In April 2001 the International Accounting Standards Board (Board) adopted IAS 22 Business Combinations, which had originally been issued by the International Accounting Standards Committee in October 1998. IAS 22 was itself a revised version of IAS 22 Business Combinations that was issued in November 1983. In March 2004 the Board replaced IAS 22 and three related Interpretations (SIC‑9 Business Combinations—Classification either as Acquisitions or Unitings of Interests, SIC‑22 Business Combinations—Subsequent Adjustment of Fair Values and Goodwill Initially Reported and SIC‑28 Business Combinations—‘Date of Exchange’ and Fair Value of Equity Instruments) when it issued IFRS 3 Business Combinations. Minor amendments were made to IFRS 3 in March 2004 by IFRS 5 Non‑current Assets Held for Sale and Discontinued Operations and IAS 1 Presentation of Financial Statements (as revised in September 2007), which amended the terminology used throughout the Standards, including IFRS 3.
In January 2008 the Board issued a revised IFRS 3. Please refer to Background Information in the Basis for Conclusions on IFRS 3 for a fuller description of those revisions.
In October 2018, the Board amended IFRS 3 by issuing Definition of a Business (Amendments to IFRS 3). This amended IFRS 3 to narrow and clarify the definition of a business, and to permit a simplified assessment of whether an acquired set of activities and assets is a group of assets rather than a business.
Other Standards have made minor consequential amendments to IFRS 3. They include Improvements to IFRSs (issued in May 2010), IFRS 10 Consolidated Financial Statements (issued May 2011), IFRS 13 Fair Value Measurement (issued May 2011), Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27) (issued October 2012), IFRS 9 Financial Instruments (Hedge Accounting and amendments to IFRS 9, IFRS 7 and IAS 39) (issued November 2013), Annual Improvements to IFRSs 2010–2012 Cycle (issued December 2013), Annual Improvements to IFRSs 2011–2013 Cycle (issued December 2013), IFRS 15 Revenue from Contracts with Customers (issued May 2014), IFRS 9 Financial Instruments (issued July 2014), IFRS 16 Leases (issued January 2016), IFRS 17 Insurance Contracts (issued May 2017), Annual Improvements to IFRS Standards 2015–2017 Cycle (issued December 2017) and Amendments to References to the Conceptual Framework in IFRS Standards (issued March 2018).
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) recognises and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any non‑controlling interest in the acquiree;
(b) recognises 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.
This IFRS applies to a transaction or other event that meets the definition of a business combination. This IFRS does not apply to:
(a) the accounting for the formation of a joint arrangement in the financial statements of the joint arrangement itself.
(b) the acquisition of an asset or a group of assets that does not constitute a business. In such cases the acquirer shall identify and recognise the individual identifiable assets acquired (including those assets that meet the definition of, and recognition criteria for, intangible assets in IAS 38 Intangible Assets) and liabilities assumed. The cost of the group shall be allocated to the individual identifiable assets and liabilities on the basis of their relative fair values at the date of purchase. Such a transaction or event does not give rise to goodwill.
(c) a combination of entities or businesses under common control (paragraphs B1–B4 provide related application guidance).
The requirements of this Standard do not apply to the acquisition by an investment entity, as defined in IFRS 10 Consolidated Financial Statements, of an investment in a subsidiary that is required to be measured at fair value through profit or loss.
Identifying a business combination
An entity shall determine whether a transaction or other event is a business combination by applying the definition in this IFRS, which requires that the assets acquired and liabilities assumed constitute a business. If the assets acquired are not a business, the reporting entity shall account for the transaction or other event as an asset acquisition. Paragraphs B5–B12D provide guidance on identifying a business combination and the definition of a business.
The acquisition method
An entity shall account for each business combination by applying the acquisition method.
Applying the acquisition method requires:
(a) identifying the acquirer;
(b) determining the acquisition date;
(c) recognising and measuring the identifiable assets acquired, the liabilities assumed and any non‑controlling interest in the acquiree; and
(d) recognising and measuring goodwill or a gain from a bargain purchase.
Identifying the acquirer For each business combination, one of the combining entities shall be identified as the acquirer.
The guidance in IFRS 10 shall be used to identify the acquirer—the entity that obtains control of another entity, ie the acquiree. If a business combination has occurred but applying the guidance in IFRS 10 does not clearly indicate which of the combining entities is the acquirer, the factors in paragraphs B14–B18 shall be considered in making that determination.
Determining the acquisition date The acquirer shall identify the acquisition date, which is the date on which it obtains control of the acquiree.
