Corporate Accounting Report: IFRS 3 Business Combination Analysis

This report provides a comprehensive analysis of corporate accounting principles, specifically focusing on business combinations and the application of IFRS 3. It details the acquisition method, outlining the steps involved, including identifying the acquirer, determining the acquisition date, and recognizing and measuring identifiable assets, liabilities, and non-controlling interests. The report explains the concept of goodwill, its calculation, and the treatment of bargain purchases. It also covers the recognition and measurement principles for assets and liabilities at fair value, with exceptions, and the classification of contracts. The report further addresses the measurement of non-controlling interests, business combinations in stages, and the treatment of contingent consideration, pre-existing relationships, and reacquired rights. It also highlights the disclosure requirements for business combinations, ensuring users understand the nature and effects of these transactions on a company's financials. Finally, the report includes a practical example with financial data, demonstrating the application of these principles and providing worksheet entries to illustrate the accounting processes.

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Part A:
This method of business combination is also known as the purchase method.
The following are the steps in the acquisition method:
1. Identification of the acquirer
2. Determination of the acquisition date
3. Recognition and the correct measurement of the identifiable assets and the liabilities
and the amount of the non-controlling interest
4. Recognition of the goodwill or the gain from bargain purchase.
The acquirer is defined as the company that take over another company along with its assets
and the liabilities. The acquirer is the one that issues the equity shares when the transaction
has been undertaken in an effective manner. Also, the company considers the facts and the
scenarios including the relative voting rights, the existence of the minority interest or the
group of the owners that have some major voting interest and the composition of the
governing body and the senior most management of the company which is being taken over.
The following are the rules that have been laid down for the purposes of recognising and
measuring the items that result from the business combination:
 In respect of the recognition principle, all of the identifiable assets and the liabilities
will have to be assumed along with the non-controlling interests which would be
recognised separately from the amount of the goodwill.
 In respect of the principle of measurement, all of the assets and the liabilities that have
been taken over by the company would be measured at their respective fair values as
on the date of acquisition.
But there ae certain exceptions to the above stated rule which include income taxes,
employee benefits, contingent liabilities etc. (IFRS, 2019).
The application of the rules would require the classification and the designation of the assets
and the liabilities that have been taken over based upon the terms and the conditions and the
economic conditions as on the date of acquisition. In order to illustrate, the derivative
financial instruments could be identified as the hedging instruments and there could be a
separation of the embedded derivatives from the host contrast. But there are certain

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exceptions that has been made in respect of the classification for leases. Also, the contracts
have been classified as the insurance contracts which have been classified based upon the
conditions that exists at the start of the contract. All of the intangible assets and the intangible
liabilities shall be report at their respective fair values but this would only hold good when
these are capable of being measured with reliability.
As part of the business combination, goodwill is determined. It is the difference between the
following:
 Value of the consideration which is the fair value that has been transferred by the
company that has taken over the company. This amount of consideration will
comprise of the fair values of the assets and the liabilities, any amount of the non-
controlling interest and the business combination that was achieved in the stages
 The net amount of the acquisition date amounts to the identifiable assets that have
been acquired and the various liabilities that have been assumed.
The above could be written in the following manner:
Goodwill = Consideration that has been transferred + amount of the non-controlling interest
In case, the above stated difference is negative, then that would mean the bargain purchase in
the profit and loss which is the result of the case in which the seller is being forced to sell his
company. But before the amount of the barging purchase gain is reported in the statement of
profit and loss, all of the identifiable assets and the liabilities of the company being taken
over would be measured using their respective fair vales.
With regard to the choice in the measurement of the non-controlling interests, the accounting
standard requires the measurement of it either using the fair value or the proportional share of
the net assets of the non-controlling interests.
The choice of the policy chosen by the company would represent the ownership interest in
the company by the company that takes over. The other components of the non-controlling
interest would be measured at the date of acquisition as on the date of acquisition.
In respect of the business combinations that is achieved in stages, the acquirer shall account
for its investments in the equity interests as per the rules and regulations of the relevant
standard on accounting. With regard to the following of the rules of IFRS 9 which deals with
the financial instrument, in case the company that takes over another company measures any
amount of interest again as the fair value, then that difference shall be considered while
determining the amount of the goodwill as the part of the business combination. Any amount

