Background

IFRS 3 (2008) replaced IFRS 3 (2004). Click for IASB Press Release on IFRS 3 (2008) (PDF
60k). IFRS 3 (2008) resulted from a joint project with the US Financial Accounting Standards
Board. FASB issued a similar standard in December 2007 (SFAS 141(R)) - see our News Story
of 5 December 2007. The revisions will result in a high degree of convergence between IFRSs
and US GAAP in these areas, although some potentially significant differences remain.
Scope
Definition of a business combination. A business combination is a transaction or event in
which an acquirer obtains control of one or more businesses. A business is defined as an
integrated set of activities and assets that is capable of being conducted and managed for the
purpose of providing a return directly to investors or other owners, members or participants.
[IFRS 3.Appendix A]
Acquirer must be identified. Under IFRS 3, an acquirer must be identified for all business
combinations. [IFRS 3.6]
Scope changes from IFRS 3(2004). IFRS 3(2008) applies to combinations of mutual entities
and combinations without consideration (dual listed shares). These are excluded from IFRS
3(2004).
Scope exclusions. IFRS 3 does not apply to the formation of a joint venture, combinations of
entities or businesses under common control. The IASB added to its agenda a separate agenda
project on Common Control Transactions in December 2007. Also, IFRS 3 does not apply to the
acquisition of an asset or a group of assets that do not constitute a business. [IFRS 3.2]
Method of Accounting for Business Combinations
Acquisition method. The acquisition method (called the 'purchase method' in the 2004 version
of IFRS 3) is used for all business combinations. [IFRS 3.4]
Steps in applying the acquisition method are: [IFRS 3.5]
1. Identification of the 'acquirer' – the combining entity that obtains control of the acquiree
[IFRS 3.7]
2. Determination of the 'acquisition date' – the date on which the acquirer obtains control of
the acquiree [IFRS 3.8]
3. Recognition and measurement of the identifiable assets acquired, the liabilities assumed
and any non-controlling interest (NCI, formerly called minority interest) in the acquiree
4. Recognition and measurement of goodwill or a gain from a bargain purchase
Measurement of acquired assets and liabilities. Assets and liabilities are measured at their
acquisition-date fair value (with a limited number of specified exceptions). [IFRS 3.18]
Measurement of NCI. IFRS 3 allows an accounting policy choice, available on a transaction by
transaction basis, to measure NCI either at:
• fair value (sometimes called the full goodwill method), or
• the NCI's proportionate share of net assets of the acquiree (option is available on a
transaction by transaction basis).
Example: P pays 800 to purchase 80% of the shares of S. Fair value of 100% of S's
identifiable net assets is 600. If P elects to measure noncontrolling interests as their
 proportionate interest in the net assets of S of 120 (20% x 600), the consolidated
financial statements show goodwill of 320 (800 +120 - 600). If P elects to measure
noncontrolling interests at fair value and determines that fair value to be 185, then
goodwill of 385 is recognised (800 + 185 - 600). The fair value of the 20%
noncontrolling interest in S will not necessarily be proportionate to the price paid by P
for its 80%, primarily due to control premium or discount as explained in paragraph
B45 of IFRS 3. [IFRS 3.19]
Acq1uired intangible assets. Must always be recognised and measured at fair value. There is no
'reliable measurement' exception.
Goodwill
Goodwill is measured as the difference between:
• the aggregate of (i) the acquisition-date fair value of the consideration transferred, (ii) the
amount of any NCI, and (iii) in a business combination achieved in stages (see Below),
the acquisition-date fair value of the acquirer's previously-held equity interest in the
acquiree; and
• the net of the acquisition-date amounts of the identifiable assets acquired and the
liabilities assumed (measured in accordance with IFRS 3). [IFRS 3.32]
If the difference above is negative, the resulting gain is recognised as a bargain purchase in profit
or loss. [IFRS 3.34]
Business Combination Achieved in Stages (Step Acquisitions)
Prior to control being obtained, the investment is accounted for under IAS 28, IAS 31, or IAS 39,
as appropriate. On the date that control is obtained, the fair values of the acquired entity's assets
and liabilities, including goodwill, are measured (with the option to measure full goodwill or
only the acquirer's percentage of goodwill). Any resulting adjustments to previously recognised
assets and liabilities are recognised in profit or loss. Thus, attaining control triggers
remeasurement. [IFRS 3.41-42]
Provisional Accounting
If the initial accounting for a business combination can be determined only provisionally by the
end of the first reporting period, account for the combination using provisional values.
