IFRS 3, 10 AND IAS 28

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). And set out the requirements for recognition and
measurements of the acquired assets and liabilities, determination of goodwill and some
disclosures
Definitions
Business combination
A transaction or other event in which an acquirer obtains control of one or more businesses.
Transactions sometimes referred to as 'true mergers' or 'mergers of equals' are also business
combinations as that term is used in IFRS 3.
Business
An integrated set of activities and assets that is capable of being conducted and managed for the
purpose of providing a return in the form of dividends, lower costs or other economic benefits
directly to investors or other owners, members or participants.
Acquisition date
The date on which the acquirer obtains control of the acquiree.
Acquirer
The entity that obtains control of the acquiree.
Acquiree
The business or businesses that the acquirer obtains control of in a business combination.
Scope
IFRS 3 must be applied when accounting for business combinations, but does not apply to:
➢ Joint venture
➢ Non-business Group of assets
➢ Businesses under common control
➢ Investment entity
Determining whether a transaction is a business combination

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IFRS 3 provides additional guidance on determining whether a transaction meets the definition of
a business combination, and so accounted for in accordance with its requirements. This guidance
includes:
Consideration
Business combinations can occur in various ways, such as by transferring cash, incurring
liabilities, issuing equity instruments (or any combination thereof), or by not issuing consideration
at all (i.e., by contract alone).
Structures
Business combinations can be structured in various ways to satisfy legal, taxation or other
objectives, including one entity becoming a subsidiary of another, the transfer of net assets from
one entity to another or to a new entity.
Three essential elements
The business combination must involve the acquisition of a business, which generally has three
elements:
➢ Inputs – an economic resource (e.g., non-current assets, intellectual property) that creates
outputs when one or more processes are applied to it
➢ Process – a system, standard, protocol, convention or rule that when applied to an input or
inputs, creates outputs (e.g., strategic management, operational processes, resource
management)
➢ Output – the result of inputs and processes applied to those inputs.

Acquisition method
The acquisition method (also called 'purchase method') is used for all business combinations.
➢ Step 1 Identification of the 'acquirer'
➢ Step 2 Determination of the 'acquisition date'
➢ Step 3 Recognition and measurement of the identifiable assets acquired, the liabilities and
any non-controlling interest (also called minority interest) in the acquiree
➢ Step 4 Recognition and measurement of goodwill or a gain from a bargain purchase

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Accounting for goodwill
As per business combination goodwill occurs due to the difference between total consideration
and value of net asset at acquisition date.
Types of goodwill
➢ Positive goodwill occurs when consideration exceeds value of net assets at acquisition
➢ Negative goodwill occurs when value of net assets at acquisition exceeds consideration
➢ Nill goodwill occurs when consideration equals value of net assets at acquisition
Goodwill determination
Partial goodwill
Requirement is usually stated as: “it is group policy to value the NCI at proportion of net assets
method”.
Price consideration xxx
TOTAL CONSIDERATION XXX
Less: Value of net assets at acquisition (XXX)
GOODWILL XXX

Full goodwill
Requirement is usually stated as “it is group policy to value the NCI at its fair value at the date of
acquisition”.
Price consideration xxx
Add: Fair value of non-controlling interest at acquisition xxx
TOTAL CONSIDERATION XXX
Less: Value of net assets at acquisition (XXX)
GOODWILL XXX

Considerations
➢ Cash
➢ Deferred
➢ Exchange
➢ Contingent

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Fair value of non-controlling interest at acquisition

This is determined when the market price of subsidiary shares is given

Subsidiary outstanding shares X non-controlling interest% X market price of subsidiary shares

Net asset valuation
At acquisition At reporting
Share capital xxx xxx
Share premium xx xx
Other reserves xx xx
Retained earnings xx xx
+- Fair value adjustment effect xx/(xx) xx/(xx)

PURP Inventory (if subsidiary is seller) - (xx)

PURP NCA (if subsidiary is seller) - (xx)

Impairment of goodwill (in case of full goodwill) - (xx)
TOTAL XXX XXX
The difference of the two is post profit

Example
Parent pays $100m for 80% of Subsidiary which has net assets with a fair value of $75m. The
directors of Parent have determined the fair value of the NCI at the date of acquisition was $25m.
Req
Calculate goodwill by two methods

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IAS 28 INVESTMENT IN ASSOCIATES AND JOINT VENTURES
Associate
Refers to an entity over which investor has significant influence.
Significant Influence
Refers to the power to participate in the financial and operating policy decisions of the investee
but is not control or joint control over those policies.
Joint venture
Refers to a form of joint arrangement where the parties have joint control of the arrangement and
have rights to the net assets of the arrangement. This will normally be established in the form of a
separate entity to conduct the joint venture activities.
Joint control
Refers to the contractually agreed sharing of control of an arrangement, which exists only when
decisions about the relevant activities require the unanimous consent of the parties sharing control.
Significant influence
Holding 20% to 50% of the equity of another entity therefore means as a general rule that
significant influence exists, but not control; therefore, the investment is treated as an associate,
provided that it is not a joint venture.

