High level overview IFRS 3 Business Combinations


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ScopeHigh level overview IFRS 3 Business Combinations

IFRS 3 does not apply to:

  • The accounting for the formation of a joint arrangement in the financial statements of the joint arrangement itself.
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    5 Comprehensive cash flow accounting events

    Here are 5 Comprehensive cash flow accounting events with special presentation and/or disclosure requirements under IAS 7. They are:

    1 IFRS 9 Classification of cash flows arising from a derivative used in an economic hedge

    Consequential amendments were not made to IAS 7 as a result of the introduction of, and subsequent changes to, IFRS 9 Financial Instruments.

    A related issue which often arises in practice is the classification of cash flows that arise from a derivative that, although used economically to hedge exposures, is not designated in an IFRS 9 qualifying hedge relationship. The same issue arises under IAS 39, for those insurers that meet the criteria for, and have chosen to apply, the temporary exemption from the application … Read more

    IAS 32 Clearly distinguishing liability and equity

    IAS 32 Clearly distinguishing liability and equity – When an entity issues a financial instrument, it must determine its classification either as a liability (debt) or as equity. That determination has an immediate and significant effect on the entity’s reported results and financial position. Liability classification affects an entity’s gearing ratios and typically results in any payments being treated as interest and charged to earnings.

    Equity classification avoids these impacts but may be perceived negatively by investors if it is seen as diluting their existing equity interests. Understanding the classification process and its effects is therefore a critical issue for management and must be kept in mind when evaluating alternative financing options.

    IAS 32 Financial Instruments: Presentation addresses this classification … Read more

    The measurement period in business combinations – the best 1 year window to complete

    The measurement period in business combinations explains the one year window allowed in properly accounting for business combinations or as they have been called in the past acquisitions/M&A etc.

    The accounting for a business combination requires substantial effort and resources. The initial accounting often is incomplete at the end of the reporting period in which the business combination happens. This is because the acquirer has been unable to obtain all pertinent information necessary to evaluate the conditions that existed as of the acquisition date. As a result, the acquirer may have to record provisional amounts for certain assets or liabilities — for instance, independent valuations for intangible assets may not yet be finalised.The measurement period in business combinations

    The measurement period in business combinations

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    Financing activities

    Financing activities - Activities that result in changes in the size and composition of the contributed capital and borrowings of the entity.

    Fair value through profit or loss

    Financial assets measured at fair value through profit or loss 2. This is part of the classification of financial assets, representing the remaining or designated class of financial assets.

    IFRS 3 Fair value of contingent consideration

    IFRS 3 Fair value of contingent consideration – Contingent consideration often involves the buyer transferring additional consideration to the seller if certain performance targets are met in the future. This allows the buyer to share the risk associated with the future of the business with the seller by making some of the consideration contingent on future performance. What factors should be considered in determining the fair value of this type of arrangement? IFRS 3 Fair value of contingent consideration

    Valuation methods for contingent consideration range from discounted cash flow analyses to more complex Monte Carlo simulations. The terms of the arrangement and the payout structure will influence the type of valuation model the acquirer uses. IFRS 3 Fair value of Read more

    IFRS vs US GAAP Business combinations

    IFRS vs US GAAP Business combinations – IFRS and US GAAP are largely converged in this area. The business combinations standards under US GAAP and IFRS are close in principles and language. However, some differences remain between US GAAP and IFRS pertaining to (1) the definition of control, (2) recognition of certain assets and liabilities based on the reliably measurable criterion, (3) accounting for contingencies, and (4) accounting for non-controlling interests. Significant differences also continue to exist in subsequent accounting. Different requirements for impairment testing and accounting for deferred taxes (e.g., the recognition of a valuation allowance) are among the most significant.

    New definitions of a business were also issued under both US GAAP and IFRS. While the new … Read more

    Equity instrument

    An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities, also called shares