- Background information
- Scope of the IFRS3
- Exclusions from the scope
- Application of IFRS3
- Purchase consideration
- Recognition of contingent consideration
- Non Controlling Interest and Goodwill
- Partial and Full Goodwill Approaches under IFRS3
- Fair measurement of liabilities and Assets
- Separate and Consolidated Financial Report
- Other Matters and Issues
- Proportional sale or disposal of a subsidiary while still maintaining control.
- Proportional disposal of a subsidiary where control is lost.
- Purchase of extra shares after control of subsidiary was gained.
IFRS 3 which involves Business Combinations will build important changes in business combinations accounting. IFRS 3 develops more the acquisition representation and applies to more day to day transactions, because combinations by contract only in addition to combinations of common entities are incorporated in the standard. Nevertheless, ordinary managed transactions and the development of joint ventures are not factored in the revised standard. IFRS 3 applies to the 1st period of accounting commencing on 1/07/09. Notably, retrospective appliance to previous business combinations isn't permitted. It can be used early as long as it's not in the period of accounting commencing on or after 30/07/07.
In 2008 the International Accounting Standards Board finished the 2nd stage of its Project on Business combinations by releasing a revised edition of IFRS 3 relating to Business Combinations. It was amended in order to replace the 2004 version. The revised IFRS 3 is the outcome of a combined project with the Financial Accounting Standards Board
Description of business combination . Its a occurrence of transactions whereby the purchaser gains power over 1 or many business entities. A business entity is described as an incorporated place of actions that is able to perform and operate in order to give a return to shareholders or other capital owners or any other participants in the business.
The purchaser or the acquiring company ought to be recognized or identified. IFRS 3 stipulates that an acquirer must be acknowledged or identified in all cases involving business combinations.
Variations in the scope from the 2004 version of IFRS 3 as compared to 2008 IFRS 3 version is used in combinations of joint business entities as well as combinations which do not have consideration for example dual listed company shares. Such are not included in unrevised IFRS.
Exclusions from the scope:
The IFRS 3 cannot be used in case of development of a joint venture or combination of business entity under common management or control. IFRS 3 cannot be used the purchase of an asset or a collection of assets which don't comprise a business entity.
Important changes to the standard involve the purchase consideration. Fair value of all benefits held formerly by the acquirer in the newly acquired company is currently incorporated in the consideration. This incorporates all interest in joint ventures undertaken and associate as well as equity interests in the newly acquired company. Any preceding venture is perceived to be 'given up' in order to obtain the company/entity and on disposal date a gain or loss is taken into account. In case the acquirer previously had interest in the entity obtained prior to acquisition, IFRS3 stipulates that the current venture to be revalued to fair cost as at the acquisition date, factoring in all changes to the profit and loss account as well as any gains formerly documented in equity that pertain to the current holding structure. A gain is accepted in the income statement during the period of business combination. Contingent consideration requirements have been modified. Contingent consideration is nowadays accepted at fair value even in cases where it's not likely to pay at the acquisition date. All ensuing modification to liability contingent consideration is taken to the income statement, instead of goodwill account because it is perceived to be a debt acknowledged in the international accounting standard 32/39. If debts for superior performance by the results in the subsidiary cause expenditure in the income statement to increase and under-performance by the subsidiary against targets will lead to a cutback in the anticipated payment and will be accounted as a profit in the statement of income. These changes in contingent consideration were formerly taken in the goodwill account.
The standard no longer treats transaction costs as a component of the purchase cost; such overheads are expensed throughout the accounting period. Transaction costs are now considered not to constitute what is given to the party selling the entity. They aren't supposed to be taken as assets of the acquired entity which ought to be acknowledged on the purchase date. The standard stipulates that businesses should reveal the quantity of transaction expenses that have been paid.
IFRS 3 takes into consideration the treatment of employee share-based payments by including supplementary regulation on estimation, as well as how to come to a decision on whether share payments constitute part of the payment for future service reimbursement or business combination.
Non-controlling interests & Goodwill
IFRS3 provides businesses with an alternative, on an individual operation basis, to value minority interest or non controlling interest at fair value in relation to their share of particular liabilities and assets or at their fair value. The 2nd technique will consider goodwill relating to the non-controlling interest together with the controlling interest acquired while the 1st technique will lead to valuation of goodwill, which is essentially similar to the current IFRS
Measurement of goodwill can also be undertaken using the 'full goodwill' basis, in this method goodwill is measured for the minority interest/ non-controlling and also the controlling interest in a subsidiary.
In the preceding edition of IFRS 3, non controlling interest was valued at their proportion of net assets and excluded any goodwill. Under the Full goodwill method it means that minority interest (non controlling interest) together with goodwill is increased by the value of goodwill that pertains to minority interest.
