Business Combinations – IFRS 3

IFRS 3 applies to most business combinations including amalgamations (where acquire loses control) and acquisitions (where acquire continues its existence).

In Indian GAAP, there is no comprehensive standard dealing with all Business Combinations. AS 14 applies to amalgamations only. AS 21, AS 23, AS 27 apply to accounting for Subsidiaries, Investment in Associates, and Joint Ventures respectively

Recognition of Assets and Liabilities

An acquirer should recognize identifiable assets, liabilities and contingent liabilities if:

a.   In case of asset other than intangible asset, it is probable that associated future economic benefits will flow to the acquirer and its value can be measured reliably.

b.    In case of liability other than contingent liability, it is probable that an outflow of economic resources will be required to settle the obligation and its value can be estimated reliably.

c.    In case of intangible asset or contingent liability, if its value can be measured reliably.

d.    They are exchanged as part of the business combination rather than a separate transaction

The exercise may also result in acquirer recognizing some assets and liabilities that the acquiree had not previously recognized in its Financial Statements.

For example, the acquirer recognizes the acquired identifiable intangible assets, such as a brand name, a patent or a customer relationship, that the acquiree did not recognize as assets in its financial statements because it developed them internally and charged the related costs to expense.

Business Combination achieved in Stages

An acquirer sometimes obtains control of an acquiree in which it held an equity interest immediately before the acquisition date.

For example, on 31 December 20X1, Entity A holds a 35 per cent non-controlling equity interest in Entity B. On that date, Entity A purchases an additional 40 per cent interest in Entity B, which gives it control of Entity B.

Two situations might arise in case of combination achieved through stages:

a.      An investment in an entity increases to become a subsidiary

b.      An investment in an associate increases to become a subsidiary

In both the cases, the acquirer shall:

a.       Remeasure its previously held equity interest in the acquiree at its fair value on the date is achieved

b.      Recognize any resulting gain or loss in Profit or Loss

c.       Calculate Goodwill

d.      In prior reporting periods, the acquirer may have recognized changes in the value of its equity interest in other comprehensive income. Such amount shall be recognized on the same basis as would be required if the acquirer had disposed directly of the previously held equity interest.

In Indian GAAP, AS recognizes step acquisitions. At each step valuation is done on basis of Book values and not Fair Values.

Business combination achieved without the transfer of consideration

An acquirer sometimes obtains control of an acquiree without transferring consideration. The acquisition method applies to those combinations. Such circumstances include:

(a) The acquiree repurchases a sufficient number of its own shares for an existing investor (the acquirer) to obtain control.

(b) Minority veto rights lapse that previously kept the acquirer from controlling an acquiree in which the acquirer held the majority voting rights.

(c) The acquirer and acquiree agree to combine their businesses by contract alone and without transfer of consideration.

In a business combination achieved by contract alone, the acquirer shall attribute to the owners of the acquiree the amount of the acquiree’s net assets recognized in accordance with this IFRS. In other words, the equity interests in the acquire held by parties other than the acquirer are a non-controlling interest in the acquirer’s post-combination financial statements even if the result is that all of the equity interests in the acquiree are attributed to the non-controlling interest