required under IFRS 3; involves four steps.

Step 1: Identify the Acquirer

• Determine who acquires whom, can be straightforward or complicated in cases of mergers or reverse acquisitions.

Step 2: Determine the Acquisition Date

• The date the parent gains control over the subsidiary, typically the closing date.

Step 3: Recognize and Measure Identifiable Assets and Liabilities

• Recognize all identifiable assets, liabilities, and non-controlling interest separately from Goodwill.
• Measure all at fair value as of the acquisition date.
• Subsidiaries may use different measurement methods, requiring fair value adjustments.
• Non-controlling interest: Equity in a subsidiary not owned by the parent:
  • If 100% owned, non-controlling interest is zero.
  • If less than 100% owned, calculate the portion not owned by the parent.
  • Two methods to measure:
    1. Proportionate share of fair value of subsidiary's net assets.
    2. Full or fair value based on market value of shares held by non-controlling interest.

Step 4: Recognize and Measure Goodwill or Gain from Bargain Purchase

• Goodwill: Future economic benefits from assets not individually recognized:
  • Example: Parent pays 100,000 currency units for subsidiary with net assets at 80,000 currency units.
  • Goodwill = 100,000 - 80,000 = 20,000 currency units.
• Calculating Goodwill:
  • Goodwill formula: Fair value of consideration transferred + non-controlling interest + previously held interest - identifiable assets - liabilities.
  • Goodwill can be positive or negative:
    • Positive: Capitalized as an intangible asset and annually reviewed for impairment.
    • Negative: Recognized immediately in profit or loss.

Additional Rules in IFRS 3

• Includes rules on contingencies, costs of acquisition, acquisitions in stages, and necessary disclosures.

Conclusion

• This overview summarizes IFRS 3. For a more detailed explanation and case studies, visit ifrsbox.com or subscribe to the weekly newsletter.
• Thank you for watching!