IFRS 3 – Business Combination

IFRS 3 Business Combinations outlines the accounting when an acquirer obtains control of a business (e.g. an acquisition or merger). The objective of this IFRS 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. To accomplish that, this IFRS establishes principles and requirements for how the acquirer:

(a) Recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquire.

(b) Recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and

(c) Determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.

Both IFRS 10 Consolidated Financial Statement and IFRS 3 Business Combination deal with business combination and financial statements. But while IFRS 10 defines control and prescribes specific consolidation procedures, IFRS 3 is more about the measurements of the items in the consolidated financial statement, such as goodwill, non-controlling interest, etc. If the entities need to deal with the consolidation, both standards should be applied.

Conversion issues

Topic	IFRS	VAS
IFRS 3 vs VAS 11 – Business Combination
Accounting method	The acquisition method is used for all business combinations. Steps in applying the acquisition method are: Identification of the “acquirer” Determination of the “acquisition date” Recognition and measurement of the identifiable assets acquired, the liabilities assumed and any non-controlling interest (NCI, formerly called minority interest) in the acquiree Recognition and measurement of goodwill or a gain from a bargain purchase.	The acquisition method is used for all business combinations. Steps in applying the acquisition method are: Identification of the “acquirer” Measurement of the costs of business combination, and At the acquisition date, allocating the cost of the business combination to the assets acquired and liabilities and contingent liabilities assumed.
Recognition and measurement of goodwill	The acquirer shall recognize goodwill as of the acquisition date measured as the excess of (a) over (b) below: (a) the aggregation of: i. The acquisition-date fair value of the consideration transferred ii. The amount of any non-controlling interest in the acquiree measured in accordance with IFRS 3. and iii. In a business combination achieved in stages, the acquisition-date fair value of the acquirer's previously held equity interest in the acquiree. (b) The net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed measured in accordance with this IFRS	Initially measure that goodwill at its cost, being the excess of the costs of the business combination over the acquirer's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognized.
Measurement of Non-controlling interest (NCI)	IFRS 3 allows an accounting policy choice, available on a transaction by transaction basis, to measure non-controlling interests (NCI): fair value (sometimes called the full goodwill method), or the NCI's proportionate share of net assets of the acquiree.	term used: minority interests. Measurement of initial recognition: Percentage ownership of minority interests in fair value of net assets of the acquiree.
Goodwill amortization	IFRS 3 prohibits the amortization of goodwill. Instead, goodwill must be tested for impairment at least annually under IAS 36 Impairment of Assets.	Goodwill may be expensed in full or be allocated over a period not exceeding 10 years.
A business combination achieves in stages	Goodwill is measured on the acquisition date, including all previously acquired investment. The re-measurement of the previous investments based on fair value on the acquisition date is required.	Determine the amount of any goodwill associated with each transaction. Prohibit re-measurement of the previous investment.
Determining what is part of the business combination transaction	There may be a relationship or other agreement between the acquirer and the acquiree before the business combination or other separate agreements during the business combination. In both cases, the acquirer must identify all items that are not covered by the exchange between the acquirer and the acquiree (or the former owners) in the business combination, i.e. those that are not covered by the transaction used by the buyer in exchange for control of the acquiree. When using the acquisition method, the acquirer is recognized only for the portion of the purchase price that is transferred to the acquiree and the assets acquired and the liabilities assumed in exchange for control of the acquiree. Separate transactions should be recorded as required by other appropriate IFRSs.	Not cover this matter
Related acquisition expenses	Acquisition-related expenses are costs the acquirer incurs to effect a business combination, such as brokerage, consulting, legal, accounting, valuation and other professional or consulting fees; general and administrative costs, including the cost of maintaining the internal acquisitions department and costs of registering and issuing debt and equity securities. The acquirer shall account for acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received, with one exception. The costs to issue debt or equity securities shall be recognised in accordance with IAS 32 and IFRS 9.	VAS 11 allows including directly related costs as part of the purchase consideration
Measurement period/ Contingent liabilities	IFRS 3 stated about measurement period that: If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the acquirer shall report in its financial statements provisional amounts for the items for which the accounting is incomplete. During the measurement period, the acquirer shall retrospectively adjust the provisional amounts recognised at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date and, if known, would have affected the measurement of the amounts recognised. During the measurement period, the acquirer shall also recognise additional assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date and, if known, would have resulted in the recognition of those assets and liabilities as of that date. The measurement period ends as soon as the acquirer receives the information it was seeking about facts and circumstances that existed as of the acquisition date or learns that more information is not obtainable. However, the measurement period shall not exceed one year from the acquisition date. After the measurement period ends, the acquirer shall revise the accounting for a business combination only to correct an error in accordance with IAS 8.	VAS 11 specifies the acquiree’s contingent liabilities as follow: the acquirer recognises separately a contingent liability of the acquiree as part of allocating the cost of a business combination only if its fair value can be measured reliably. If its fair value cannot be measured reliably: (a) There is a resulting effect on the amount recognized as goodwill or accounted for in accordance with paragraph 55 – VAS 11; and (b) The acquirer shall disclose the information about that contingent liability required to be disclosed by VAS 18- “Provisions, Contingent Liabilities and Contingent Assets”.