June 2024

Business combinations IFRS 3 ,IAS 27, IAS 28, IAS 31

Business Combinations, Consolidations, Associates & Joint Ventures (IFRS 3,IAS 27,28,31)

Business combinations (IFRS 3,IAS 27,28,31)

On 10 January 2008, the IASB published a revised IFRS 3 Business and related
revisions to IAS 27 Consolidated and Separate Financial Statements.
IFRS 3(2008) replaced IFRS 3(2004) effective for business combinations on or after
1 July 2009.

The revisions will result in a high degree of convergence between IFRSs and US
GAAP in these areas, although some potentially significant differences remain.
Among the differences: the FASB standard requires (rather than permits) the full
goodwill method. There are also differences in scope, the definition of control, and
how fair values, contingencies, and employee benefit obligations are measured, as
well as several disclosure differences.

IAS 39 IAS 28/31 IAS 27
20% 50%


Method of Accounting for Business Combinations

Acquisition method. The acquisition method is used for all business combinations.
Steps in applying the acquisition method are:

1. Identification of the ‘acquirer’ – the combining entity that obtains control of the

2. Determination of the ‘acquisition date’ – the date on which the acquirer obtains
control of the acquiree.

3. Recognition and measurement of the identifiable assets acquired, the
liabilities assumed and any non-controlling interest (NCI, formerly called
minority interest) in the acquiree.

4. Recognition and measurement of goodwill or a gain from a bargain purchase

Measurement of acquired assets and liabilities. Assets and liabilities are
measured at their acquisition-date fair value (with a limited number of specified

Measurement of NCI. IFRS 3 allows an accounting policy choice, available on a
transaction by transaction basis, to measure NCI either at:

• fair value (sometimes called the full goodwill method), or
• the NCI’s proportionate share of net assets of the acquiree (option is available on a transaction by transaction basis).

Example: P pays 800 to purchase 80% of the shares of S. Fair value of
100% of S’s identifiable net assets is 600. If P elects to measure
Non-controlling interests as their proportionate interest in the net assets of S
of 120 (20% x 600), the consolidated financial statements show goodwill of
320 (800 +120 – 600). If P elects to measure noncontrolling interests at fair
value and determines that fair value to be 185, then goodwill of 385 is
recognised (800 + 185 – 600). The fair value of the 20% noncontrolling
interest in S will not necessarily be proportionate to the price paid by P for
its 80%


Goodwill is measured as the difference between:

• the aggregate of (i) the acquisition-date fair value of the consideration transferred, (ii) the amount of any NCI, and (iii) in a business combination achieved in stages the acquisition-date fair value of the acquirer’s previously held equity interest in the acquiree; and

• the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed (measured in accordance with IFRS 3).

Treatment of positive goodwill

Purchased positive goodwill arises where the value of the consideration exceeds the
total of the fair values of net assets acquired. This guidance states that this positive
goodwill must be recognised as an asset.

Contrary to prior practice, the standard does not permit the goodwill asset to be
amortised. Instead, the goodwill amount is subject to annual impairment reviews.
Once an impairment loss is recognised, it may not be reversed in subsequent

Treatment of negative goodwill

If the difference above is negative, the resulting gain is recognised as a bargain
purchase in profit or loss.

Negative goodwill arises where the acquirer effectively pays a consideration which is
less than the fair value of the identifiable net assets. In circumstances where
negative goodwill is identified, it is advisable to review the bases of the fair values
and the bases of the cost which have been included in the calculation, to ensure no
errors have been made. It may also arise where there has been a bargain purchase.

The IFRS3 guidance states that negative goodwill should be recognised immediately
in the income statement.

Missile acquires a subsidiary on 1 January 2008. The fair value of the identifiable net
assets of the subsidiary were $2,170m. Missile acquired 70% of the shares of the
subsidiary for $2.145m. The NCI was fair valued at $683m.


Compare the value of goodwill under the partial and full methods.


Goodwill based on the partial and full goodwill methods under IFRS 3
(Revised) would be:

Partial goodwill $m

Purchase consideration 2,145
Fair value of identifiable net assets (2,170)
NCI (30% x 2,170) 651
Goodwill 626

Full goodwill $m

Purchase consideration 2,145
NCI 683
Fair value of identifiable net assets (2,170)
Goodwill 658

It can be seen that goodwill is effectively adjusted for the change in the value of the
NCI, which represents the goodwill attributable to the NCI of $32m ($658m – $626m).