The date on which the acquirer obtains control of the acquiree is generally the date on which the acquirer legally transfers the consideration, acquires the assets and assumes the liabilities of the acquiree—the closing date. However, the acquirer might obtain control on a date that is either earlier or later than the closing date. For example, the acquisition date precedes the closing date if a written agreement provides that the acquirer obtains control of the acquiree on a date before the closing date. An acquirer shall consider all pertinent facts and circumstances in identifying the acquisition date.
Recognising and measuring the identifiable assets acquired, the liabilities assumed and any non‑controlling interest in the acquiree
Recognition principle As of the acquisition date, the acquirer shall recognise, separately from goodwill, the identifiable assets acquired, the liabilities assumed and any non‑controlling interest in the acquiree. Recognition of identifiable assets acquired and liabilities assumed is subject to the conditions specified in paragraphs 11 and 12.
Recognition conditions To qualify for recognition as part of applying the acquisition method, the identifiable assets acquired and liabilities assumed must meet the definitions of assets and liabilities in the Framework for the Preparation and Presentation of Financial Statements1 at the acquisition date. For example, costs the acquirer expects but is not obliged to incur in the future to effect its plan to exit an activity of an acquiree or to terminate the employment of or relocate an acquiree’s employees are not liabilities at the acquisition date. Therefore, the acquirer does not recognise those costs as part of applying the acquisition method. Instead, the acquirer recognises those costs in its post‑combination financial statements in accordance with other IFRSs.
In addition, to qualify for recognition as part of applying the acquisition method, the identifiable assets acquired and liabilities assumed must be part of what the acquirer and the acquiree (or its former owners) exchanged in the business combination transaction rather than the result of separate transactions. The acquirer shall apply the guidance in paragraphs 51–53 to determine which assets acquired or liabilities assumed are part of the exchange for the acquiree and which, if any, are the result of separate transactions to be accounted for in accordance with their nature and the applicable IFRSs.
The acquirer’s application of the recognition principle and conditions may result in recognising some assets and liabilities that the acquiree had not previously recognised as assets and liabilities in its financial statements. For example, the acquirer recognises the acquired identifiable intangible assets, such as a brand name, a patent or a customer relationship, that the acquiree did not recognise as assets in its financial statements because it developed them internally and charged the related costs to expense.
Paragraphs B31–B40 provide guidance on recognising intangible assets. Paragraphs 22–28B specify the types of identifiable assets and liabilities that include items for which this IFRS provides limited exceptions to the recognition principle and conditions.
Classifying or designating identifiable assets acquired and liabilities assumed in a business combination At the acquisition date, the acquirer shall classify or designate the identifiable assets acquired and liabilities assumed as necessary to apply other IFRSs subsequently. The acquirer shall make those classifications or designations on the basis of the contractual terms, economic conditions, its operating or accounting policies and other pertinent conditions as they exist at the acquisition date.
In some situations, IFRSs provide for different accounting depending on how an entity classifies or designates a particular asset or liability. Examples of classifications or designations that the acquirer shall make on the basis of the pertinent conditions as they exist at the acquisition date include but are not limited to:
(a) classification of particular financial assets and liabilities as measured at fair value through profit or loss or at amortised cost, or as a financial asset measured at fair value through other comprehensive income in accordance with IFRS 9 Financial Instruments;
(b) designation of a derivative instrument as a hedging instrument in accordance with IFRS 9; and
(c) assessment of whether an embedded derivative should be separated from a host contract in accordance with IFRS 9 (which is a matter of ‘classification’ as this IFRS uses that term).
This IFRS provides an exception to the principle in paragraph 15:
(a) classification of a lease contract in which the acquiree is the lessor as either an operating lease or a finance lease in accordance with IFRS 16 Leases.
The acquirer shall classify those contracts on the basis of the contractual terms and other factors at the inception of the contract (or, if the terms of the contract have been modified in a manner that would change its classification, at the date of that modification, which might be the acquisition date).
Measurement principle The acquirer shall measure the identifiable assets acquired and the liabilities assumed at their acquisition‑date fair values.
For each business combination, the acquirer shall measure at the acquisition date components of non‑controlling interests in the acquiree that are present ownership interests and entitle their holders to a proportionate share of the entity’s net assets in the event of liquidation at either
(a) fair value; or
(b) the present ownership instruments’ proportionate share in the recognised amounts of the acquiree’s identifiable net assets. All other components of non‑controlling interests shall be measured at their acquisition‑date fair values, unless another measurement basis is required by IFRSs.
