hi today I'll take a look at another IFRS gender dealing with the groups and consolidation which is IFRS 3 business combinations it is closely related to IFRS 10 Consolidated financial statements so if you study this topic I strongly recommend watching my video about introduction to the group accounts and another video about IFRS 10 you can find it right here in my website or in this YouTube channel I am Sylvia the founder of IFRS box and if you'd like to learn more about the consolidation and actually learn how to do it with lots of case studies examples and if you need to learn IFRS and you want to do it easily and with lots of fun then you're welcome to check my web ifsb box.com my courses quizzes and many more I would say that IFRS 3 and IFRS 10 supplement each other as both of them deal with the parent subsidiary relationship and they just look at different aspects of it so what's IFRS 3 about the objective of IFRS 3 is to improve the relevance reliability and comparability of the information that a reporting entity provides in its financial statements about a business combination and its effects while more specifically IFRS 3 establishes principles and requirements for how the acquirer recognizes and measures the identifiable assets acquired the liabilities assumed and any non-controlling interest in the acquir then recognizes and measures the Goodwill acquired in the business combination or a gain from a bu purchase will explain Goodwill and non-controlling interest a bit later and determines what information to disclose about the business combination well first of all let me tell you that in order to account for a business combination assets and liabilities acquired need to constitute a business otherwise it's not a business comp ation and an investor needs to account for the transaction in line with some other IFRS standard the guidance in IFRS 3 says that the business can be acquired in many different ways and it needs to contain three basic elements to be a business inputs which is any economic resource that creates or can create outputs when one or more processes are applied to it for example non-current assets or inventories or cash then element number two process or processes well processes any system standard protocol convention or rule that when applied to inputs it can create outputs for example management processes Workforce production processes and finally outputs as the results of inputs and processes apply to those inputs that provide or can provide a return in the form of dividends lower cost or other economic benefits directly to investors or other owners well if all three elements are present then an investor acquired a business and needs to apply IFRS 3 for business combinations otherwise investor might acquire just assets and apply own processes in such a case investor does not account in line with IFRS 3 but in line with some other standard applicable for the acquired assets well how shall we can for business combination ifers 3 requires application of the acquisition method which involves four steps step number one identify the acquirer or the buyer I know it looks very straightforward and in many cases it is straightforward but sometimes it's not so clear for example you can deal with some merger when two companies merge together and in such a case you need to identify who acquires whom in most cases it will be the larger company or reverse Acquisitions might make confusion too it's when smaller company bu picker company step number two determine the acquisition date it's the date on which a parent acquires control over subsidiary and starts applying acquisition method in most cases it's the closing date but it can be earlier or later step number three recognize and measure the identifiable assets acquired the liability assumed and any non-controlling interest in the acquirer and step number four recognize and measure Goodwill or a gain from a bargain purchase well we'll spend a little more time on steps number three and number four let's take a closer look at step number three recognize and measure the identifiable assets acquired the liabilities assumed and any non-controlling interest in the acquir an acquirer or investor shall recognize all identifiable assets acquired liabilities assumed and non-controlling interest in the inquiry separately from Goodwill the important thing here is to recognize all assets and liabilities at fair value determined at the acquisition date while a subsidiary can apply different measurement method such as Costless depreciation and therefore often fair value adjustments are necessary at consolidation sometimes subsid has some unrecognized assets or liabilities and these need to be recognized too what about non-controlling interest well it's the equity in a subsidiary not attributable directly or indirectly to a parent so it's that part of subsidiary that belongs to someone else well if a parent owns 100% share in a subsidiary then non-controlling interest is zero because full subsidiaries Equity is owned by the parent however if parent owns less than 100% share let's say 80% then non-controlling interest is 20% a few years ago it was called minority interest there are two options or methods permitted by IFRS 3 to measure non-controlling interest method number one we can opt to measure non-controlling interest at the proportionate share of non-controlling interest on the fair value of the subsidiaries net assets or alternatively we can measure it as its full or fair value usually based on market value of the shares held by the non-controlling interest method two affects Goodwill by the way because under Fair Value method you're showing that non-controlling interest owns a part of that Goodwill too well if you'd like to revise the short illustrative example with numbers please refer to iars 3 article on wwwi ibx.com or subscribe to the IFRS kit in which you'll find lots of related calculations and explanations step number four recognize and measure Goodwill or a gain from a bargain purchase Goodwill is an asset representing future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized so let's imagine a parent buas 100% shares in subsidiary parent pays 100,000 currency units for these shares in cash and at the date of purchase or acquisition subsidiaries net assets or Equity was 80,000 currency unit here we have a difference of 20,000 currency units and this difference is nothing else than Goodwill in fact there are more things to watch out when calculating Goodwill it's the access of the aggregate or the sum of the following amounts the consideration transferred measured in accordance with this IFRS which generally requires acquisition date for value simply speaking the payment for interest in subsidiary then the amount of any non-controlling interest in the acquir measured in accordance with this standard and finally if a business combination was achieved in stages we need to add the acquisition date fair value of the acquirer's previously held Equity interest in the acquir in our small example the aggregate is 100,000 currency units on the other hand we need to look at the net of the acquisition date amounts of the identifiable assets Acquired and the liabilities assumed measured in accordance with the IFRS 3 in this case it's 880,000 sometimes Goodwill is positive and sometimes it's negative the basic Goodwill formula is fair value of consideration transferred plus non-controlling interest plus the previously held interest when subsidiary is acquired in stages and we should deduct subsidi reasoned assets now as I mentioned the result can be either positive or negative so when the result is positive or greater than zero then the difference is called Goodwill and as it's acquired in a business combination a parent needs to capitalize it as an intangible asset and perform annual impairment review but when the difference is negative or less than zero it means then the parent paid lower amount for the subsidiary than its fair value is and this is called negative Goodwill or a gain on a bargain purchase well first of all you need to reassess the amounts at which the parent measured both the cost of the combination and subsidiaries andet assets because there might be some error and parent needs to be sure that there's really a negative Goodwill secondly if everything is okay we need to recognize any excess or negative Goodwill to profit or loss immediately so we're not going to treat it like some liability we are just going to recognize it to profit or loss except for these basic rules covered in this video IFRS 3 contains also other rules and specifications that deal for example with the contingencies cost of acquisition acquisition achieved in stages and many disclosures about business combinations so this was a short summary of The Standard IFRS 3 business combinations if you're interested in more detailed explanation of the group accounting or our case studies and examples teaching you how to prepare Consolidated financial statements well then you're welcome to check out my offs kit or subscribe for free Weekly Newsletter at ifors box.com bye-bye and thank you for watching