Lesson 26 - Advanced Accounting Course

Lesson 26: Accounting for Business Combinations Under IFRS 3

Business combinations are common in today’s global economy. When one company acquires control over another, the transaction must be properly accounted for. IFRS 3 provides the rules for this.

In this lesson, we’ll cover:

• ✅ What is a business combination?
  
  

• 🔍 Key principles of IFRS 3
  
  

• 🧾 Steps to account for a combination
  
  

• 🧠 Understanding purchase price allocation and goodwill
  
  

• ⚖️ Important disclosures and common pitfalls
  
  

🤔 What Is a Business Combination?

A business combination happens when one company (the acquirer) gains control over another business (the acquiree). This typically involves buying shares or net assets.

📘 IFRS 3 defines a business combination as:

“A transaction or other event in which an acquirer obtains control of one or more businesses.”

🎯 Objective of IFRS 3

The objective is to ensure that business combinations are accounted for consistently and provide useful information to users.

The standard requires the use of the acquisition method—not the pooling of interests or other methods.

📌 The Acquisition Method (4 Key Steps)

🧠 What’s Included in the Purchase Price?

The cost of the acquisition (called the consideration transferred) can include:

• 💵 Cash paid
  
  

• 🏢 Assets transferred
  
  

• 📈 Shares issued
  
  

• 📄 Liabilities assumed (e.g., earn-outs or contingent consideration)
  
  

🧮 Example of Business Combination

Let’s say:

• Company A acquires 100% of Company B
  
  

• Company A pays: $1,000,000 cash
  
  

• Fair value of Company B’s net assets: $850,000
  
  

Goodwill = $1,000,000 - $850,000 = $150,000

➡️ Company A records:

• Assets & liabilities of Company B at fair value
  
  

• Goodwill of $150,000 on its balance sheet
  
  

🎯 Identifiable Assets and Liabilities

Assets and liabilities must be:

• Identifiable (can be separated from the business)
  
  

• Measured at fair value on the acquisition date
  
  

This includes:

• 🏭 Tangible assets (land, inventory)
  
  

• 🧠 Intangible assets (patents, trademarks, customer relationships)
  
  

• 💳 Financial liabilities (loans, payables)
  
  

• ⚠️ Contingent liabilities (if reliably measurable)
  
  

💡 Non-Controlling Interest (NCI)

If the acquirer doesn’t acquire 100%, the NCI must be measured using one of two options:

🧾 Goodwill or Bargain Purchase

🔍 Goodwill is not amortized but must be tested annually for impairment (see Lesson 25).

📄 Required Disclosures Under IFRS 3

Companies must disclose:

• 📆 Date of acquisition
  
  

• 🧮 Purchase price and how it was paid
  
  

• 📊 Fair values of acquired assets and liabilities
  
  

• 💡 Amount of goodwill or gain on bargain purchase
  
  

• 👥 Amount of NCI and method used
  
  

• 🧾 Reasons for the business combination (strategic, operational, etc.)
  
  

🚨 Common Mistakes in Applying IFRS 3

📑 Quick Recap