2.1 IFRS 3 Definitions & the Acquisition Method

• Business combination: a transaction in which an acquirer obtains control of one or more businesses.
• Acquirer: the entity that gains control of the acquiree.
• Acquiree: the entity or group that the acquirer obtains control over.
• Control: existing rights that give the ability to direct relevant activities, exposure to variable returns, and the ability to use power to affect returns.

Acquisition method steps:

1. Identify the acquirer and the acquisition date.
2. Measure the consideration transferred: fair value of assets given, liabilities incurred, and equity interests issued.
3. Recognize and measure identifiable assets acquired and liabilities assumed at their acquisition-date fair values.
4. Measure goodwill or gain from a bargain purchase.

2.2 Identifying Acquirer, Acquiree & Acquisition Date

• Look for:
  • Who issues equity or pays cash?
  • Who appoints the board?
• Acquisition date: the date on which the acquirer obtains control (often closing).

2.3 Measuring Consideration Transferred & FV of Net Assets

• Consideration transferred may include:
  • Cash paid (fair value at acquisition date)
  • Equity instruments issued (fair value)
  • Contingent consideration (measured at fair value at acquisition and remeasured if classified as a liability)
• Identifiable net assets: fair value of acquiree’s assets minus liabilities, including intangible assets meeting recognition criteria.

2.4 Calculating & