IFRS 3 – Business Combinations

Acquirer is the party that obtained control, which is the power to govern the
financial and operating policies of an entity/business to obtain benefits from its
activities.
The parties that presumed to have obtained control over the others when it
acquired more than one-half of the other entity’s voting right.

An entity may hold less than one-half of the voting rights but obtains control
when it has the:
1. Power over more than one-half of the voting power by virtue of an
agreement with other investor.
2. Power to govern the financial and operating policies of the enterprise under
a statute/an agreement.
3. Power to appoint/remove the majority of the members of the BOD or
equivalent governing body of the other entity.
4. Power to cast the majority of votes at meeting of BOD or equivalent
governing body of the other entity.

If difficult to identify the acquirer, the following indications will help to identify the
acquirer:
1. FV of one of the combining entities is significantly greater than that of the
other combining entity, the larger entity is the ecquirer.
2. The entity giving the purchase consideration.
3. The acquirer is likely to be the one whose management is able to dominate
the selection of the management team of the combined entity.

Different between IFRS 3 and IFRS 10

-Both standards deal with business combinations and their financial
statements
-But while IFRS 10 defines a control and prescribes specific consolidation
procedures, IFRS 3 is more about the measurement of the items in the
 consolidated financial statements, such as goodwill, non-controlling
interest, etc.

IFRS 10 – Consolidated Financial Statements

Outlines the requirements for the preparation and presentation of consolidated
financial statements, requiring entities to consolidate entities it controls. Control
requires exposure or rights to variable returns and the ability to affect those
returns through power over an investee.
More specifically, IFRS 10:
(a) Requires an entity (a parent) that controls one or more other entities
(subsidiaries) to present consolidated financial statements.
(b) Defines the principle of control as the basis for consolidation and sets out how
to identify whether the investor controls the investee.
(c) Sets out the accounting requirements for the preparation of consolidated
financial statements, and
(d) Defines an investment entity and sets out an exception to consolidating
subsidiaries of an investment entity.

An investor controls an investee if and only if the investor has all of the following
elements:
1. power over the investee, i.e., the investor has existing rights that give it the
ability to direct the relevant activities (the activities that significantly affect
the investor’s returns)
2. exposure, or rights, to variable returns from its involvement with the
investee.
3. the ability to use its power over the investee to affect the amount of the
investor’s returns.

Control
-power over direct relevant activities
Example of power:
Voting rights
Rights to appoint, reassign/ remove key management personnel
Decision making rights stipulated in a management contract
Example of relevant activities:
Selling and purchasing good and service
Selecting, acquiring, disposing of assets
Researching and developing new product
Determining funding decision

-Exposure/Rights to variable return

Example of variable return:
Dividend
Interest from debt
Changes in value of investment

-Ability to use power to affect the amount of return

An investor (the parent) can have the current ability to direct the activities of an
investee (the potential subsidiary) even if it does not actively direct the activities
of the investee.