1. Objective of IFRS 3
IFRS 3 provides guidance on how an acquirer should recognize, measure, and disclose a business combination using the acquisition method to ensure transparency and comparability.
2. Key Concepts
2.1 Business Combination
A transaction where one entity obtains control over a business (e.g., acquisition of shares, assets, merger).
2.2 Business
An integrated set of activities and assets that create inputs + processes → outputs.
2.3 Control
Control exists when the acquirer has:
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Power over the investee
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Exposure to variable returns
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Ability to influence returns
(consistent with IFRS 10)
3. The Acquisition Method (Mandatory)
IFRS 3 requires all business combinations to be accounted for using the acquisition method, which includes:
3.1 Step 1: Identify the Acquirer
The entity that obtains control.
Example:
Company A buys 80% of Company B →
→ Company A is the acquirer
3.2 Step 2: Determine the Acquisition Date
The date the acquirer obtains control (not contract date).
Example:
Agreement signed: 25 Dec
Control transferred: 5 Jan
→ Acquisition date = 5 Jan
3.3 Step 3: Recognize and Measure Identifiable Assets, Liabilities & NCI
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Recognize all identifiable assets and liabilities of the acquiree.
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Measure at fair value on acquisition date.
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Recognize intangible assets even if not on acquiree’s books (e.g., brand, customer list).
Non-Controlling Interest (NCI) Measurement Options
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Fair value method (full goodwill)
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Proportionate share of net assets (partial goodwill)
3.4 Step 4: Measure and Recognize Goodwill or Gain on Bargain Purchase
Goodwill Formula
Bargain Purchase
Occurs when consideration < net identifiable assets
→ Recognized as gain in profit or loss
4. Measurement of Consideration Transferred
Consideration may include:
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Cash
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Shares issued
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Contingent consideration
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Assets transferred
Contingent Consideration
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Measured at fair value on acquisition date
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Classified as liability (remeasured) or equity (not remeasured)
5. Worked Example (Simple and Clear)
Example: Acquisition with Goodwill
Company A acquires 80% of Company B.
| Item | Amount |
|---|---|
| Cash paid (consideration) | $1,200,000 |
| NCI fair value | $300,000 |
| Fair value of identifiable net assets | $1,300,000 |
Goodwill Calculation
Journal Entry
Example: Bargain Purchase (Negative Goodwill)
Consideration paid: $900,000
Fair value of identifiable net assets: $1,000,000
Recognize gain in profit or loss.
6. Step Acquisition
If acquirer previously held a minority stake:
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Re-measure previously held interest at fair value
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Recognize gain or loss in profit or loss
Example
Before acquisition:
Acquirer held 20% (FV at acquisition date = $200,000)
Carrying amount = $150,000
7. Acquisition-related Costs
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Expenses (legal fees, consulting, valuation) → Recognize in profit or loss
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Exception: Costs to issue shares or debt → deduct from equity or include in liability
8. Post-Acquisition Adjustments
8.1 Measurement Period
Up to 12 months to finalize fair value adjustments
Adjustments made retrospectively to acquisition date.
8.2 Indemnification Assets
If seller covers specific liabilities → recognize an asset.
9. Disclosures Required
Companies must disclose:
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Details of acquiree
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Date of acquisition
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Consideration transferred
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Breakdown of assets acquired & liabilities assumed
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Goodwill or bargain purchase gain
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Revenue & profit contribution of acquiree
10. Key Summary Points
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IFRS 3 requires the acquisition method
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Measure identifiable assets & liabilities at fair value
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Goodwill = plug figure
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Bargain purchase → profit
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Costs of acquisition → expense
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NCI: choose fair value or proportionate share
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Adjustments allowed within a 12-month measurement period