Mercer has purchased a subsidiary company on 2 February 2008. The gross fair value of the assets in the subsidiary company is $2,170million. Mercer purchased 70 percent of the total shares of the subsidiary company for $2,145million. The minority interest was measured at $683million.
Goodwill recognized on the full and partial goodwill techniques under IFRS 3 would be computed as:
Mercer - partial goodwill method
Assets (net) -
(30percent of 2,170)
Consideration on acquisition
Full goodwill Method
Fair value of identifiable net assets
Assets taken over
Consideration on Purchase
Goodwill is in actual fact adjusted for the variation in the figure of the minority interest which factors in the goodwill belonging to the non controlling interest.
This preference of technique of accounting for non controlling interest only causes a disparity in acquisition figures where less than 100 percent of the entity obtained is bought. The full goodwill technique will cause an increase in net assets reported on the statement of financial position which means that any prospective goodwill impairment will be greater. While valuing non-controlling interest at reasonable cost may be complex, testing goodwill impairment may be less difficult in full goodwill, because there is no point of summing-up goodwill for subsidiary companies which are partially owned.
Fair measurement of liabilities and Assets
IFRS 3 has brought about some alterations to liabilities and assets documented in the statement of financial position. The present conditions to distinguish the net identifiable liabilities and assets of the entity being acquired are retained. Assets ought to be measured at fair value excluding some specific items for example pension liabilities and deferred tax. International accounting standard board has given supplementary regulations that are likely to lead to recognition of additional intangible assets. Purchasers are obliged to identify and record trade licenses, client relationships and brands, plus other assets classified as intangible.
There are minor alterations to existing regulation under IFRS in relation to contingencies.. Following the business combination date, conditional liabilities are re-valued at the initial figure and the quantity in current relevant standard whichever is higher. Contingent assets are not identified or recorded, and contingent liabilities are valued at fair cost.
Other Matters and Issues
IFRS 3 gives direction on some precise details of combinations of entities such as :
business combinations done with no reallocation of consideration
acquisitions done in reverse
identifying and recording assets which are intangible
the re-examination of the purchaser's contractual provisions at the date of acquisition
Holding Company's Disposal or Acquisition of extra shares in Subsidiary
Proportional sale or disposal of a subsidiary while still maintaining control.
. This is treated as an equity exchange with shareholders as well as loss or gain not recoded.
Proportional disposal of a subsidiary where control is lost.
Losing controlling power on re valuing of the remaining fair value held. Disparity between carrying value and fair value is treated as a loss or gain on the disposal, recorded in the income statement. Afterwards, using international accounting standard 28 and 31 is suitable, to the outstanding investment.
Purchase of extra shares after control of subsidiary was gained
This is treated as a transaction involving equity with shareholders (such as purchase of shares in the treasury. Goodwill is not revalued in such an event.
The purchaser must reveal all relevant financial information to users of its annual reports to assess the financial outcome of a business combination that happens throughout the present reporting phase or subsequent to the end of the phase but before the reports are approved for issue.
Disclosures necessary to meet the previous purpose are :
A depiction and also the name of the purchaser
Date of purchase
proportion of voting interests purchased
Principal s purpose of the business combination and a explanation of method used by the purchaser to acquire power over the seller
Account of the reasons that show goodwill recorded, for example probable synergies from combining activities, and non qualifying assets.
purchase-date fair cost of the combined consideration taken over and the purchase-date fair cost of every main category of consideration
Particulars of dependent consideration provisions as well as indemnification assets taken over.
Particulars of purchased receivables
the value for all key category of assets purchased and debts implicit
Particulars of contingent liabilities recorded.
Combined value of goodwill that is anticipated to be removed for purposes of tax.
Facts of all activities that take place individually from the purchase of assets and debts in business combination
Facts concerning negative goodwill.
In conclusion I believe that the speedy endorsement of IFRS 3 will end the doubt regarding the treatment of financial statements and reports. Hopefully the aims of the revised IFRS Board will be achieved and end the requirement for reconciliation between different accounting standards as well as end the conflicting use of the revised IFRS3 in the accounting profession . I look forward to the outcome caused by the implementation of the IFRS3 with interest!
Barry, J. Epstein (2009). Interpretation and Application of International Accounting and Financial Reporting Standards pp. (98-122).New York: Paperback press.
Abbas, A., & Graham, H. (2008) IFRS: Practical Implementation Guide and Workbook.(pp.540-578). Oxford: Oxford University Press
Irene, M. Wince, & Nicola, C. Young (2006), Understanding IFRS Fundamentals: International Financial Reporting Standards. Oregon: Paperback Publishers
B, J. Epstein (2009, April). IFRS Converges on Business Combinations. Retrieved from http://www.journalofaccountancy.com/Issues/2009/Apr/20081008.htm
Jesse, A. Challis (2008). IFRS3: Business Combinations. Retrieved from http://www.iasplus.com/standard/ifrs03.htm