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of gain or loss shall be determined as the part of the statement of profit or loss (ACCA
Global, 2019).
The amount of the goodwill is measured on the date on which the company was acquired by
the other company.
Any transaction which did not form the part of the business combination shall be reported
separately from the business combination and their recognition and measurement shall be
done as per the relevant rules and regulations of the accounting standards. When it comes to
determining if any item forms the part of the business combination or not, the timing and the
party that started the transaction would be considered.
With regard to the contingent consideration, the same must be measured at the fair values as
at the time of the business combination and would take into account the amount of the
goodwill. In case, that amount of the contingent consideration forms the part of the equity
instrument, then the same shall not be measured again.
In case, the contingent liability undergoes a change, then the difference shall be reported in
the financial accounts.
All of the costs that have been incurred as part of the business combination shall be charged
as an expense as in the statement of profit and loss. The examples of the costs to be expenses
include the advisory, legal, finder’s fees etc. (Chartered Global, 2019).
With regard to the pre-existing relationship and reacquired right, in case, the company that
has taken over and the company that has been taken over had an earlier relationship, then that
must be reported separately form the business combination.
As per the IAS 137 which deals with the provisions, contingent liabilities and the contingent
assets, unless and until the contingent liability is settled or has been cancelled or has expired,
it would be reported in the final accounts for the business combination and shall be measured
at the higher of the amount of the liabilities.
With regard to the contingent payments to the employees and the shareholders, in case the
company that has taken over enters into an agreement with the selling the shares, then
whether this would form part of the business combination or not will have to be determined.
While determining such arrangements, the acquirer shall consider the factors such as the level
of remuneration of the employees, the arrangement of the continuing employment etc. where
there are share based payment arrangements, wherein an acquiree exists and are replaced,
then the value of such of the awards shall be segregated between the pre combination and the

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post combination services and the same shall be accounted for in the final accounts
separately.
Any amount of indemnification of the assets would be measured at the fair values and would
be reported as on the date of acquisition.
In respect of the other issues, the IFRS 3 provides some of the guidance on the different
aspects such as the business combinations in which there is no consideration which is
transferred, the reverse acquisitions, identifiable intangible assets that have been acquired.
With regard to the disclosure of information, the company that has taken over another
company is duty bound to disclose all of the information which would help the users of the
financial statements to ascertain the nature and the effect of the business combination on the
financials of the company. This would be done either during the reporting date or after the
end of the reporting date but this has to be done before the final accounts are authorised for
issue.
The following are some of the disclosures that have to be done:
 Name and the description of the company that has been acquired as the result of the
business combination
 The date on which the stated business combination took place
 The listing down of the factors that made up the goodwill which was recognised
 The fair values of all of the assets and the liabilities that were taken over (PWC,
2019).
Part B:
As at July, 2018:
Net fair value of identifiable assets and
liabilities of Davis Ltd
Equity: Share capital
6,74,0
00.00
General
reserve
2,31,0
00.00

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Retained
earnings
2,89,0
00.00
11,94,0
00.00
Add: revaluations Vehicle
3,77,3
00.00
Inventory
1,61,7
00.00
Land
3,23,4
00.00
4,85,1
00.00
Consideration transferred
19,25,1
60.00
Goodwill
2,46,0
60.00
Worksheet entries:
Retained earnings
2,89,000.0
0
Share capital
6,74,000.0
0
General reserve
2,31,000.0
0
Business
combination
valuation reserve
7,31,160.0
0
Shares in Davis Ltd
19,25,160.0
0

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General reserve
1,15,500.0
0
Retained earnings
1,15,500.0
0
Inventory
23,100.0
0
Deferred tax
liability 6930
Business
combination
valuation reserve
16,170.0
0
Cost of sales
2,07,900.0
0
Income tax
expense
62,370.0
0
Business
combination
valuation reserve
1,45,530.0
0
Depreciation
expense
1,79,666.6
7
Accumulated
depreciation
1,79,666.6
7
(1213000-
674000)*1/3
Deferred tax liability
53,900.0
0
Income tax expense
53,900.0
0

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References:
Chartered Club. (2019). Summary of IFRS 3 – Business Combinations. [online] Available at:
https://www.charteredclub.com/summary-of-ifrs-3-business-combinations/ [Accessed 26 Sep.
2019].
https://www.accaglobal.com, A. (2019). Business Combinations – IFRS 3 (Revised) | ACCA
Global. [online] Accaglobal.com. Available at:
https://www.accaglobal.com/hk/en/student/exam-support-resources/professional-exams-
study-resources/strategic-business-reporting/technical-articles/business-combinations.html
[Accessed 26 Sep. 2019].
Ifrs.org. (2019). IFRS. [online] Available at: https://www.ifrs.org/issued-standards/list-of-
standards/ifrs-3-business-combinations/ [Accessed 26 Sep. 2019].
Pwc.com. (2019). IFRS 3 (Revised): Impact on earnings The crucial Q&A for decision-
makers. [online] Available at: https://www.pwc.com/gx/en/ifrs-reporting/pdf/ifrs3r.pdf
[Accessed 26 Sep. 2019].