Library / Technical Accounting Manual: IFRS, IAS and Ind AS Equivalents

IFRS 3 - Business Combinations

Indian equivalent: Ind AS 103 - Business Combinations

Objective and scope

IFRS 3 explains how to account when one company acquires control of another business - how to identify the acquirer, measure everything acquired at fair value, and calculate and record goodwill (or a bargain-purchase gain).

Core principle

Defined terms and technical terminology

Application and worked illustrations

The acquisition method, step by step

(1) Identify the acquirer - the party gaining control. (2) Determine the acquisition date. (3) Recognise and measure the identifiable assets and liabilities at fair value - including some the acquiree never recorded, such as internally generated brands or customer relationships. (4) Recognise goodwill or a bargain-purchase gain.

Worked example 1 - goodwill

BigCo buys SmallCo for ₹10 crore cash. On fair-value assessment, SmallCo's identifiable assets are ₹12 crore and liabilities ₹5 crore → net identifiable assets ₹7 crore. Goodwill = ₹10 crore − ₹7 crore = ₹3 crore, recorded on the consolidated balance sheet. Goodwill is not amortised but tested for impairment annually (IAS 36).

Worked example 2 - bargain purchase

If BigCo had paid only ₹6 crore for those ₹7 crore of net assets - perhaps SmallCo was a distressed seller - the ₹1 crore excess is a bargain-purchase gain, recognised immediately in profit (only after re-verifying that all assets and liabilities were correctly identified and valued).

Non-controlling interest

If BigCo bought only 80% of SmallCo, the other 20% is non-controlling interest, measured either at fair value (full goodwill method) or at its proportionate share of net assets (partial goodwill method) - an accounting-policy choice per transaction.

Further worked illustrations

Extra numeric example - fair-valuing an unrecorded intangible

BigCo acquires TargetCo. TargetCo never recorded its valuable customer relationships, but at acquisition they're independently valued at ₹5 crore. IFRS 3 requires BigCo to recognise that ₹5 crore intangible as a separate identifiable asset (reducing goodwill by ₹5 crore), even though it was invisible on TargetCo's own books. Fair-valuing previously-unrecorded intangibles is a core part of purchase price allocation.

Extended technical analysis

The acquisition method - comprehensive mechanics

IFRS 3 requires the acquisition method for every business combination. Its technical difficulty concentrates in four areas: determining whether the acquired set constitutes a business; identifying the acquirer; measuring consideration transferred including contingent consideration; and recognising identifiable net assets at fair value, with the residual being goodwill.

Step 1 - Is it a business?

A business requires, at minimum, an input and a substantive process that together contribute to the ability to create outputs. The concentration test (an optional screen introduced by the 2018 amendments) provides that if substantially all of the fair value of gross assets acquired is concentrated in a single identifiable asset or group of similar assets, the acquisition is not a business and is accounted for as an asset acquisition - with no goodwill, no deferred tax on initial recognition, and transaction costs capitalised rather than expensed. This distinction has significant consequences.

Step 2 - Goodwill computation

Identifiable net assets - recognition beyond the acquiree's books

The acquirer recognises identifiable assets and liabilities regardless of whether the acquiree had recognised them. This routinely brings previously unrecognised intangibles onto the balance sheet - customer relationships, order backlog, trade names, technology, non-compete agreements - because they meet the separability or contractual-legal criterion. Conversely, the acquirer must not recognise the acquiree's internally generated goodwill, future restructuring costs it is not obliged to incur, or expected synergies as separate assets.

Non-controlling interests - the two measurement choices

For each transaction separately, the acquirer elects to measure NCI at either fair value (the full goodwill method, recognising goodwill attributable to both the parent and the NCI) or at the NCI's proportionate share of identifiable net assets (the partial goodwill method). The election materially changes reported goodwill and NCI, and consequently the amount at risk on subsequent impairment testing.

Measurement period and subsequent accounting

Where the initial accounting is incomplete, the acquirer reports provisional amounts and has a measurement period - not exceeding twelve months from the acquisition date - to retrospectively adjust them for facts and circumstances that existed at the acquisition date. Adjustments after that window, or arising from post-acquisition events, are not goodwill adjustments; they go to profit or loss. Subsequently, goodwill is not amortised but tested for impairment annually under IAS 36, and impairment of goodwill can never be reversed.

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