IFRS 3 Business Combinations

IFRS 3 Business Combinations Effective date IFRS 3(2008) issued January 2008, replacing IFRS 3(2004). Effective for business combinations in periods beginning on or after 1 July 2009.

Core principle

An acquirer of a business recognises the assets acquired and liabilities assumed at their acquisition date fair values and discloses information that enables users to evaluate the nature and financial effects of the acquisition.

Summary

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 does not apply to

• the formation of a joint arrangement in the financial statements of the joint arrangement itself,
• combinations of entities or businesses under common control, nor

(iii) to the acquisition of an asset or a group of assets that do not constitute a business.

The acquisition method is used for all business combinations. Steps in applying the acquisition method are as follows:

1. Identification of the 'acquirer' - the combining entity that obtains control of the acquiree.

2. Determination of the 'acquisition date' - the date on which the acquirer obtains control of the acquiree.

3. Recognition and measurement of the identifiable assets acquired, the liabilities assumed and any non-controlling interest (NCI) in the acquiree.

4. Recognition and measurement of goodwill or a gain from a bargain purchase.

Summaries of current Standards and related Interpretations 27

Assets and liabilities are measured at their acquisition-date fair values (with a limited number of specified exceptions). An entity may elect to measure components of NCI in the acquiree that are present ownership interests and entitle their holders to a proportionate share of the entity's net assets in liquidation either at (a) fair value or (b) the present ownership instruments' proportionate share in the recognised amounts of the acquiree's identifiable net assets (option available on a transaction-bytransaction basis). All other components of NCI shall be measured at their acquisition-date fair value, unless another measurement basis is required by IFRS.

Goodwill is measured as the difference between: - the aggregate of (a) the acquisition-date fair value of the consideration transferred, (b) the amount of any NCI, and (c) 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).

If the difference above is negative, the resulting gain is recognised as a bargain purchase in profit or loss. For business combinations achieved in stages, if the acquirer increases an existing equity interest so as to achieve control of the acquiree, the previously-held equity interest is remeasured at acquisition-date fair value and any resulting gain or loss is recognised in profit or loss. If the initial accounting for a business combination can be determined only provisionally by the end of the first reporting period, the combination is accounted for using provisional values. Adjustments to provisional values relating to facts and circumstances that existed at the acquisition date are permitted within one year. No adjustments are permitted after one year except to correct an error in accordance with IAS 8.28