Choosing this method of accounting for NCI only makes a difference in an
acquisition where less than 100% of the acquired business is purchased. The full
goodwill method will increase reported net assets on the balance sheet, which
means that any future impairment of goodwill will be greater. Although measuring
NCI at fair value may prove difficult, goodwill impairment testing is likely to be easier
under full goodwill, as there is no need to gross-up goodwill for partially owned

Business Combination Achieved in Stages (Step Acquisitions)

Prior to control being obtained, the investment is accounted for under IAS 28, IAS
31, or IAS 39, as appropriate. On the date that control is obtained, the fair values of
the acquired entity’s assets and liabilities, including goodwill, are measured (with the
option to measure full goodwill or only the acquirer’s percentage of goodwill). Any
resulting adjustments to previously recognised assets and liabilities are recognised
in profit or loss. Thus, attaining control triggers remeasurement.

Provisional Accounting

If the initial accounting for a business combination can be determined only
provisionally by the end of the first reporting period, account for the combination
using provisional values. Adjustments to provisional values within one year relating
to facts and circumstances that existed at the acquisition date. No adjustments after
one year except to correct an error ( in accordance with IAS 8. )

Cost of an Acquisition

Measurement. Consideration for the acquisition includes the acquisition-date fair
value of contingent consideration. Changes to contingent consideration resulting
from events after the acquisition date must be recognised in profit or loss.

Acquisition costs. Costs of issuing debt instruments are accounted for under IAS
39, and costs of issuing equity instruments are accounted for under IAS 32. All other
costs associated with the acquisition must be expensed, including reimbursements
to the acquiree for bearing some of the acquisition costs. Examples of costs to be
expensed include finder’s fees; advisory, legal, accounting, valuation, and other
professional or consulting fees; and general administrative costs, including the costs
of maintaining an internal acquisitions department.

Contingent consideration. Contingent consideration must be measured at fair
value at the time of the business combination. If the amount of contingent
consideration changes as a result of a post-acquisition event (such as meeting an
earnings target), accounting for the change in consideration depends on whether the
additional consideration is an equity instrument or cash or other assets paid or owed.
If it is equity, the original amount is not remeasured. If the additional consideration is
cash or other assets paid or owed, the changed amount is recognised in profit or
loss. If the amount of consideration changes because of new information about the
fair value of the amount of consideration at acquisition date (rather than because of a
post-acquisition event) then retrospective restatement is required.

Example 1

Josey acquires 100% of the equity of Burton on 31 December 2008. There are three
elements to the purchase consideration: an immediate payment of $5m and two
further payments of $1m if the return on capital employed (ROCE) exceeds 10% in
each of the subsequent financial years ending 31 December
All indicators have suggested that this target will be met. Josey uses a discount rate
of 7% in any present value calculations


Determine the value of the investment.


The two payments that are conditional upon reaching the target ROCE are
contingent consideration and the fair value of $(1m/1.07 + 1m/1.07²) ie $1.81m will
be added to the immediate cash payment of $5m to give a total consideration of

Parent’s Disposal of Investment or Acquisition of Additional Investment in

Partial disposal of an investment in a subsidiary while control is retained.

This is accounted for as an equity transaction with owners, and gain or loss is not

Partial disposal of an investment in a subsidiary that results in loss of control.

Loss of control triggers remeasurement of the residual holding to fair value. Any
difference between fair value and carrying amount is a gain or loss on the disposal,
recognised in profit or loss. Thereafter, apply IAS 28, IAS 31, or IAS 39, as
appropriate, to the remaining holding.

Acquiring additional shares in the subsidiary after control was obtained.

This is accounted for as an equity transaction with owners (like acquisition of ‘treasury
shares’). Goodwill is not remeasured.


Step acquisition

On 1 January 2008, A acquired a 50% interest in B for $60m. A already held a 20%
interest which had been acquired for $20m but which was valued at $24m at 1
January 2008. The fair value of the NCI at 1 January 2008 was $40m, and the fair
value of the identifiable net assets of B was $110m. The goodwill calculation would
be as follows, using the full goodwill method:

$m $m
1 January 2008 consideration 60
Fair value of interest held 24
NCI 40
Fair value of identifiable net assets (110)
Goodwill 14

A gain of $4m would be recorded on the increase in the value of the previous holding
in B.


Acquisition of part of an NCI

On 1 January 2008, Rage acquired 70% of the equity interests of Pin, a public
limited company. The purchase consideration comprised cash of $360m. The fair
value of the identifiable net assets was $480m. The fair value of the NCI in Pin was
$210m on 1 January 2008. Rage wishes to use the full goodwill method for all
acquisitions. Rage acquired a further 10% interest from the NCIs in Pin on 31
December 2008 for a cash consideration of $85m. The carrying value of the net
assets of Pin was $535m at 31 December 2008.

$m $m

Fair value of consideration for 70% interest 360
Fair value of NCI 210 570
Fair value of identifiable net assets (480)
Goodwill 90

Acquisition of further interest

The net assets of Pin have increased by $(535 – 480)m ie $55m and therefore the
NCI has increased by 30% of $55m, ie $16.5m. However, Rage has purchased an
additional 10% of the shares and this is treated as a treasury transaction. There is no
adjustment to goodwill on the further acquisition.

