IFRS and IFRS 3 – Business Combinations

IFRS is short for International Financial Reporting Standards. IFRS originated in the European Union, with the intention of making business affairs and accounts accessible across the continent.

IFRS is the international accounting framework within which to properly organize and report financial information. It is derived from the pronouncements of the London-based International Accounting Standards Board (IASB). It is currently the required accounting framework in more than 120 countries.

IFRS requires businesses to report their financial results and financial position using the same rules; this means that, barring any fraudulent manipulation, there is considerable uniformity in the financial reporting of all businesses using IFRS, which makes it easier to compare and contrast their financial results.

IFRS is used primarily by businesses reporting their financial results anywhere in the world except the United States. Generally Accepted Accounting Principles, or GAAP, is the accounting framework used in the United States. GAAP is much more rules-based than IFRS. IFRS focuses more on general principles than GAAP, which makes the IFRS body of work much smaller, cleaner, and easier to understand than GAAP.

IFRS has several Codes. For this article, we will focus on IFRS 3 – Business Combinations.

IFRS 3 establishes principles and requirements for how an acquirer in a business combination:

recognises and measures in its financial statements the assets and liabilities acquired, and any interest in the acquiree held by other parties;
recognises and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.

The core principles in IFRS 3 are that an acquirer measures the cost of the acquisition at the fair value of the consideration paid; allocates that cost to the acquired identifiable assets and liabilities on the basis of their fair values; allocates the rest of the cost to goodwill; and recognises any excess of acquired assets and liabilities over the consideration paid (a ‘bargain purchase’) in profit or loss immediately. The acquirer discloses information that enables users to evaluate the nature and financial effects of the acquisition.

Any investor who acquires some investment needs to determine whether this transaction or event is a business combination or not.

IFRS 3 requires that assets and liabilities acquired need to constitute a business, otherwise it’s not a business combination and an investor needs to account for the transaction in line with other IFRS.
A business consists of 3 elements:

Input = any economic resource that creates or can create outputs when one or more processes are applied to it, e.g. non-current assets, etc.;
Process = any system, standard, protocol, convention or rule that when applied to an input(s), creates outputs, e.g. management processes, workforce, etc.
Output = the result of inputs and processes applied to those inputs that provide or can provide a return in the form of dividends, lower costs or other economic benefits directly to investors or other owners.

Some of the key differences between a business combination and an asset acquisition are the requirements to record the full fair value of all assets, liabilities and contingent liabilities,
recognition of goodwill, the treatment of transaction costs, the requirements for contingent consideration and the deferred tax consequences.

When undertaking an acquisition you need to implement the Acquisition Approach with 4 steps:

Identifying the acquirer,
Determining the acquisition date,
Recognizing and measuring the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree;
Recognizing and measuring goodwill or a gain from a bargain purchase.

All assets and liabilities are measured at acquisition-date fair value.

Non-controlling interest is the equity in a subsidiary not attributable, directly or indirectly, to a parent.

For example, when an investor acquires 100% share in a company, then there’s no non-controlling interest, because the investor owns subsidiary’s equity in full.

When an investor acquires less than 100%, assume 80% as an example, then there’s non-controlling interest of 20%, as the 20% of subsidiary’s net assets belong to someone else.

IFRS 3 permits 2 methods of measuring non-controlling interest:

Fair value, or
The proportionate share in the recognized acquiree’s net assets.

Selection of method for measuring non-controlling interest directly impacts the amount of goodwill recognized.

A Fair Value (FV) approach is given below:

Fair Value considers the transaction from the market participant perspective and reflects fair values exchanged.

Goodwill is the difference between FV acquired business and FV acquired identifiable net assets (i.e. internally generated goodwill in the acquired business). A gain is never recognised.

An equity transaction is recognised if:

FV Consideration is > FV Business (a distribution from equity);
or FV Consideration is < FV Business (a contribution to equity).

Ceiling approach

This considers fair values exchanged with the aim to avoid recognising any inflated goodwill.

Goodwill is the excess of FV consideration over FV acquired identifiable net assets but is capped at FV acquired business (i.e. capped purchased goodwill). A gain is never recognised.

An equity transaction is recognised if:

FV Consideration is > FV Business (a distribution from equity); or
FV Consideration is < FV Identifiable Net Assets (a contribution to equity).


Goodwill can be recognised in full even where control is less than 100%. Before the revisions to IFRS 3, the IFRS stated that on acquisition, goodwill should only be recognised with respect to the part of the subsidiary undertaking that is attributable to the interest held by the parent.
This is still an option in IFRS 3 but now goodwill can be recognised in full which now means that the non-controlling interest (previously known as ‘minority interest’) will be measured at fair value and be included within goodwill.

For further information about Goodwill please read our article published on 29 July 2019 titled “Goodwill – Capital Gains Tax and Accounting”.

Goodwill can be both positive and negative:

If the goodwill is positive, then you shall recognize it as an intangible asset and perform annual impairment test;

If the goodwill is negative, then it is a gain on a bargain purchase.

You should:

Review the procedures for recognizing assets and liabilities, non-controlling interest, previously held interest and consideration transferred (i.e. check whether they are error-free);
Recognize a gain on bargain purchase in profit or loss.

​Pre-acquisition headroom approach (PH)

This approach relates to circumstances in which acquired goodwill is allocated to pre-existing cash-generating units (CGUs) of the acquirer but the concern is that the CGU may have a recoverable amount higher than its carrying amount at the date of acquisition, meaning that when the goodwill is allocated to the CGU, this excess (the pre-acquisition headroom) will shield the goodwill from impairment.
The PH approach aims to incorporate the PH, measured at the acquisition date, into the impairment test calculation, so that this ‘sheltering effect’ is removed.


This article is provided for information only and does not constitute the provision of professional advice of any kind.

Author Craig Tonkin