Introduction to Business Combinations

under IFRS 3
 Posted by Pete
 Acquisitions, Business Combination, IFRS 3 Business Combinations

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.