IFRS 3 Business Combinations is an International Financial Reporting Standard that sets out the rules and guidelines for accounting for business combinations. A business combination is a transaction in which an acquirer obtains control of one or more businesses. The acquirer is the entity that obtains control of the other entity or entities in the business combination.
The standard requires that all business combinations be accounted for using the acquisition method. This means that the acquirer should measure the assets and liabilities of the acquired business at their fair values at the acquisition date. Any difference between the fair value of the consideration paid and the fair value of the assets and liabilities acquired is recognized as goodwill or a gain on bargain purchase.
The acquisition date is the date on which the acquirer obtains control of the acquired business. Control is defined as the ability to direct the activities of an entity to generate returns. Control is presumed to exist when the acquirer has a majority of the voting rights, but can also be achieved through contractual arrangements or other means.
The standard requires the acquirer to disclose information that enables users of the financial statements to evaluate the nature and financial effects of the business combination. This includes information about the assets and liabilities acquired, the consideration transferred, and any goodwill or gain on bargain purchase recognized.
Under IFRS 3, a business combination can take many forms, including a merger, acquisition, consolidation, or the acquisition of assets that constitute a business. In all cases, the acquirer must apply the acquisition method to account for the transaction.
The acquisition method requires the acquirer to identify the assets acquired and liabilities assumed, and to measure them at their fair values at the acquisition date. This includes intangible assets such as trademarks, patents, and customer relationships.
The standard also requires the acquirer to recognize any goodwill or gain on bargain purchase resulting from the acquisition. Goodwill represents the excess of the consideration paid over the fair value of the identifiable assets and liabilities acquired. A gain on bargain purchase arises when the consideration paid is less than the fair value of the identifiable assets and liabilities acquired.
Example 1: Company A acquires Company B for $10 million. The fair value of the assets acquired is $12 million and the fair value of the liabilities assumed is $2 million. Company A recognizes goodwill of $8 million ($10 million – $2 million).
Example 2: Company A acquires Company B for $10 million. The fair value of the assets acquired is $12 million and the fair value of the liabilities assumed is $3 million. Company A recognizes goodwill of $7 million ($10 million – $3 million).
Case Study 1: In 2018, Amazon acquired PillPack, an online pharmacy. The purchase price was not disclosed, but it was reported to be around $1 billion. Amazon recognized goodwill of $400 million as a result of the acquisition.
Case Study 2: In 2019, Salesforce acquired Tableau, a data visualization company, for $15.7 billion. Salesforce recognized goodwill of $8.5 billion as a result of the acquisition.
In 2020, the International Accounting Standards Board (IASB) issued amendments to IFRS 3 that aim to improve the information provided in the financial statements about acquisitions that occurred after the reporting period but before the financial statements are authorized for issue.
The amendments require the acquirer to provide additional disclosures about the acquisition after the reporting period, including the fact that an acquisition has occurred, the name and description of the acquired business, the acquisition date, the consideration transferred, and the reason why the information was not available before the financial statements were authorized for issue.