Adjustments to provisional values within one year relating to facts and circumstances that
existed at the acquisition date. [IFRS 3.45] No adjustments after one year except to correct an
error in accordance with IAS 8. [IFRS 3.50]
Cost of an Acquisition
Measurement. Consideration for the acquisition includes the acquisition-date fair value of
contingent consideration. Changes to contingent consideration resulting from events after the
acquisition date must be recognised in profit or loss. [IFRS 3.58]
Acquisition costs. . Costs of issuing debt or equity instruments are accounted for under IAS 32
and IAS 39. All other costs associated with the acquisition must be expensed, including
reimbursements to the acquiree for bearing some of the acquisition costs. Examples of costs to be
expensed include finder's fees; advisory, legal, accounting, valuation and other professional or
consulting fees; and general administrative costs, including the costs of maintaining an internal
acquisitions department. [IFRS 3.53]
Contingent consideration. Contingent consideration must be measured at fair value at the time
of the business combination. If the amount of contingent consideration changes as a result of a
post-acquisition event (such as meeting an earnings target), accounting for the change in
consideration depends on whether the additional consideration is an equity instrument or cash or
other assets paid or owed. If it is equity, the original amount is not remeasured. If the additional
consideration is cash or other assets paid or owed, the changed amount is recognised in profit or
loss. If the amount of consideration changes because of new information about the fair value of
the amount of consideration at acquisition date (rather than because of a post-acquisition event)
then retrospective restatement is required. [IFRS 3.58]
Pre-existing Relationships and Reacquired Rights
If the acquirer and acquiree were parties to a pre-existing relationship (for instance, the acquirer
had granted the acquiree a right to use its intellectual property), this must must be accounted for
separately from the business combination. In most cases, this will lead to the recognition of a
gain or loss for the amount of the consideration transferred to the vendor which effectively
represents a 'settlement' of the pre-existing relationship. The amount of the gain or loss is
measured as follows:
• for pre-existing non-contractual relationships (for example, a lawsuit): by reference to
fair value
• for pre-existing contractual relationships: at the lesser of (a) the favourable/unfavourable
contract position and (b) any stated settlement provisions in the contract available to the
counterparty to whom the contract is unfavourable. [IFRS 3.B51-53]
However, where the transaction effectively represents a reacquired right, an intangible asset is
recognised and measured on the basis of the remaining contractual term of the related contract
excluding any renewals. The asset is then subsequently amortised over the remaining contractual
term, again excluding any renewals. [IFRS 3.55]
Other Issues
In addition, IFRS 3 provides guidance on some specific aspects of business combinations
including:
• business combinations achieved without the transfer of consideration [IFRS 3.43-44]
• reverse acquisitions [IFRS 3.B19]
• identifying intangible assets acquired [IFRS 3.B31-34]
• the reassessment of the acquiree's contractual arrangements at the acquisition date [IFRS
3.15]
Parent's Disposal of Investment or Acquisition of Additional Investment in Subsidiary
Partial disposal of an investment in a subsidiary while control is retained. This is accounted
for as an equity transaction with owners, and gain or loss is not recognised.
Partial disposal of an investment in a subsidiary that results in loss of control. Loss of
control triggers remeasurement of the residual holding to fair value. Any difference between fair
value and carrying amount is a gain or loss on the disposal, recognised in profit or loss.
Thereafter, apply IAS 28, IAS 31, or IAS 39, as appropriate, to the remaining holding.
Acquiring additional shares in the subsidiary after control was obtained. This is accounted
for as an equity transaction with owners (like acquisition of 'treasury shares'). Goodwill is not
remeasured.
