IFRS 3 Business Combinations

The objective of this IFRS is to improve the relevance, reliability and comparability of the information that a reporting entity provides in its financial statements about a business combination and its effects.

The Acquisition Method illustrated

The short case:

The company A Corp is purchasing all shares in B Corp. Control is acquired by A Corp, B Corp disappears from the economic entity, and B or B’s shareholders receive either A Corp stock or other property. This will result in a business combination which means A Corp’s acquisition of control over the business of B Corp.

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Application of the definition of a business

The following examples illustrate the application of the concentration test and the evaluation of whether a set is a business.

 

Example: Life sciences


Pharma Co. purchases a legal entity that holds a Phase 3 compound (i.e., a compound in the clinical research phase) developed to treat diabetes, a Phase 3 compound to treat Alzheimer’s disease and the related at-market CRO and CMO contracts for each compound. Included with each project are the historical know-how, formula protocols, designs and procedures expected to be needed to complete the related phase of testing. No employees, other assets or other activities are transferred. Assume both Phase 3 compounds have equal fair value.

Application of the concentration test

Pharma Co. concludes that, … Read more

Acquired process is substantive?

IFRS 3 requires a business to include, as a minimum, an input and a substantive process that together significantly contribute to the ability to create output. Because all asset acquisitions include inputs, the existence of a substantive process is what distinguishes an asset or group of assets from a business. Entities can no longer presume that a set contains a process if the set generates revenues before and after the transaction. Further analysis is required to determine whether the set contains a substantive process.

Implementation of IFRS 3 revealed difficulties in assessing whether the acquired processes are sufficient to constitute one of the elements of a business; whether any missing processes are so significant that an acquired set of Read more

Redefinition of a business

In summary:

  • The IASB issued narrow-scope amendments to IFRS 3 to help entities determine whether an acquired set of activities and assets is a business or not.
  • The amendments clarify the minimum requirements to be a business, remove the assessment of a market participant’s ability to replace missing elements, and narrow the definition of outputs.
  • The amendments add guidance to assess whether an acquired process is substantive and add illustrative examples.
  • The amendments introduce an optional concentration test to permit a simplified assessment.
  • The amendments are effective for annual reporting periods beginning on or after 1 January 2020 and apply prospectively. Earlier application is permitted.

Introduction

IFRS 3 continues to adopt a market participant’s perspective … Read more

Overview of the amendments IFRS 3

In May 2019 amendments to IFRS 3 Business Combinations were published by IASB. See the introduction in Redefinition of a business.

IFRS 3 continues to adopt a market participant’s perspective to determine whether an acquired set of activities and assets is a business. The amendments: clarify the minimum requirements for a business; remove the assessment of whether market participants are capable of replacing any missing elements; add guidance to help entities assess whether an acquired process is substantive; narrow the definitions of a business and of outputs; and introduce an optional fair value concentration test.

Minimum requirements to be a business

In the IASB’s view, the existence of a process (or processes) is what distinguishes a … Read more

New on IFRS 3 The Optional concentration test

Whilst applying the definition of a business might involve significant judgement, there was little or no guidance to identify situations where an acquired set of activities and assets is not a business. To address those concerns, the IASB introduced an optional fair value concentration test. The purpose of this test is to permit a simplified assessment of whether an acquired set of activities and assets is not a business. Important – Entities may elect whether or not to apply the concentration test on a transaction-by-transaction basis. AND once starting the optional concentration tests an entity can always back off!

The concentration test is met if substantially all of the fair value of the gross assets acquired is concentrated in … Read more

Accounting treatment acquisition of a business or asset(s)

An entity has to determine whether a transaction or other event is a business combination, which requires that the assets acquired and liabilities assumed constitute a business. If the assets acquired are not a business, the reporting entity shall account for the transaction or other event as an asset acquisition.

Whether the simplified (optional) concentration tests is applied or a detailed assessment applying the normal requirements in IFRS 3 is applied, in IFRS 3 (simplified in May 2019) the result of the assessment of what was acquired is the acquirer obtained control over a business (business combination or business acquisition) or a (group of similar) identifiable asset(s) (asset acquisition).

Major differences between the accounting requirements for Read more

Identify a business

An entity shall determine whether a transaction or other event is a business combination by applying the definition in IFRS 3, which requires that the assets acquired and liabilities assumed constitute a business. If the assets acquired are not a business, the reporting entity shall account for the transaction or other event as an asset acquisitionSee also the accounting treatment acquisition of a business or asset(s) 

Guidance on identifying a business combination and the definition of a business are as follows:

The definition of a 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 … Read more

IFRS 3 Business combinations

IFRS 3 Business Combinations outlines the accounting when an acquirer obtains control of a business (e.g. an acquisition or merger). Such business combinations are accounted for using the ‘acquisition method’, which generally requires assets acquired and liabilities assumed to be measured at their fair values at the acquisition date.

A revised version of IFRS 3 was issued in January 2008 and applies to business combinations occurring in an entity’s first annual period beginning on or after 1 July 2009.

Introduction
IDENTIFYING A BUSINESS COMBINATION
THE ACQUISITION METHOD

The acquisition method
Exceptions to IFRS principles in the acquisition method
The Acquisition Method illustrated
Guidance in identifying the acquirer

Related topics (IFRS 13)

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Valuation of Intangibles on Acquisition

THE CASE: Shockwave Corporation

  • Shockwave Corporation is the largest satellite radio provider in the country. Shockwave commenced operations five years ago when the government granted satellite spectrum licenses to four start-ups seeking to cultivate a then-burgeoning industry. Since that time, precipitated by the accelerating wireless data needs of telecommunication industry technology, the government has stated that it will not be licensing any new spectrum for satellite radio but may approve the sale or transfer of existing spectrum.
  • Shockwave generates its revenue from monthly subscriptions to consumers sourced via a direct retail sales channel (i.e. direct mail, print and television advertisements, billboards, and retail in-store kiosks).
  • Shockwave does not manufacture the satellite radio receivers used by consumers but transmits signals that
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