IFRS 3: Business Combinations

IFRS 3 establishes principles and requirements for how an acquirer in a business combination:

  • recognizes and measures in its financial statements the assets and liabilities acquired, and any interest in the acquiree held by other parties;
  • recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and
  • determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.

The core principles in IFRS 3 are that an acquirer measures the cost of the acquisition at the fair value of the consideration paid; allocates that cost to the acquired identifiable assets and liabilities on the basis of their fair values; allocates the rest of the cost to goodwill, and recognizes any excess of acquired assets and liabilities over the consideration paid (a ‘bargain purchase’) in profit or loss immediately. The acquirer discloses information that enables users to evaluate the nature and financial effects of the acquisition.

What is the purpose of IFRS 3?

What is the objective of IFRS 3? The objective of IFRS 3 Business Combinations 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.

What does IFRS 3 say?

IFRS 3 establishes the following principles in relation to the recognition and measurement of items arising in a business combination: Recognition principle. Identifiable assets acquired, liabilities assumed, and non-controlling interests in the acquiree, are recognized separately from goodwill

How is goodwill calculated IFRS 3?

IFRS 3 illustrates the calculation of consolidated goodwill at the date of acquisition as 

Consideration paid by parent + non-controlling interest – fair value of the subsidiary’s net identifiable assets = consolidated goodwill.”

What is the first step in the acquisition method under IFRS 3?

The acquisition method

  1. Step 1 – Identifying a business combination. …
  2. Step 2 – Identifying the acquirer. …
  3. Step 3 – Determining the acquisition date. …
  4. Step 4 – Recognising and measuring identifiable assets acquired and liabilities assumed. …
  5. Step 5 – Recognising and measuring any non-controlling interest (NCI)
  6. Step 6 – Determining the consideration transferred
  7. Step 7 – Recognising and measuring goodwill or a gain from a bargain purchase