Disclosure
Disclosure of information about current business combinations
The acquirer shall disclose information that enables users of its financial statements to evaluate
the nature and financial effect of a business combination that occurs either during the current
reporting period or after the end of the period but before the financial statements are authorised
for issue. [IFRS 3.59]
Among the disclosures required to meet the foregoing objective are the following: [IFRS 3.B64-
66]
• name and a description of the acquiree
• acquisition date
• percentage of voting equity interests acquired
• primary reasons for the business combination and a description of how the acquirer
obtained control of the acquiree. description of the factors that make up the goodwill
recognised
• qualitative description of the factors that make up the goodwill recognised, such as
expected synergies from combining operations, intangible assets that do not qualify for
separate recognition
• acquisition-date fair value of the total consideration transferred and the acquisition-date
fair value of each major class of consideration
• details of contingent consideration arrangements and indemnification assets
• details of acquired receivables
• the amounts recognised as of the acquisition date for each major class of assets acquired
and liabilities assumed
• details of contingent liabilities recognised
• total amount of goodwill that is expected to be deductible for tax purposes
• details of any transactions that are recognised separately from the acquisition of assets
and assumption of liabilities in the business combination
• information about a bargain purchase ('negative goodwill')
• for each business combination in which the acquirer holds less than 100 per cent of the
equity interests in the acquiree at the acquisition date, various disclosures are required
• details about a business combination achieved in stages
• information about the acquiree's revenue and profit or loss
• information about a business combination whose acquisition date is after the end of the
reporting period but before the financial statements are authorised for issue
Disclosure of information about adjustments of past business combinations
The acquirer shall disclose information that enables users of its financial statements to evaluate
the financial effects of adjustments recognised in the current reporting period that relate to
business combinations that occurred in the period or previous reporting periods. [IFRS 3.61]
Among the disclosures required to meet the foregoing objective are the following: [IFRS 3.B67]
 • details when the initial accounting for a business combination is incomplete for particular
assets, liabilities, non-controlling interests or items of consideration (and the amounts
recognised in the financial statements for the business combination thus have been
determined only provisionally)
• follow-up information on contingent consideration
• follow-up information about contingent liabilities recognised in a business combination
• a reconciliation of the carrying amount of goodwill at the beginning and end of the
reporting period, with various details shown separately
• the amount and an explanation of any gain or loss recognised in the current reporting
period that both:
○ (i) relates to the identifiable assets acquired or liabilities assumed in a business
combination that was effected in the current or previous reporting period, and
○ (ii) is of such a size, nature or incidence that disclosure is relevant to
understanding the combined entity's financial statements.
.

Objective of IAS 22
The objective of IAS 22 (Revised 1993) is to prescribe the accounting treatment for business
combinations. The Standard covers both an acquisition of one enterprise by another (an
acquisition) and also the rare situation where an acquirer cannot be identified (a uniting of
interests).
Key Definitions [IAS 22.8]
Business combination: Combining two separate enterprises into a single economic entity as a
result of one enterprise uniting with or obtaining control over the net assets and operations of
another enterprise. The combination can result in a single legal entity or two separate legal
entities.
Acquisition: A business combination in which one of the enterprises, the acquirer, obtains
control over the net assets and operations of another enterprise, the acquiree, in exchange for the
transfer of assets, incurrence of a liability or issue of equity.
Uniting of interests: A business combination in which the shareholders of the combining
enterprises combine control over the whole, or effectively the whole, of their net assets and
operations to achieve a continuing mutual sharing in the risks and benefits attaching to the
combined entity such that neither party can be identified as the acquirer. Also called a pooling of
interests.
Control: The power to govern the financial and operating policies of an enterprise so as to obtain
benefits from its activities. If one enterprise controls another, the controlling enterprise is called
the parent and the controlled enterprise is called the subsidiary.
Distinguishing Between Acquisitions and Unitings of Interests
Under IAS 22, "virtually all" business combinations are acquisitions. [IAS 22.10]
Indications of an acquisition are: [IAS 22.10]
 • One enterprise acquires more than one half of the voting rights of the other combining
enterprise.
• One enterprise has the power over more than one half of the voting rights of the other
enterprise as a result of an agreement with other investors.
• One enterprise has the power to govern the financial and operating policies of the other
enterprise as a result of a statute.
• One enterprise has the power to appoint or remove the majority of the members of the
board of directors or equivalent governing body of the other enterprise.
• One enterprise has power to cast the majority of votes at meetings of the board of
directors of the other enterprise.
SIC 9 explains that the overriding criterion to distinguish an acquisition from a uniting of
interests is whether an acquirer can be identified, that is to day, whether the shareholders of one
of the combining enterprises obtain control over the combined enterprise.
In an acquisition, therefore, the acquiring company must be identified. Usually, that is evident. If
it is not evident, IAS 22.11 provides some guidance:
• The fair value of one of the combining enterprises is significantly more than that of the
other.
• In an exchange of voting common shares for cash, the enterprise paying the cash is the
acquirer.
• After the business combination, the management of one enterprise dominates the
selection of the management team of the combined enterprise.
Indications of a uniting of interests are: [IAS 22.13]
• An acquirer cannot be identified.
• The shareholders of both combining enterprises share control over the combined
enterprise substantially equally.
• The managements of both of the combining enterprises share in the management of the
combined entity.
