The IASB revised IFRS3, Business Combinations and amended IAS27, Consolidated and Separate Financial Statements in January 2008

IFRS 3 Business Combinations - OLD vs NEW

as part of the second phase of the joint effort by the IASB and the FASB to improve financial reporting while promoting the international convergence of accounting standards.

The amendments provide guidance for the application of the acquisition method, allow for non-controlling interest in an acquiree to be measured at fair value and provide principles for the measurement of goodwill acquired. The revised or amended standards are applicable for years ending on or after 30 June 2010, and earlier application is permitted.
The revised IFRS3 sets out the following five-pronged approach to applying the acquisition method, namely: see diagram 1 below.

Diagram 1


The revised IFRS3 places increased emphasis on measuring the various elements of the acquisition at fair value at the acquisition date. This is evident in:

  • the requirement to measure the net assets of the acquiree at their acquisition-date fair values;
  • the option to measure the non-controlling interest at fair value at the acquisition date;
  • measuring the consideration transferred at fair value; and
  • measuring the interest in the subsidiary already held by the parent, i.e. prior to obtaining control at fair value (rather than at cost as was the requirement in the 2004 IFRS3) on the date that control is obtained.

This article aims to highlight the changes in the accounting treatment of business combinations that have arisen as a result of the revised IFRS3, focusing on the accounting principles surrounding the recognition and measurement of the identifiable net assets of the acquiree and any non-controlling interest in the acquiree; and the implications for calculating and measuring goodwill (at acquisition and subsequent thereto).

1. Non-controlling interest
Non-controlling interest is defined as the “equity in a subsidiary which is not attributable, directly or indirectly, to a parent” (the 2004 versions of IFRS3 and IAS27 refer to this as a minority interest).

Previously, IFRS required this interest to be measured at the acquisition date, at its proportionate share of the fair value of the net assets of the acquiree. The revised IFRS3 gives the acquirer a choice in terms of measuring the non-controlling interest in the acquiree at the acquisition date, with the impact of the choice affecting the measurement of goodwill. The acquirer can either measure the non-controlling interest at fair value (being the market price of the shares not held by the acquirer where the shares are listed, or using a valuation model) or at the non-controlling interest's proportionate share of the acquiree's identifiable net assets.

This choice is not a policy decision; the acquirer can choose which measurement principle to apply on an investment-by-investment basis. The introduction of a choice such as this could be problematic, as it appears to contradict the IASB's decision a few years back to eliminate options in order to improve comparability.

2. Recognising and measuring the identifiable assets acquired and liabilities assumed
The 2004 version of IFRS3 requires the acquirer, at the acquisition date, to recognise separately from goodwill:

  • any asset (other than an intangible asset), if it was probable that the future economic benefits would flow to the acquirer, and its fair value could be measured reliably;
  • any liability (other than a contingent liability) if it was probable that an outflow of future economic benefits was probable, and its fair value could be measured reliably; and
  • in the case of an intangible asset or contingent liability, if its fair value could be measured reliably.

The standard requires the identifiable assets, liabilities and contingent liabilities that met these recognition criteria to be measured at their respective fair values at the acquisition date. The one exception was non-current assets (or disposal groups) that are classified as held for sale in terms of IFRS5, Non-current assets held for sale and discontinued operations, which were measured at fair value less cost to sell (as noted below, this remains an exception in the revised IFRS3).

The revised IRFS3 reinforces these principles by establishing general recognition and measurement principles. The standard, however, also introduces exceptions to the recognition or measurement principle or both. The accounting treatment in the revised IFRS is summarised in

Diagram 2

The revised standard also provides guidance on the classification and designation of identifiable assets acquired and liabilities assumed in a business combination. The general principle is that the classification and designation is based on conditions that exist at the acquisition date, with the exception of the classification of leasing arrangements and the classification of a contract as an insurance contract. In both these instances, the acquirer classifies the related contracts based on conditions that existed at the inception of the contract (or the modification date if the terms of the contract have been modified in a way that alters the classification of the contract subsequently).

Finalisation of acquisition date fair values – "the measurement period"
As is the case with the 2004 version of IFRS3, the revised version acknowledges that it is not always practical to finalise, at the acquisition date, the fair values of the identifiable net assets of the acquiree. The initial accounting for a business combination requires a determination of the fair values to be used in relation to the assets, liabilities and contingent liabilities acquired, as well as of the consideration transferred and the measurement of a non-controlling interest.

The period in which the initial accounting is finalised is known as the measurement period, which ends on the earlier of the date on which the outstanding information relating to the acquisition is received and 12 months after the acquisition date. The 2004 version of IFRS3 included an exception to the 12-month rule relating to recognising deferred tax assets, which existed at the acquisition date, but which could not be recognised. No such exception applies in the revised IFRS3.

As is the case with the 2004 version of IFRS3, measurement period adjustments are recognised as if the accounting for the business combination had been completed at the acquisition date. Therefore, if the  previous reporting date falls between the acquisition date and the end of the measurement period, comparative information for the previous reporting period is restated as applicable.

Once the measurement period has elapsed, any changes to the accounting for a business combination, and consequently the goodwill arising at acquisition, should be made only to correct an error, and must be accounted for in accordance with IAS8, Accounting Policies, Changes in Accounting Estimates, and Errors.

3. Consideration transferred
As with the 2004 version of IFRS3, the revised version requires the acquirer to determine the cost of acquisition with reference to fair values of assets transferred and liabilities assumed and equity instruments issued by the acquirer. However, there are differences in determining the cost of acquisition between the two versions, the most significant of which relate to the treatment of acquisition-related costs and contingent considerations.

  • Acquisition-related costs
    In terms of the 2004 version of IFRS3, those costs directly attributable to the business combination (such as advisory and legal fees) were included