IFRS 3 - Business Combinations

Introduction

• Examines IFRS 3 in relation to group accounting and consolidation.
• Related to IFRS 10: Consolidated Financial Statements.
• Suggested to watch prior videos on Introduction to Group Accounts and IFRS 10.
• Presented by Sylvia, founder of IFRS Box.

Objective of IFRS 3

• Improve relevance, reliability, and comparability of financial statements regarding business combinations.
• Establishes principles for:
  • Recognition and measurement of identifiable assets acquired.
  • Liabilities assumed and non-controlling interest in the acquirer.
  • Recognition and measurement of Goodwill or gain from a bargain purchase.
  • Disclosure requirements about business combinations.

Definition of a Business

• A business requires three elements:
  1. Inputs: Economic resources that create outputs (e.g., non-current assets, inventories, cash).
  2. Processes: Systems that convert inputs into outputs (e.g., management processes, production processes).
  3. Outputs: Results that provide returns to investors or owners (e.g., dividends, lower costs).
• If all three are present, it constitutes a business, requiring IFRS 3 application; otherwise, different IFRS standards apply.

Accounting for Business Combinations

• Acquisition Method: Requires four steps:
  1. Identify the Acquirer: Determine who is the buyer.
  2. Determine the Acquisition Date: When control over the subsidiary is acquired.
  3. Recognize Assets and Liabilities:
     • Identify and measure identifiable assets, liabilities, and non-controlling interests at fair value at the acquisition date.
  4. Recognize Goodwill or Gain from Bargain Purchase:
     • Calculate Goodwill based on the difference between the purchase price and net assets.

Step 3 - Recognizing Identifiable Assets and Liabilities

• Acquirer must recognize all identifiable assets, liabilities, and non-controlling interests separately from Goodwill.
• Assets and liabilities measured at fair value at the acquisition date.
• Non-controlling interest defined as equity not attributable to the parent.
  • If parent owns 100%, non-controlling interest is 0%.
  • If less than 100%, calculate non-controlling interest using two methods:
    • Proportionate share of net assets.
    • Fair value based on market value of shares.

Step 4 - Recognizing Goodwill or Gain from Bargain Purchase

• Goodwill: Represents future economic benefits from assets not separately identified.
• Example Calculation:
  • Parent pays 100,000 currency units for 100% shares.
  • Subsidiary's net assets = 80,000 currency units.
  • Goodwill = 100,000 - 80,000 = 20,000 currency units.
• Goodwill Calculation Formula:
  • Fair value of consideration transferred + Non-controlling interest + Previously held interest - Net identifiable assets acquired.
• Negative Goodwill: Occurs when the purchase price is less than fair value of net assets. Recognized immediately in profit or loss.

Additional Considerations

• IFRS 3 includes rules for contingencies, costs of acquisition, acquisitions in stages, and disclosure requirements.
• For more information and case studies, refer to IFRS Box resources and subscribe for updates.