Pin NCI, 1 January 2008 210
Share of increase in net assets in post-acquisition period 16.5
Net assets, 31 December 2008 226.5
Transfer to equity of Rage (10/30 x 226.5) (75.5)
Balance at 31 December 2008 – NCI 151
Fair value of consideration 85
Charge to NCI (75.5)
Negative movement in equity 9.5

Rage has effectively purchased a further share of the NCI, with the premium paid for
that share naturally being charged to equity. The situation is comparable when a
parent company sells part of its holding but retains control.


Disposal of part of holding to NCI

Using Example 4, instead of acquiring a further 10%, Rage disposes of a 10%
interest to the NCIs in Pin on 31 December 2008 for a cash consideration of $65m.
The carrying value of the net assets of Pin is $535m at 31 December 2008.

Pin net assets at 1 January 2008 480
Increase in net assets 55
Net assets at 31 December 2008 535
Fair value of consideration 65
Transfer to NCI (10% x (535 net assets + 90 goodwill)) (62.5)
Positive movement in equity 2.5

The parent has effectively sold 10% of the carrying value of the net assets (including
goodwill) of the subsidiary ($62.5m) at 31 December 2008 for a consideration of
$65m, giving a profit of $2.5m, which is taken to equity.

Exclusion from consolidation

All subsidiaries must now be included. One specific item which was previously
excluded but must now be included are those whose business operations are
significantly different in nature to the parent’s business. IAS27 is also amended by
IFRS5 in that those entities acquired with a view to subsequent resale, must also be
included as consolidation items (and not presented as investments as was previously the case).

The only bases for exclusion under the recent guidance are

• immaterial subsidiaries
• where there is a demonstrable loss of control over subsidiary operations (an entity is no longer permitted to exclude from consolidation simply because that entity is operating under severe long-term restrictions that significantly impair its ability to transfer funds to the parent)

Minority Interests

The minority interest in a business combination refers to that portion of the profit or
loss and net assets of a subsidiary attributable to equity interests that are not owned,
directly or indirectly through subsidiaries, by the parent.

In terms of inclusion, all of the net assets of the acquiree are included in the
combined entity balance sheet because the acquirer controls them. The minority
interest element is shown as a separate item, as partly financing those net assets. In
the consolidated income statement, all acquiree profit is highlighted but a deduction
is then made for the minority interest element.

IAS28 Investments In Associates

IAS28 is also amended by IFRS5 in that those entities acquired with a view to
subsequent resale, must also be included as consolidation items (similar to
subsidiary treatment).

Presentation of associate results

The results of the associate must now be included as a single line item in the
consolidated income statement. This means that the disclosure of the share of the
associates profit is after interest and taxes, i.e. the amount attributable to equity


IAS 27 sets out the adjustments to be made when a parent loses control of a

Derecognise the carrying amount of assets (including goodwill), liabilities and NCIs
Recognise the fair value of consideration received Recognise any distribution of
shares to owners

Reclassify to profit or loss any amounts (the entire amount, not a proportion) relating
to the subsidiary’s assets and liabilities previously recognised in other comprehensive income, as if the assets and liabilities had been disposed of directly Recognise any resulting difference as a gain or loss in profit or loss attributable to the parent Recognise the fair value of any residual interest.


Disposal of controlling interest

On 1 January 2008, Rage acquired a 90% interest in Machine, a public limited
company, for a cash consideration of $80m. Machine’s identifiable net assets had a
fair value of $74m and the NCI had a fair value of $6m. Rage uses the full goodwill
method. On 31 December 2008, Grange disposed of 65% of the equity of Machine
(no other investor obtained control as a result of the disposal) when its identifiable
net assets were $83m. Of the increase in net assets, $6m had been reported in profit
or loss, and $3m had been reported in comprehensive income. The sale proceeds
were $65m, and the remaining equity interest was fair valued at $25m. After the
disposal, Machine is classified as an associate under IAS 28, Investments in
Associates. The gain recognised in profit or loss would be as follows:

Fair value of consideration 65
Fair value of residual interest to be recognised as an associate 25
Gain reported in comprehensive income 3
Less net assets and goodwill derecognised:
net assets (83)
goodwill (80 + 6 – 74) (12)
Loss on disposal to profit or loss (2)

After the sale of the interest, the holding in the associate will be fair valued at $25m.

As can be seen from the points raised above, IFRS 3 (Revised) and IAS 27 (Revised) will potentially mean a substantial change to the ways in which business combinations, and changes in shareholdings, will be accounted for within the real world.

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