Corporate Accounting Assignment: IFRS 3 on Business Combinations

This essay delves into the intricacies of corporate accounting, specifically focusing on the application of IFRS 3 and IFRS 10 in business combinations. It outlines the four-step process for recognizing and measuring identifiable assets acquired and liabilities assumed, emphasizing the role of the acquirer and the importance of the acquisition date. The essay discusses the measurement of assets and liabilities at acquisition-date fair values, exceptions to fair value recognition, and the treatment of goodwill and bargain purchases. It underscores the significance of these standards in ensuring the compatibility, relevance, and reliability of financial statements related to business combinations. The essay also provides a comprehensive discussion on the implications of IFRS 3 and IFRS 10, offering a detailed analysis of the accounting standards.

Running head: CORPORATE ACCOUNTING
Corporate Accounting
By Name of the Student
Group Number
Module Name

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Introduction
The requirement of “Business Combinations” in “IFRS 3” acts as a
guideline to the accounting process in which an acquirer gains control of the
business, especially through a merger or acquisition. One of the main objectives of
this standard is to recognise and measure the “liabilities assumed”, recognisable
assets and any “non-controlling interest” pertaining to the acquiree. Moreover,
“IFRS 3” is compliant to any transaction or event which adheres to the definition of
business combination (Aasb.gov.au 2019).
Discussion
The process of recognising and measuring the identifiable “liabilities
assumed” and “assets acquired” in a merger or acquisition involves four steps. In
general, the acquirer is known as the investor who is responsible for acquiring a
subsidiary or investment. This relates to the first step of identifying the acquirer. The
acquirer is identified as per the guidelines of “IFRS 10”, which suggests the
accounting requirements for consolidation procedure (Cpaaustralia.com.au 2019b).
“IFRS 3” also recognises special instances such as “reverse acquisitions”, issuing
equity as per the effect of business combination via creation of new entity and
combinations involving more than two companies. In these situations, the
identification process is not straightforward (Cpaaustralia.com.au 2019a).
The second step is to assess the date of acquisition. The acquirer is
responsible for depicting the date of acquisition in which the acquirer gains control of
the acquiree. The date on which legal transfer related to the payment for investment
takes place and the liabilities of the acquirer are assumed by the acquirer, is termed

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as the closing date. However, it is important to note that, depending on the
contractual agreement the closing date can be earlier or later (Grantthornton.com.au.
2019b).
The third step deals with recognising and measuring the liabilities assumed
and requirement of the identifiable assets. This is particularly done for eliminating
any presence of unrecognised asset in an acquiree or identify the assets which fails
to comply with the recognition process. For instance, an entity may have
unrecognised intangible assets which were generated internally. It is the
responsibility of the acquirer to take precautionary measures to exclude such assets
during the consolidation process. In this phase, all the liabilities and assets are
measured at “acquisition-date fair values” (Pwc.com. 2019). Sometimes, the
investors are required to make the “fair value adjustments” on the date of
acquisition. This is required as the valuation of various assets and liabilities are done
differently. The exceptions to the rulings of “fair value recognition and
measurement” comprises of “income taxes”, “indemnification assets” and
“employee benefits”. On the other hand, the exceptions to only measurement
principles are noticeable among “share-based payment”, “reacquired rights”,
“employee benefits” and “assets held for sale” (Cpaaustralia.com.au 2019a).
The fourth step is considered with measurement and recognition of gain from
a bargain purchase or goodwill. Goodwill refers to such an asset which represents
future economic benefits as a result of the acquired assets pertaining to a business
combination which are otherwise not recognised or identified separately. It is
recognised during the date of acquisition and the measurement is done in
compliance with “IFRS 3” (Ifrs.org. 2019). Therefore, it is worth mentioning that the
total amounts recorded on the date of acquisition for the “liabilities assumed” and

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“identifiable assets” are measured in accordance with this standard. In case an
acquirer puts forward a bargain purchase, with a consideration lesser than the value
of net assets acquired, the measurement procedure is followed by a reassessment
of “liabilities assumed” and “identifiable assets”. If the bargain purchase still
persists, the excess amount is recognised immediately as a profit or loss at the date
of acquisition (Grantthornton.com.au. 2019a).
The recognition of positive goodwill is done by performing an annual
impairment test. The recognition of positive goodwill is categorised as an intangible
asset. On the contrary, the negative goodwill is considered as a gain on bargain
purchase which involves reviewing the process of recognising the “liabilities
assumed”, “identifiable assets” and “non-controlling interest”. This is done to
ensure that the previously held interests are free from error (IFRScommunity.com
2019).
Conclusion
The excerpts of the essay illustrate how the standards prescribed by “IFRS
3” and “IFRS 10” plays a pivotal role in recognising and measuring assets and
liabilities pertaining to the business combination. The importance of IFRS 3 is
evident in identifying the acquirer in a non-standard business combination,
measuring and recognition of gain from a bargain purchase or goodwill and
improving the overall compatibility, relevance and reliability of the financial statement
about business combination. The importance of “IFRS 10” is evident in identifying
the acquirer in standard business combinations.

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References
Aasb.gov.au. 2019. [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB3_08-15.pdf [Accessed 12
Sep. 2019].
Cpaaustralia.com.au. 2019a. [online] Available at:
https://www.cpaaustralia.com.au/-/media/corporate/allfiles/document/professional-
resources/ifrs-factsheets/factsheet-ifrs3-business-combinations.pdf?
la=en&rev=0a677d72cdd743beb631cac0a01c172d [Accessed 12 Sep. 2019].
Cpaaustralia.com.au. 2019b. [online] Available at:
https://www.cpaaustralia.com.au/-/media/corporate/allfiles/document/professional-
resources/ifrs-factsheets/factsheet-ifrs10-consolidated-financial-statements.pdf?
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Grantthornton.com.au. 2019a. [online] Available at:
https://www.grantthornton.com.au/globalassets/1.-member-firms/australian-website/
technical-publications/ifrs/gtal_2016-ifrs3-business-combinations.pdf [Accessed 12
Sep. 2019].
Grantthornton.com.au. 2019b. [online] Available at:
https://www.grantthornton.com.au/globalassets/1.-member-firms/australian-website/
publications/gtil-2011-navigating-the-accounting-for-business-combinations-applying-
ifrs-3-in-practice.pdf [Accessed 12 Sep. 2019].
Ifrs.org. 2019. [online] Available at:
https://www.ifrs.org/-/media/project/pir-ifrs-3/published-documents/pir-ifrs-3-report-
feedback-statement.pdf [Accessed 12 Sep. 2019].

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IFRScommunity.com. 2019. IFRS 3 Business Combinations • IFRScommunity.com.
[online] Available at: https://ifrscommunity.com/knowledge-base/ifrs-3-business-
combinations/ [Accessed 12 Sep. 2019].
Pwc.com. 2019. [online] Available at:
https://www.pwc.com/gx/en/ifrs-reporting/pdf/ifrs3r.pdf [Accessed 12 Sep. 2019].