A business combination should be classified as an acquisition unless the all of the following
three characteristics are present. Even if all three are present, the combination should be
presented as a uniting of interests only if the enterprise can demonstrate that an acquirer cannot
be identified. [IAS 22.15]
• The substantial majority of the voting common shares of the combining enterprises are
exchanged or pooled.
• The fair value of one enterprise is not significantly different from that of the other
enterprise.
• Shareholders of each enterprise maintain substantially the same voting rights and
interests in the combined entity, relative to each other, after the combination as before.
The following suggest that a business combination is not a uniting of interests: [IAS 22.16]
• Financial arrangements provide a relative advantage to one group of shareholders.
• One party's share of the equity in the combined entity depends on the performance,
subsequent to the business combination, of the business which it previously controlled.
Unitings of Interests - Accounting Procedures
A uniting of interests should be accounted for using the pooling of interests method. [IAS 22.77]
Under this method:
• Financial statement items of uniting entities should be combined, in both the current and
prior periods, as if they had been united from the beginning of the earliest period
presented. [IAS 22.78]
• Any difference between the amount recorded as share capital issued plus any additional
consideration in the form of cash or other assets and the amount recorded for the share
capital acquired should be adjusted against equity. [IAS 22.79]
• The costs of the combination should be expensed when incurred. [IAS 22.82]
Acquisitions - Accounting Procedures
An acquisition should be accounted for using the purchase method of accounting. Under this
method: [IAS 22.19]
• The income statement should incorporate the results of the acquiree from the date of
acquisition; and
• The balance sheet should include the identifiable assets and liabilities of the acquiree and
any goodwill or negative goodwill arising.
Date of Acquisition
The date of acquisition is the date on which control of the net assets and operations of the
acquiree is effectively transferred to the acquirer. Goodwill is the difference between the cost of
the acquisition and the acquiring enterprise's share of the fair values of the identifiable assets
acquired less liabilities assumed. [IAS 22.20]
Cost of Acquisition
The cost of the acquisition is the amount of cash paid and the fair value of the other
consideration given by the acquirer, plus any costs directly attributable to the acquisition.
Contingent consideration should be included in the cost of the acquisition at the date of the
acquisition if payment of the amount is probable and it can be measured reliably. The cost of
acquisition should be adjusted when a relevant contingency is resolved. When settlement of the
consideration is deferred, the cost is the present value of such consideration and not the nominal
amount. [IAS 22.21]
Identifiable assets and liabilities
The identifiable assets and liabilities acquired that are recognised should be those of the acquiree
that existed at the date of acquisition (some of which may not have been recognised by the
acquiree), together with any permitted provisions for restructuring costs (see below). They
should be recognised separately if it is probable that any associated future economic benefits will
flow to or from the acquirer, and their cost/fair value can be measured reliably. Other than
permitted provisions for restructuring costs (see below), liabilities should not be recognised at
the date of acquisition if they result from either:
• the acquirer's intentions or actions; or
• future losses or other costs expected to be incurred an a result of the acquisition.
Restructuring Provisions
Liabilities should not be recognised at the date of acquisition based on the acquirer's stated
intentions. Liabilities should also not be recognised for future losses or other costs expected to be
incurred as a result of the acquisition, whether they relate to the acquirer or the acquiree. [IAS
22.29]
Restructuring provisions are recognised at acquisition only if the restructuring is an integral part
of the acquirer's plan for the acquisition and, among other things, the main features of the
restructuring plan were announced at, or before, the date of acquisition. The restructuring must
involve terminating or reducing the acquired company's activities. Furthermore, even if the main
features of a restructuring plan were announced prior to the acquisition, a provision for the
restructuring sill should not be accrued unless, by the earlier of three months after the date of
acquisition and the date when the annual financial statements are authorised for issue, the
restructuring plan has been further developed into a detailed formal plan (specifics set out in IAS
22.31].
