IFRS 3 – Business Combinations – Merger and Acquisition (M&A)

One of the current accounting and market trends is the expansion of business activities around the world. Each country has its own market peculiarities and needs, however, many accounting issues and information need a certain unity.

Thus, in order for companies to have the same economic and accounting language, with the objective of standardizing and standardizing their actions, the International Accounting Standards were created. Accepted in more than 140 countries, these standards are responsible for issuing statements and rules for various aspects of accounting.

In Brazil, a body called the Accounting Pronouncements Committee, or CPC, was created by some entities in this sector. And this with the objective that Brazilian accounting converges with international accounting and its standards.

With the various changes within the financial world and the advancement of technologies, some regulations and their institutions also needed to change. Thus, until 2001, the International Accounting Standards were called IAS, or International Accounting Standards.

However, in order to follow and adapt to these changes, these standards became the IFRS, or International Financial Reporting Standards. The very bodies that create and issue these standards have also changed. The IASB, International Accounting Standards Board, created in 2001, succeeded the IASC, International Accounting Standards Committee.

One of the International Accounting Standards that suffered these changes was IAS 22, which, after some changes, became IFRS 3. IFRS 3 is responsible for information about business combinations.

Thus, the IFRS 3 standard establishes the accounting treatment for the business combination that occurs in a Merger and Acquisition (M&A).

IFRS 3 summary

IFRS 3 – Business Combinations is the international standard that postulates the accounting procedure for business combinations. In other words, its focus is on the operations that this procedure involves, which are mergers and acquisitions of companies. These processes, merger and acquisition, are even contemplated by the Brazilian norms.

Thus, in a globalized market and with a lot of competition, one of the expansion and competition strategies is the merger and acquisition of companies. What is encouraged and reported by IFRS 3.

In terms of its objective, this standard seeks to cover all transactions in which an acquirer obtains control of an acquiree. Without considering how this operation is structured.

Thus, IFRS 3 seeks to increase the relevance, reliability, and comparability of the information provided on business combinations, with a focus on acquisitions and mergers, and their effects.

Thus, the entity provides this data about a business combination and its what it causes in its financial statements about a business combination and its effects. And this standard establishes the principles about the recognition and measurement of assets and liabilities. The determination of goodwill and the required disclosures.

IFRS 3, too, grew out of the former IAS 22 – Business Combinations. IAS 22 postulated information about business combinations, but with only two methods and one of them was banned in countries like Australia, the United States and Canada. Therefore, it was necessary to modify the standard and its characteristics.


What is Merger and Acquisition (M&A)?

The concept of Mergers and Acquisitions (M&A) comes from the English Mergers and Acquisitions. This term refers to the process involving purchases, sales, and different financial transactions that consolidate a company and its merger.

The Merger and Acquisition process has to be as transparent and conscious as possible and always studied and based on reality. In this way, the security of corporate assets and information will be guaranteed to show that the business combination in question is not a bad deal. As well as showing its possible risks.

With this process, companies have the possibility to increase their efficiency and productivity in the market. In addition to reducing competition, having new talent on your team, increasing your products and services, and participating in new markets. This culminates in increased profits and strategic advantages.

Which CPC corresponds to IFRS 3?

With the importance of Brazilian accounting being in line with international accounting standards, several Brazilian entities got together to create a committee responsible for issuing several standards. This committee is called the Accounting Pronouncements Committee, or CPC, and is responsible for unifying the Brazilian standards with the international ones.

It was through CFC resolution number 1.055/05 that the CPC was established, and through Law 11.638/2007 that the Brazilian accounting standards converged with the international standards.

So this is a relatively current procedure, and at the time it came out, IAS 22 was no longer in existence. Even so, because it is of utmost importance to postulate about business combinations, the IAS became IFRS 3 and, in Brazil, to take care of this subject, the CPC 15 – Business Combination was created. This statement was approved in the year 2011.

CPC 15 – Business Combination

The Accounting Pronouncements Committee approved and released CPC 15 – Business Combinations in the year 2011. And this with the aim of enhancing and providing various information and aspects about business combinations and their impacts.

Get to know IFRS 3

The Accounting Pronouncements Committee approved and released CPC 15 – Business Combinations in the year 2011. And this with the aim of enhancing and providing various information and aspects about business combinations and their impacts.

Thus, this IFRS has several characteristics of its own. Among them are your requirements that:

  • All business combinations within its scope need to account for themselves by applying the chosen purchase method;
  • An acquirer needs to have an ID for each business combination within its scope. Just as you need to measure the cost of a business combination with the fair values, at the date of exchange, of assets and liabilities and equity instruments issued by the acquirer. And that in exchange for control of the acquired with the addition of any costs directly attributable to the combination.
  • Also, an acquirer must recognize separately, at the acquisition date, the acquiree’s assets and identifiable assets that satisfy the following recognition criteria at that date, regardless of whether they were previously recognized in the acquiree’s financial statements:

a. When an asset is not intangible, it is probable that any associated future economic benefits will flow to the acquirer and its fair value can be reliably measured;

b. in the case of a liability that is not contingent it will probably take an outflow of resources embodying economic benefits to settle the obligation and its fair value can be reliably measured;

c. If there is an intangible asset or a contingent liability, its fair value can be reliably measured.

