Acquisitions and mergers
Acquisitions and mergers are becoming more and more common as entities aim to achieve their growth objectives. IFRS 3 ‘Business Combinations’ contains the requirements for these transactions, which are challenging in practice.
This narrative sets out how an entity should determine if the transaction is a business combination, and whether it is within the scope of IFRS 3.
Identifying a business combination
IFRS 3 refers to a ‘business combination’ rather than more commonly used phrases such as takeover, acquisition or 
merger because the objective is to encompass all the transactions in which an acquirer obtains control over an acquiree no matter how the transaction is structured. A business combination is defined as a transaction or other event in which an acquirer (an investor entity) obtains control of one or more businesses.
An entity’s purchase of a controlling interest in another unrelated operating entity will usually be a business combination (see case below).
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Case – Straightforward business combination |
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Entity T is a clothing manufacturer and has traded for a number of years. Entity T is deemed to be a business. On 1 January 2020, Entity A pays CU 2,000 to acquire 100% of the ordinary voting shares of Entity T. No other type of shares has been issued by Entity T. On the same day, the three main executive directors of Entity A take on the same roles in Entity T. Consider this….. Entity A obtains control on 1 January 2020 by acquiring 100% of the voting rights. As Entity T is a business, this is a business combination in accordance with IFRS 3. |
However, a business combination may be structured, and an entity may obtain control of that structure, in a variety of ways.