FRS 3 Business Combinations outlines the accounting when an acquirer obtains control of a business (e.g.

an
acquisition or merger). Such business combinations are accounted for using the 'acquisition method', which generally
requires assets acquired and liabilities assumed to be measured at their fair values at the acquisition date.
A revised version of IFRS 3 was issued in January 2008 and applies to business combinations occurring in an entity's
first annual period beginning on or after 1 July 2009.

History of IFRS 3
1 April 2001 Project carried over from the old IASC
July 2001 Project added to IASB agenda
5 December 2002 Exposure Draft Business Combinations and related exposure drafts proposing amendments
to IAS 36 and IAS 38
31 March 2004 IFRS 3 Business Combinations and related amended versions of IAS 36and IAS 38; IFRS 3
supersedes IAS 22
1 April 2004 Effective date of IFRS 3
29 April 2004 Exposure Draft of Proposed Amendments to IFRS 3 Combinations by Contract Alone or
Involving Mutual Entities After considering comments on this ED, the Board decided to
include the issues addressed in the ED in the 30 June 2005 exposure draft.
25 June 2005 Exposure Draft of Proposed Amendments to IFRS 3
10 January 2008 Revised IFRS 3 (2008) issued. Click for Information about the 2008 revisions to IFRS 3
(2008); Deloitte Guide to IFRS 3 and IAS 27 (PDF 647k)
1 July 2009 Effective date of IFRS 3 (2008)
6 May 2010 IFRS 3 amended for Annual Improvements to IFRSs 2010
1 July 2010 Effective date of May 2010 amendment to IFRS 3
Related Interpretations
o None
Amendments under consideration by the IASB
o Common control transactions
o Post-implementation review IFRS 3
Summary of IFRS 3
Background
IFRS 3 (2008) replaced IFRS 3 (2004). 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)). The revisions 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 oncommon 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:
o fair value (sometimes called the full goodwill method), or
o 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 non-controlling 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 non-controlling 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% non-
controlling 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]
Acquired 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:
o 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
o 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:
o for pre-existing non-contractual relationships (for example, a lawsuit): by reference to fair value
o 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:
o business combinations achieved without the transfer of consideration [IFRS 3.43-44]
o reverse acquisitions [IFRS 3.B19]
o identifying intangible assets acquired [IFRS 3.B31-34]
o 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]
o name and a description of the acquiree
o acquisition date
o percentage of voting equity interests acquired
o 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
o 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
o acquisition-date fair value of the total consideration transferred and the acquisition-date fair value of each major
class of consideration
o details of contingent consideration arrangements and indemnification assets
o details of acquired receivables
o the amounts recognised as of the acquisition date for each major class of assets acquired and liabilities
assumed
o details of contingent liabilities recognised
o total amount of goodwill that is expected to be deductible for tax purposes
o details of any transactions that are recognised separately from the acquisition of assets and assumption of
liabilities in the business combination
o information about a bargain purchase ('negative goodwill')
o 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
o details about a business combination achieved in stages
o information about the acquiree's revenue and profit or loss
o 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]
o 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)
o follow-up information on contingent consideration
o follow-up information about contingent liabilities recognised in a business combination
o a reconciliation of the carrying amount of goodwill at the beginning and end of the reporting period, with various
details shown separately
o the amount and an explanation of any gain or loss recognised in the current reporting period that both:
o (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
o (ii) is of such a size, nature or incidence that disclosure is relevant to understanding the combined entity's
financial statements.
Deloitte Guide to IFRS 3 and IAS 27
In July 2008, the Deloitte IFRS Global Office has published Business Combinations and Changes in Ownership
Interests: A Guide to the Revised IFRS 3 and IAS 27. This 164-page guide deals mainly with accounting for
business combinations under IFRS 3(2008). Where appropriate, it deals with related requirements of IAS
27(2008) particularly as regards the definition of control, accounting for non-controlling interests, and
changes in ownership interests. Other aspects of IAS 27 (such as the requirements to prepare consolidated
financial statements and detailed procedures for consolidation) are not addressed.