Business

Combinations

PFRS 3
Overview

PFRS 3 Business Combinations outlines the

accounting when an acquirer obtains control
A revised version of IFRS 3 was issued in
of a business (e.g. an acquisition or merger).
January 2008 and applies to business
Such business combinations are accounted
combinations occurring in an entity's first
for using the 'acquisition method', which
annual period beginning on or after 1 July
generally requires assets acquired and
2009.
liabilities assumed to be measured at their
fair values at the acquisition date.
Key
definitions
1. Business combination - a transaction or other event in which an acquirer obtains
control of one or more businesses. Transactions sometimes referred to as 'true mergers'
or 'mergers of equals' are also business combinations as that term is used in.
2. Business - An integrated set of activities and assets that is capable of being conducted
and managed for the purpose of providing goods or services to customers, generating
investment income (such as dividends or interest) or generating other income from
ordinary activities*
3. Acquisition date - the date on which the acquirer obtains control of the acquiree
4. Acquirer - the entity that obtains control of the acquiree
5. Acquiree - the business or businesses that the acquirer obtains control of in a business
combination
Scope

IFRS 3 must be applied when accounting for business combinations but does
not apply to:
• The formation of a joint venture.
• The acquisition of an asset or group of assets that is not a business, although general guidance
is provided on how such transactions should be accounted for.
• Combinations of entities or businesses under common control (the IASB has a separate agenda
project on common control transactions.
• Acquisitions by an investment entity of a subsidiary that is required to be measured at fair
value through profit or loss under PFRS 10 Consolidated Financial Statements.
Determining whether a transaction is a business
combination
IFRS 3 provides additional guidance on determining whether a transaction meets the definition of
a business combination, and so accounted for in accordance with its requirements. This guidance
includes:
1.Business combinations can occur in various ways, such as by transferring cash, incurring liabilities, issuing equity
instruments (or any combination thereof), or by not issuing consideration at all (i.e. by contract alone)
2.Business combinations can be structured in various ways to satisfy legal, taxation or other objectives, including one entity
becoming a subsidiary of another, the transfer of net assets from one entity to another or to a new entity
3.The business combination must involve the acquisition of a business, which generally has three elements:
Inputs – an economic resource (e.g. non-current assets, intellectual property) that creates outputs when one or more
processes are applied to it 
Process – a system, standard, protocol, convention or rule that when applied to an input or inputs, creates outputs (e.g.
strategic management, operational processes, resource management) 
Output – the result of inputs and processes applied to those inputs.
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.

Steps in applying the acquisition method are:

1. Identification of the 'acquirer'

2. Determination of the 'acquisition date'
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
Identifying an acquirer
The entity that obtains 'control' of the acquiree
Identifying an acquirer
If the guidance in PFRS 10 does not clearly indicate which of the combining entities is an
acquirer, PFRS 3 provides additional guidance which is then considered:

1.The acquirer is usually the entity that transfers cash or other assets where the business combination is effected in
this manner
2.The acquirer is usually the entity with the largest relative size (assets, revenues or profit)
3.For business combinations involving multiple entities, consideration is given to the entity initiating the
combination, and the relative sizes of the combining entities.
4.The acquirer is usually, but not always, the entity issuing equity interests where the transaction is effected in this
manner, however the entity also considers other pertinent facts and circumstances including:
relative voting rights in the combined entity after the business combination
the existence of any large minority interest if no other owner or group of owners has a significant voting
interest
the composition of the governing body and senior management of the combined entity
the terms on which equity interests are exchanged
Acquisition date
An acquirer considers all pertinent facts and
circumstances when determining the
acquisition date, i.e. the date on which it
obtains control of the acquiree. The acquisition
date may be a date that is earlier or later than
the closing date
Acquired
assets and
liabilities
PFRS 3 establishes the following principles in relation
to the recognition and measurement of items arising in a
business combination:

Recognition principle. Identifiable assets

acquired, liabilities assumed, and non-controlling
interests in the acquiree, are recognized separately
from goodwill
Measurement principle. All assets acquired and
liabilities assumed in a business combination are
measured at acquisition-date fair value.
Exceptions to the
recognition and
measurement
principles
The following exceptions to the above principles
apply:

Liabilities and
contingent liabilities Contingent liabilities
Income taxes Employee benefits
within the scope of and contingent assets
PAS 37 or IFRIC 21

Share-based payment
Indemnification assets Reacquired rights Assets held for sale
transactions
Goodwill
Goodwill is measured as the difference
between:

the aggregate of (i) the value of the

consideration transferred (generally at fair
value), (ii) the amount of any non-
the net of the acquisition-date amounts of
controlling interest (NCI, see below), and
the identifiable assets acquired and the
(iii) in a business combination achieved in
liabilities assumed
stages (see below), the acquisition-date
fair value of the acquirer's previously-held
equity interest in the acquiree, and 
This can be written in simplified equation form
as follows:

Goodwill  =  Consideration  +  Amount of  +  Fair value  -  Net assets
transferred non- of previous recognized
controlling equity
interests interests
WHAT IF?

