Introduction to Business Combinations under IFRS 3

What is a Business Combination?

A Business Combination is a “transaction or other event in which an acquirer obtains control of one or more businesses”. IFRS 3 Business Combinations states how an acquirer should recognise and measure the acquisition of another business, and the recognition and measurement of any goodwill.

Examples of business combinations include:

  • Buying shares
  • Buying assets
  • Legal mergers of two previously unrelated
  • Reverse acquisitions, and
  • Establishment of a new entity to control the combined entities

The following aren’t business combinations:

  • Joint ventures
  • Entities under common control
  • The acquisition of assets or a group of assets which is not a business. This is just a standard asset acquisition

Business combinations may be effected by the:

  • Transfer of cash
  • Transfer of shares (equity instruments)
  • Transfer of assets, or
  • A combination of the above

What is Control?

Before the introduction of IFRS 10 Consolidated Financial Statements, control was assumed once an acquirer held more than 50% of the shares in the acquiree. Now under IFRS 10, we must take a look at whether or not the acquirer could control the business of an acquiree even if it doesn’t own the full 50% or more. This could happen say if a company owned 47% of the shares in the acquiree, and the remaining shareholders were all individuals with small holdings. If they wanted to team together to control the acquiree, it would take them a great deal of effort, which simply wouldn’t be practical. So in this instance we assume the company with 47% of the shares has control over the acquiree.

Indicators of control include:

  • More than 50% of the voting rights in a company
  • The power to govern the affairs of a company by statute or agreement, and
  • The power to appoint the majority of directors to the company

What is Fair Value?

Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s-length transaction.