Measuring Acquired Assets and Liabilities
Individual assets and liabilities should be recognised separately as at the date of acquisition when
it is probable that any associated future economic benefits will flow to or from the acquirer, and
their cost/fair value can be measured reliably. [IAS 22.26]
IAS 22 provides for benchmark and an allowed alternative treatments for measuring the acquired
assets and liabilities:
• Under the benchmark treatment, the assets and liabilities are measured at the aggregate of
the fair value of the identifiable assets and liabilities acquired to the extent of the
acquirer's interest obtained, and the minority's proportion of the pre-acquisition carrying
amounts of the assets and liabilities. [IAS 22.32]
• Under the allowed alternative treatment, the assets and liabilities should be measured at
their fair values as at the date of acquisition with the minority's interest being stated at its
proportion of the fair value of the assets and liabilities. [IAS 22.34]
The fair values of assets and liabilities should be determined by reference to their intended use
by the acquirer. Guidelines are provided for the determining fair values for specific categories of
assets and liabilities. When an asset or business segment of the acquiree is to be disposed of, this
is taken into consideration in determining fair value. [IAS 22.39]
Step Acquisitions (Successive Share Purchases)
Where the acquisition is achieved by successive share purchases, each significant transaction is
treated separately for the purpose of determining the fair values of the assets/liabilities acquired
and for determining the amount of goodwill arising on that transaction - comparing each
individual investment with the percentage interest in the fair values of the assets and liabilities
acquired at each significant step. If all of the assets and liabilities are restated to fair values at the
time of each purchase, adjustments relating to the previously held interests are accounted for as
revaluations. [IAS 22.36]
Subsequent Adjustments to Original Measurements of Acquired Assets and Liabilities
The carrying amounts of assets and liabilities should be adjusted when additional evidence
becomes available to assist with the estimation of the fair value of assets and liabilities at the
date of acquisition. Goodwill should also be adjusted if the adjustment is made by the end of the
first annual accounting period commencing after the acquisition (providing that it is probable
that the amount of the adjustment will be recovered from the expected future economic benefits).
Otherwise, the adjustment should be treated as income or expense. [IAS 22.68] Further guidance
is provided in SIC22.
Goodwill
Goodwill arising on the acquisition should be recognised as an asset and amortised over its
useful life. There is a rebuttable presumption that the useful life of goodwill will exceed 20
years. [IAS 22.44] IAS 22 indicates that the 20-year maximum presumption can be overcome "in
rare cases" -- for instance if the goodwill is so clearly related to an identifiable asset or group of
identifiable assets that it can reasonably be expected to provide benefits over the entire life of
those related assets. Amortisation will normally be on a straight-line basis. [IAS 22.50]
Goodwill is subject to the general impairment requirements of IAS 36. [IAS 22.55] If the
amortisation period exceeds 20 years, recoverable amount must be calculated annually, even if
there is no indication that it is impaired. [IAS 22.56] Non-amortisation of goodwill based on an
argument that it has an infinite life is not permitted by IAS 22.
Negative Goodwill
Negative goodwill must always be measured and initially recognised as the full difference
between the acquirer's interest in the fair values of the identifiable assets and liabilities acquired
less the cost of acquisition. [IAS 22.59]
• To the extent that it relates to expected future losses and expenses that are identified in
the acquirer's acquisition plan, the negative goodwill is recognised as income when the
future losses and expenses are recognised. [IAS 22.61]
• An excess of negative goodwill to the extent of the fair values of acquired identifiable
nonmonetary assets is recognised in income over the average live of those nonmonetary
assets. [IAS 22.62(a)]
• Any remaining excess is recognised as income immediately. [IAS 22.62(b)]
• Negative goodwill is presented as a deduction from the assets of the enterprise, in the
same balance sheet classification as (positive) goodwill. [IAS 22.64]
Deferred Income Taxes
In both acquisitions and uniting of interests, sometimes the accounting treatment may differ from
measurements under national income tax laws. Any resulting deferred tax liabilities and deferred
tax assets are recognised under IAS 12, Income Taxes. [IAS 22.84]
Disclosure
These disclosures apply to all business combinations [IAS 22.86]
• Names and descriptions of the combining enterprises.
• Method of accounting for the combination.
• Effective date of the merger.
• Plans to dispose of a portion of the combined enterprise
These disclosures apply to acquisitions [IAS 22.87-88]
• Percentage of voting shares acquired. [IAS 22.87]
• Cost of acquisition, including a description of the purchase consideration paid or
contingently payable. [IAS 22.87]
 • Amortisation period(s) for goodwill and, if over 20 years or non-straight-line, the
justification. [IAS 22.88]
• Line item(s) of the income statement in which the amortisation of goodwill is included
[IAS 22.88]
• A reconciliation of the carrying amount of goodwill at the beginning and end of the
period [IAS 22.88]
• Comparative information is not required.
• Special disclosures in negative goodwill situations. [IAS 22.91]
• Problems in determining fair values of assets and liabilities [IAS 22.93]
These disclosures apply to unitings of interest [IAS 22.94]
• Information about type and number of shares issued
• Amounts of assets and liabilities contributed by each enterprise; and
• Sales revenue, other operating revenues, extraordinary items and the net profit or loss of
each enterprise prior to the date of the combination that are included in the net profit or
loss shown by the combined enterprise's financial statements.