Other IFRS 3 requirements

There are still other requirements and features that IFRS 3 has. Among them are:

  • Assets and liabilities that meet the recognition criteria need initial measurement by the acquirer at their fair values at the acquisition date, regardless of the extent of any minority interest;
  • Goodwill that the company has achieved through a business combination needs the acquirer to recognize it as an asset as of the acquisition date;
  • Amortization of goodwill arising from a business combination is prohibited. If this is the case, the requirement is that it is tested for impairment annually;
  • The acquirer should reassess the identification and measurement of the acquiree’s assets and liabilities and the measurement of the cost of the business combination. Only if the acquirer’s share of the net fair value of the items recognized exceeds the cost of the combination. Thus, the acquirer will need to immediately recognize any excess remaining after this revaluation.
  • It is required to disclose information that enables users of a company’s financial statements to evaluate the nature and financial effect of:

a) Business combinations took place during the period;

b) Business combinations that were effected after the balance sheet date but before issuing the financial statements;

c) Certain business combinations that were made in previous periods.

  • The company needs to disclose information that allows users of the financial statements to assess changes in the carrying amount of goodwill during the period.

The principles of IFRS 3

IFRS 3 establishes principles and requirements for how an acquirer in a business combination. They are:

  • Recognize and measure in its financial statements the assets and liabilities that it has acquired with any participation from other parties;
  • Check and calculate the goodwill that was acquired in the business combination or the gain from an advantageous purchase;
  • Determine what information is pertinent to enable users of financial statements to assess the nature and financial effects of the business combination.

So, in summary, the fundamental principles of IFRS 3 are that an acquirer measures the cost of the acquisition at the fair value of the consideration paid. It also allocates this cost to the assets and liabilities that were acquired based on their fair values and allocates the remainder of the cost to goodwill.

IFRS 3 also has the principle of recognizing any excess assets and liabilities that a company has achieved over the consideration paid. And that at an immediate profit or loss. So the acquirer discloses information that allows users to evaluate the nature and financial effects of the acquisition.


What is business combination?

Business combination is the most important concept for IFRS 3, so it is essential to know it. It is characterized as a transaction in which an acquirer gains control of one or more businesses. This transaction merges the separate companies or businesses into one entity that becomes responsible for reporting and disclosing business combinations.

If an entity has control of one or more other companies that are not characterized as businesses, the union of these is not a business combination.

In addition, a business combination can be structured in many different ways, whether for legal or tax reasons or other reasons. So it can involve the purchase by one entity of the net assets, all the net assets and liabilities, or the purchase of some net assets of another entity that together form one or more businesses.

How to determine if a transaction is a business combination?

Under IFRS 3 and its guidance on determining whether a transaction meets the definition of a business combination, these are:

  • They can happen in various ways, such as transferring cash, incurring liabilities, issuing equity instruments, or just for a consideration, i.e. just by contract;
  • Its structure is varied in order to meet legal, tax, or other objectives;

Furthermore, when there is an acquisition of a business, it occurs through three distinct elements:

  • Input: Is an economic resource that develops outputs when one or more processes apply to it;
  • Process: This can be a system, protocol, convention, or rule that, when applied to an input or inputs, creates outputs;
  • Output: Output, as the name suggests, is the result of the inputs and processes.

Which business combinations are not accounted for under IFRS 3?

In accordance with paragraph 3 of the IFRS, there are some companies to which IFRS should not be applied. They are:

  • Business combinations in which separate companies join together to form a joint venture;
  • Business combinations involving entities that have common control;
  • Business combinations that encompass two or more mutual entities;
  • And finally, business combinations where separate companies come together to form a contract reporting entity without obtaining an ownership interest.

Know the methods of accounting for business combination

According to IFRS 3, the acquisition method is responsible for recording all business combinations. By this method, the transaction is recorded from the buyer’s point of view. And that means that the acquirer buys all liabilities and assets, even those that the acquiree does not recognize.

In other words, any business acquisition needs to happen by the acquisition method. That will make its measurement at the fair value of its assets and liabilities.

Acquisition Method

The acquisition method is fundamental to IFRS 3 because it is mandatory for all business combinations. So there are a few steps in its application:

  • Identification of the acquirer;
  • Determining the acquisition date;
  • Recognition and measurement of assets, liabilities, and non-controlling interest in the acquiree;
  • Recognition and measurement of goodwill.


What is the cost of a business combination?

According to IFRS 3, to find the total cost of the business combination you need to know that it is the total aggregate of the fair value. That is, the price a company is likely to receive for selling an asset or transferring a liability on the measurement date. And this when considering current market conditions and an unforced transaction.

Thus, the fair value of the cost of the business combination involves the assets given, liabilities incurred or assumed, and equity instruments. Always considering the transaction date and what the acquirer has issued in exchange for control of the acquiree.

Also, this cost needs to encompass any cost that can be attributed to the business combination.

Therefore, even with this informative article about IFRS 3, a manager may still have several questions about how the business combination process works. After all, there are several rules and variants that IFRS 3 and CPC 15 present on this subject.

Therefore, it is necessary for a manager to seek expert help to get into and move forward on this issue. Especially regarding the procedure of business mergers and acquisitions, how to measure and disclose this process according to the accounting standards.

The CPCON group is a company that has been in business for more than a decade and that, due to the quality and excellence of its services, operates throughout the entire American continent. With extremely qualified professionals, CPCON provides accounting consulting services in several subjects – and business combination is one of them!

For any questions that you, a manager or even an individual, may have regarding the business combination or any other accounting matter, be sure to contact CPCON and ensure quality assistance.

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