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BUSINESS COMBINATIONS (IFRS 3)
1.
BACKGROUND AND INTRODUCTION
The International Financial Reporting Standards (lFRS) assume that an acquirer can be determined
and identified in nearly all business combinations. IFRS 3 applies to all business combinations ex–
cept combinations of entities under common control, combinations of mutual entities, combinations
by contract without exchange of any ownership interest, and any joi nt venture operations.
2. DEFINITIONS OF KEY TERMS
Business combination. Occurs where several entities are brought together to form a single
reporting entity.
Purchase method. Looks at the business combination from the perspective of the acquiring
company. It measures the cost of the acquisition and allocates the cost of the acquisition to the
net assets acquired.
Control. The power to govern the financial and operating policies of an entity so as to obtain
benefits from its activities.
2.1 Business Combination
If a business combination involves the purchase of net assets, including goodwill of another entity,
rather than the purchase of the equity of the other entity, this does not result in a parent/subsidiary
relationship. All business combinations within the scope of IFRS 3 have to be accounted by for
using the purchase method. The pooling method of accounting for business combinations is no
longer acceptable, and an acquirer must be identified for all business combinations.
2.2 Purchase Method
Net assets acquired and contingent liabilities assumed are measured from the viewpoint of the ac–
quirer. The measurement of the acquirer's net assets is not affected by the acquisition nor are any
additional assets or liabilities of the acquirer recognized because of it. The reason for this is that
these net assets have not been the subject of a transaction. An acquirer must be identified for all
business combinations. The acquirer is the entity that obtains control of the other combining enti-
ties and businesses.
.
2.3 Control
There is a presumption that control is obtained when an entity acquires more than half of the other
entity' s voting rights unless it can be shown otherwise.
It
is possible not to hold more than half of
the voting rights of the other entity and still obtain control of that entity where
• An entity has power over more than half of the voting rights because of an agreement with
other investors;
or
• It has power to control the financial and operating policies of another entity because of a law
or an agreement;
or
• It has the power to appoint or remove the majority of the board of directors;
or
• It
has the power to cast the majority of votes at board meetings or equivalent bodies within
the entity.
Facts
A, a public limited company, owns 50% of B and 49% of C. There is an agreement with the shareholders
of C that the group
will
control the board of directors.