Paragraphs 24–31A specify the types of identifiable assets and liabilities that include items for which this IFRS provides limited exceptions to the measurement principle.
Exceptions to the recognition or measurement principles This IFRS provides limited exceptions to its recognition and measurement principles. Paragraphs 22–31A specify both the particular items for which exceptions are provided and the nature of those exceptions. The acquirer shall account for those items by applying the requirements in paragraphs 22–31A, which will result in some items being:
(a) recognised either by applying recognition conditions in addition to those in paragraphs 11 and 12 or by applying the requirements of other IFRSs, with results that differ from applying the recognition principle and conditions. (b) measured at an amount other than their acquisition‑date fair values.
Exception to the recognition principle
Contingent liabilities IAS 37 Provisions, Contingent Liabilities and Contingent Assets defines a contingent liability as:
(a) a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non‑occurrence of one or more uncertain future events not wholly within the control of the entity; or
(b) a present obligation that arises from past events but is not recognised because:
(i) it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or
(ii) the amount of the obligation cannot be measured with sufficient reliability.
The requirements in IAS 37 do not apply in determining which contingent liabilities to recognise as of the acquisition date. Instead, the acquirer shall recognise as of the acquisition date a contingent liability assumed in a business combination if it is a present obligation that arises from past events and its fair value can be measured reliably. Therefore, contrary to IAS 37, the acquirer recognises a contingent liability assumed in a business combination at the acquisition date even if it is not probable that an outflow of resources
embodying economic benefits will be required to settle the obligation. Paragraph 56 provides guidance on the subsequent accounting for contingent liabilities.
Exceptions to both the recognition and measurement principles
Income taxes The acquirer shall recognise and measure a deferred tax asset or liability arising from the assets acquired and liabilities assumed in a business combination in accordance with IAS 12 Income Taxes.
The acquirer shall account for the potential tax effects of temporary differences and carryforwards of an acquiree that exist at the acquisition date or arise as a result of the acquisition in accordance with IAS 12.
Employee benefits The acquirer shall recognise and measure a liability (or asset, if any) related to the acquiree’s employee benefit arrangements in accordance with IAS 19 Employee Benefits.
Indemnification assets The seller in a business combination may contractually indemnify the acquirer for the outcome of a contingency or uncertainty related to all or part of a specific asset or liability. For example, the seller may indemnify the acquirer against losses above a specified amount on a liability arising from a particular contingency; in other words, the seller will guarantee that the acquirer’s liability will not exceed a specified amount. As a result, the acquirer obtains an indemnification asset. The acquirer shall recognise an indemnification asset at the same time that it recognises the indemnified item measured on the same basis as the indemnified item, subject to the need for a valuation allowance for uncollectible amounts. Therefore, if the indemnification relates to an asset or a liability that is recognised at the acquisition date and measured at its acquisition‑date fair value, the acquirer shall recognise the indemnification asset at the acquisition date measured at its acquisition‑date fair value. For an indemnification asset measured at fair value, the effects of uncertainty about future cash flows because of collectibility considerations are included in the fair value measure and a separate valuation allowance is not necessary (paragraph B41 provides related application guidance).
In some circumstances, the indemnification may relate to an asset or a liability that is an exception to the recognition or measurement principles. For example, an indemnification may relate to a contingent liability that is not recognised at the acquisition date because its fair value is not reliably measurable at that date. Alternatively, an indemnification may relate to an asset or a liability, for example, one that results from an employee benefit, that is measured on a basis other than acquisition‑date fair value. In those circumstances, the indemnification asset shall be recognised and measured using assumptions consistent with those used to measure the indemnified item, subject to management’s assessment of the collectibility of the indemnification asset and any contractual limitations on the indemnified amount. Paragraph 57 provides guidance on the subsequent accounting for an indemnification asset.
Leases in which the acquiree is the lessee The acquirer shall recognise right-of-use assets and lease liabilities for leases identified in accordance with IFRS 16 in which the acquiree is the lessee. The acquirer is not required to recognise right-of-use assets and lease liabilities for:
(a) leases for which the lease term (as defined in IFRS 16) ends within 12 months of the acquisition date; or
(b) leases for which the underlying asset is of low value (as described in paragraphs B3–B8 of IFRS 16).
The acquirer shall measure the lease liability at the present value of the remaining lease payments (as defined in IFRS 16) as if the acquired lease were a new lease at the acquisition date. The acquirer shall measure the right-of-use asset at the same amount as the lease liability, adjusted to reflect favourable or unfavourable terms of the lease when compared with market terms.