IFRS – 3 Business Combinations
This standard highlights the accounting when an acquirer obtains control of a business (e.g. an acquisition or merger). Such business combinations are accounted using the 'acquisition method', which generally requires assets and liabilities assumed to be recognised at their fair values at the acquisition date.
The purchase consideration is including the fair value of all interests that the acquirer may had held previously in acquired company. This includes any interest in an associate company or joint venture company, or other equity interests of the acquired company. Any previous stake is seen as being ‘given up’ to acquire the entity, and a gain or loss is recorded on its disposal.
The acquirer pays the amount to the owner of other company which he is purchasing. There may be conditional consideration and it also must be recognised at fair value even if the payment is not done. All the consideration either payment is done or not it is to be recognised at fair value.
Goodwill and Non-controlling interests (NCI)
Goodwill is ‘an asset showing the future economic benefits arising from assets acquired in a business combination that are not individually identified and separately recognised. In simple terms, goodwill is measured as the difference between:
- The consideration paid and any Non-Controlling Interest
- The acquisition–date fair value of identifiable net assets acquired
In this way NCI effects on the calculation of goodwill. However, IFRS – 3 gives two options to measure the assets and liabilities of identifiable fair value or full method (All assets and liabilities must be at fair value).