Accounting for Business Combinations under IFRS 3
If you’re familiar with GAAP Dynamics, you know I love to talk about business combinations. But this post is a bit different for me because this post covers the accounting for business combinations under IFRS. I typically cover ASC 805; however, I wanted to show some love to the requirements of IFRS 3.
Before I get into specifics, I wanted to remind you that as part of our IFRS eLearning library we’ve put together a course collection (eligible for 2.0 hours of CPE) on IFRS 3, Business Combinations. If you’re looking for U.S. GAAP rules, we also have a 3-part course collection on ASC 805 (worth 3.0 CPE credits).
Let’s dissect IFRS 3, which we’ve summarized based on our courses available.
Business combinations: Key concepts of IFRS 3
Under IFRS 3, a business combination is a transaction or other event in which an acquirer obtains control of one or more businesses. IFRS 3 requires the application of the acquisition method when accounting for all business combinations. The application method can be separated into four steps:
- Identify the acquirer
- Determine the acquisition date
- Recognize and measure the identifiable assets acquired, the liabilities assumed, and any noncontrolling interests in the acquiree
- Recognize and measure goodwill or a gain from a bargain purchase
Does this sound familiar? ASC 805, which governs business combinations under U.S. GAAP, requires the use of the same method when accounting for a business combination. And this is one of the main reasons why I love IFRS 3; it is mostly converged with ASC 805!
I say “mostly” because there are a few differences between the two Standards. Here are a few of the differences as it relates to the content we cover in our first IFRS 3 course:
- Scope: There are generally no scope exceptions for not-for-profit entities in IFRS 3 (not-for-profits are scoped out of ASC 805)
- Identifying a business: IFRS 3 provides a two-part framework to help determine whether an acquired integrated set meets the definition of a business (this is similar to ASC 805); however, under IFRS 3, the first part of the framework to identify the concentration of the fair value of what was acquired is OPTIONAL (this is known as the concentration test). Under ASC 805, both parts of the framework must be performed to identify whether an acquired set meets the definition of a business.
- Acquirer: IFRS 10, which provides guidance on control, is used to identify the acquirer under IFRS 3. IFRS 3 has no guidance on identifying primary beneficiaries because there is no consolidation guidance like there is in U.S. GAAP (which is used to identify an acquirer in ASC 805).
Business combinations: Application of the acquisition method and other considerations under IFRS 3
In our second course on IFRS 3, we discuss Steps 3 and 4 of the acquisition method, which includes exceptions to general principles, calculating goodwill, measurement of noncontrolling interests, step acquisitions, and measurement period adjustments.
As you can guess, we see a few more differences between the Standards in these areas and here are a few of my favorites:
- Leases: Under IFRS 3, the acquirer must consider the lease term when measuring the acquisition-date fair value for operating leases for which the acquiree is a lessor (but it does not require the acquirer of an operating lease for which the acquiree is a lessor to recognize a separate asset (liability) based on the lease term as compared to market terms as required in ASC 805).
- Noncontrolling interest: ASC 805 requires noncontrolling interest in the acquiree to be measured at fair value, but under IFRS 3, the acquirer can elect to measure fair value interest in one of two ways (either at fair value, similar to ASC 805, or at its proportionate interest in the fair value of the identifiable assets and liabilities of the acquiree).
Final thoughts
Accounting for business combinations can be challenging and subjective; therefore, it’s important to understand the accounting requirements (whether under ASC 805 or IFRS 3). There are a few more differences between the standards that I didn’t mention above, but you can read about those in our Business Combinations topic page, which provides all sorts of resources and guidance on accounting for business combinations!
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Disclaimer
This post is for informational purposes only and should not be relied upon as official accounting guidance. While we’ve ensured accuracy as of the publishing date, standards evolve. Please consult a professional for specific advice.
