International Financial Reporting Standards_guide.pdf

Chapter 6 Business Combinations (IFRS 3) 61
6.3.7 Fair value is the amount for which an asset could be exchanged, or a liability settled,
between knowledgeable, willing parties in an arm’s-length transaction.
6.3.8 Goodwill is the future economic benefits arising from assets that cannot be individually
identified and separately recognized.
6.3.9 Acquisition-related costs are costs incurred to effect a business combination, for
example legal, accounting, or valuation fees, any general administration costs, and the costs
to register and issue debt or equity instruments. These costs are to be expensed through
profit or loss unless the cost to issue debt or equity should be capitalized in terms of IAS 32
and IAS 39.
6.3.10 Reacquired rights are intangible assets that are separately recognized at acquisition
date. They relate to any pre-combination right to the use of an asset that was granted by the
acquirer to the acquiree, such as a franchise agreement. On acquisition of the acquiree the
acquirer effectively “reacquires” this right, and thus a separate intangible asset.
6.3.11 Indemnification assets are assets recognized at acquisition date where the sellers of
the acquiree make a contractual guarantee to indemnify the acquirer in respect of the outcome
of a specific contingency or uncertainty related to an asset or liability at acquisition. For
example, where losses may arise from a particular contingent liability that is included in the
net assets, the acquiree guarantees that the liability will not exceed a specific amount. This
guarantee is an asset recognized by the acquirer as the same time as recognizing the related
contingent liability of the acquiree.
6.3.12 Contingent consideration is an obligation of the acquirer to transfer additional consideration
if a specified event occurs or conditions are met. An example would be where the
acquirer has the obligation to pay additional consideration if the profits of the acquiree
exceed certain levels after acquisition. Contingent arrangements may also give an acquirer
the right to the reimbursement of a portion of consideration already paid, which would result
in the recognition of a contingent consideration asset.
6.4 ACCOUNTING TREATMENT
6.4.1 The acquisition method must be applied by the acquirer for all business combinations
entered into. It consists of the following steps:
■ identifying a business combination;
■ identifying the acquirer;
■ determining the acquisition date;
■ recognizing and measuring the identifiable net assets of the acquiree; and
■ recognizing and measuring goodwill or a gain from a bargain purchase, which includes
measuring consideration and non-controlling interest.
Identifying a Business Combination
6.4.2 An entity shall determine whether a transaction or event is a business combination
by applying the definitions as above—in other words, there is an acquirer and control is
obtained over a business. A business is not necessarily a legal entity. IFRS 3 would also be
applicable where a business is purchased out of a legal entity, for example a division.