However, before any bargain purchase

gain is recognized in profit or loss, the
If the difference above is negative, the
acquirer is required to undertake a
resulting gain is a bargain purchase in
review to ensure the identification of
profit or loss, which may arise in
assets and liabilities is complete, and that
circumstances such as a forced seller
measurements appropriately reflect
acting under compulsion.
consideration of all available
information.
Choice in the
PFRS 3 allows an accounting policy
measurement of choice, available on a transaction by
non-controlling transaction basis, to measure non-
controlling interests (NCI) either at:
interests (NCI)
fair value the NCI's
(sometimes proportionate
called the full share of net
goodwill assets of the
method), or  acquiree.
Example
P pays 800 to acquire an 80% interest in the ordinary shares of S. The aggregated fair value of 100% of S's identifiable assets and
liabilities (determined in accordance with the requirements of IFRS 3) is 600, and the fair value of the non-controlling interest (the
remaining 20% holding of ordinary shares) is 185.
The measurement of the non-controlling interest, and its resultant impacts on the determination of goodwill, under each option is
illustrated below:

NCI based on NCI based on

fair value net assets

Consideration transferred 800    800   

Non-controlling interest 185 (1) 120 (2)

985    920   

Net assets (600)   (600)  

Goodwill 385    320   

(1) 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%
interest, primarily due to any control premium or discount [IFRS 3.B45]
(2) Calculated as 20% of the fair value of the net assets of 600.
Business combination achieved in
stages (step acquisitions)
• Prior to control being obtained, an acquirer accounts for its investment
in the equity interests of an acquiree in accordance with the nature of
the investment by applying the relevant standard, e.g. PAS
28Investments in Associates and Joint Ventures (2011), PFRS 11 Joint
Arrangements, PAS 39Financial Instruments: Recognition and
Measurement or PFRS 9 Financial Instruments
• As part of accounting for the business combination, the acquirer
remeasures any previously held interest at fair value and takes this
amount into account in the determination of goodwill as noted above
[PFRS 3.32] Any resultant gain or loss is recognized in profit or loss or
other comprehensive income as appropriate
Measurement period
• The measurement period cannot exceed one year from the
acquisition date and no adjustments are permitted after one
year except to correct an error in accordance with PAS 8.
• Adjustments to provisional amounts, and the recognition of
newly identified asset and liabilities, must be made within
the 'measurement period' where they reflect new information
obtained about facts and circumstances that were in existence
at the acquisition date
Related
transactions and
subsequent
accounting
General principles
In general:

the recognition and measurement of

transactions that are not part of what the
assets and liabilities arising in a business
acquirer and acquiree (or its former
combination after the initial accounting
owners) exchanged in the business
for the business combination is dealt
combination are identified and
with under other relevant standards, e.g.
accounted for separately from business
acquired inventory is subsequently
combination 
accounted under PAS 2 Inventories.
Contingent
consideration
• Contingent consideration must be measured at fair value at the time
of the business combination and is taken into account in the
determination of goodwill.
• 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 classified as an equity instrument or an
asset or liability:
 If the contingent consideration is classified as an equity
instrument, the original amount is not remeasured
 If the additional consideration is classified as an asset or liability
that is a financial instrument, the contingent consideration is
measured at fair value and gains and losses are recognized in
either profit or loss or other comprehensive income in accordance
with PFRS 9 Financial Instruments or PAS 39 Financial
Instruments: Recognition and Measurement
 If the additional consideration is not within the scope of IFRS 9
(or IAS 39), it is accounted for in accordance with PAS 37
 Provisions, Contingent Liabilities and Contingent Assets or other
IFRSs as appropriate.
Acquisition costs

Costs of issuing debt or equity instruments are accounted for under PAS
32 Financial Instruments: Presentation and PAS 39 Financial Instruments:
Recognition and Measurement/ PFRS 9 Financial Instruments.

All other costs associated with an acquisition must be expensed, including

reimbursements to the acquiree for bearing some of the acquisition costs.
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.
Contingent liabilities
Until a contingent liability is settled, cancelled or
expired, a contingent liability that was recognized in
the initial accounting for a business combination is
measured at the higher of the amount the liability
would be recognized under PAS 37 Provisions,
Contingent Liabilities and Contingent Assets, and the
amount less accumulated amortization under PAS
18 Revenue.
Contingent payments to
employees and
shareholders
• As part of a business combination, an acquirer may
enter into arrangements with selling shareholders or
employees.
• In determining whether such arrangements are part of
the business combination or accounted for separately,
the acquirer considers a number of factors, including
whether the arrangement requires continuing
employment (and if so, its term), the level or
remuneration compared to other employees, whether
payments to shareholder employees are incremental to
non-employee shareholders, the relative number of
shares owns, linkages to valuation of the acquiree, how
the consideration is calculated, and other agreements
and issues.
Indemnification assets
Indemnification assets recognized at the
acquisition date (under the exceptions to
the general recognition and measurement
principles noted above) are subsequently
measured on the same basis of the
indemnified liability or asset, subject to
contractual impacts and collectability.
Indemnification assets are only
derecognized when collected, sold or when
rights to it are lost.
Disclosure of information about
current business combinations
 An acquirer is required to 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 authorized for issue.
 An acquirer is required to disclose information that enables users of
its financial statements to evaluate the financial effects of
adjustments recognized in the current reporting period that relate to
business combinations that occurred in the period or previous
reporting periods.
THANK YOU