Method of accounting
Associates and joint ventures are not consolidated rather they are accounted for under the equity
method. The equity method is a method of accounting whereby the investment is initially
recognized at cost and adjusted thereafter for the post-acquisition change in the investor’s share of
the investee’s net assets. The investor’s profit or loss includes its share of the investee’s profit or
loss and the investor’s other comprehensive income includes its share of the investee’s other
comprehensive income.

Consideration xxx

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Post profit xxx
Impairment (xx)
Dividend (expense)/ income (xx) xx
Unrealized profit (xx) Xxx
Investment in associate XXX

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IFRS 10 CONSOLIDATED FINANCIAL STATEMENTS
Objective
The standard prescribes the principle of preparation and presentation of consolidated financial
statements when an entity controls one or more other entities
Defined terms
Consolidated financial statements
The financial statements of a group in which the assets, liabilities, equity, income, expenses and
cash flows of the parent and its subsidiaries are presented as those of a single economic entity.
Control of an investee
An investor controls an investee when the investor is exposed, or has rights, to variable returns
from its involvement with the investee and has the ability to affect those returns through its power
over the investee.
Investment entity
An entity that:
(a) obtains funds from one or more investors for the purpose of providing those investor(s) with
investment management services
(b) commits to its investor(s) that its business purpose is to invest funds solely for returns from
capital appreciation, investment income, or both, and
(c) measures and evaluates the performance of substantially all of its investments on a fair value
basis.
Parent
An entity that controls one or more entities.
Power
Existing rights that give the current ability to direct the relevant activities.
Protective rights
Rights designed to protect the interest of the party holding those rights without giving that party
power over the entity to which those rights relate.
Relevant activities
Activities of the investee that significantly affect the investee's returns

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Control
Determining control
An investor determines whether it is a parent by assessing whether it controls one or more
investees. An investor considers all relevant facts and circumstances when assessing whether it
controls an investee. An investor controls an investee when it is exposed, or has rights, to variable
returns from its involvement with the investee and has the ability to affect those returns through
its power over the investee.
Elements of Control
An investor controls an investee if and only if the investor has all of the following elements:
➢ 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 investee's returns);
➢ exposure, or rights, to variable returns from its involvement with the investee;
➢ the ability to use its power over the investee to affect the amount of the investor's returns.
Power arises from rights
Such rights can be straightforward (e.g. through voting rights) or be complex (e.g. embedded in
contractual arrangements). An investor that holds only protective rights cannot have power over
an investee and so cannot control an investee.
Exposure to variable returns
An investor must be exposed, or have rights, to variable returns from its involvement with an
investee to control the investee. Such returns must have the potential to vary as a result of the
investee's performance and can be positive, negative, or both.
Ability to use power
A parent must not only have power over an investee and exposure or rights to variable returns from
its involvement with the investee, a parent must also have the ability to use its power over the
investee to affect its returns from its involvement with the investee.
Determining status as principal or agent
When assessing whether an investor controls an investee an investor with decision-making rights
determines whether it acts as principal or as an agent of other parties. A number of factors are
considered in making this assessment. For instance, the remuneration of the decision-maker is
considered in determining whether it is an agent.

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Exemption Criteria
However, a parent need not present consolidated financial statements if it meets all of the following
conditions:
➢ it is a wholly-owned subsidiary or is a partially-owned subsidiary of another entity and its
other owners, including those not otherwise entitled to vote, have been informed about,
and do not object to, the parent not presenting consolidated financial statements
➢ its debt or equity instruments are not traded in a public market (a domestic or foreign stock
exchange or an over-the-counter market, including local and regional markets)
➢ it did not file, nor is it in the process of filing, its financial statements with a securities
commission or other regulatory organization for the purpose of issuing any class of
instruments in a public market, and
➢ its ultimate or any intermediate parent of the parent produces financial statements available
for public use that comply with IFRSs, in which subsidiaries are consolidated or are
measured at fair value through profit or loss in accordance with IFRS 10.

Consolidation procedures
➢ Determination of acquisition date and reporting date together with group structure (attend
class)
➢ Determination of goodwill
➢ Eliminate inter group transactions

MORE TO BE DISCUSSED IN CLASS, WELCOME

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