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Group accounts · IFRS 3

IFRS 3 Business Combinations

Summary, key points, exam traps and a worked example — written for ICAP, ACCA, ICAI, CIMA and ICAEW students.

On this page
  1. Objective
  2. Scope
  3. Key definitions
  4. Recognition & measurement
  5. Key disclosures
  6. Common exam traps
  7. Worked example
  8. Related standards
  9. Practise MCQs

Objective

Sets out how an acquirer recognises and measures the assets acquired, liabilities assumed, any non-controlling interest and goodwill in a business combination.

Scope

  • Transactions where an acquirer obtains control of one or more businesses.
  • Excludes formation of a joint arrangement in its own financial statements, acquisitions of assets that are not a business, and combinations of entities under common control.

Key definitions

Business
An integrated set of activities and assets that includes, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. An optional 'concentration test' can show that an acquisition is of assets rather than a business.
Acquisition date
The date the acquirer obtains control.
Goodwill
An asset representing future economic benefits from assets that are not individually identified and separately recognised.
Non-controlling interest (NCI)
Equity in a subsidiary not attributable, directly or indirectly, to the parent.

Recognition & measurement

Acquisition method

  • Identify the acquirer and the acquisition date.
  • Recognise identifiable assets and liabilities at acquisition-date fair value, including intangibles the acquiree never recognised.
  • Specific exceptions apply, e.g. deferred tax (IAS 12), employee benefits (IAS 19), share-based payments (IFRS 2) and assets held for sale (IFRS 5).
  • A contingent liability of the acquiree is recognised if it is a present obligation and its fair value is reliable, even if an outflow is not probable.
  • Do not recognise provisions for the acquirer's planned restructuring or future losses of the acquiree.

Consideration, NCI and goodwill

  • Consideration is measured at fair value, including contingent consideration (at acquisition-date fair value).
  • Acquisition-related costs (legal, due diligence) are expensed; costs of issuing debt or equity follow IFRS 9 / IAS 32.
  • NCI may be measured at fair value (full goodwill) or at its proportionate share of identifiable net assets, chosen per acquisition.
  • Goodwill = consideration + NCI + fair value of any previously held interest − fair value of identifiable net assets.
  • A negative result (bargain purchase) is reassessed and, if confirmed, recognised as a gain in profit or loss.
  • In a step acquisition, the previously held interest is remeasured to fair value with the gain or loss in profit or loss.
  • Provisional amounts can be adjusted for new information about acquisition-date facts during a measurement period of up to one year.
  • Later changes in contingent consideration (outside the measurement period): equity-classified is not remeasured; others are remeasured at fair value through profit or loss.

Key disclosures

  • Name and description of the acquiree, acquisition date, percentage acquired and reasons for the combination.
  • Fair value of consideration and its components, amounts recognised for each major class of assets and liabilities.
  • Qualitative factors behind goodwill, and the NCI measurement basis.
  • Revenue and profit of the acquiree since acquisition, and for the combined entity as if acquired at the start of the year.

Common exam traps

  • Acquisition costs are expensed, not added to goodwill.
  • Goodwill is not amortised; it is tested for impairment annually under IAS 36.
  • Post-acquisition changes in contingent consideration due to events after acquisition do not adjust goodwill.
  • Bargain purchase gains go to profit or loss immediately — after reassessment.

Worked example: Goodwill on acquisition

Scenario. P acquires 80% of S for $800,000 cash. The fair value of S's identifiable net assets is $900,000. The fair value of the 20% NCI is $190,000.

  1. Full goodwill (NCI at fair value): 800,000 + 190,000 − 900,000 = $90,000.
  2. Partial goodwill (NCI at share of net assets): NCI = 20% × 900,000 = 180,000; goodwill = 800,000 + 180,000 − 900,000 = $80,000.

Answer: Goodwill is $90,000 under the fair value method or $80,000 under the proportionate method.

Practise MCQs on this standard

Test your understanding of IFRS 3 with free chapter-wise MCQs and explanations in these question banks.

CAF-6 Corporate ReportingICAP CAFACCA FR Financial ReportingACCACA Inter P1 Advanced AccountingICAI CA Intermediate

ICAI CA Intermediate examines Indian Accounting Standards, which are based on but can differ from IFRS. Check your syllabus.

Read the official IFRS 3 text on ifrs.org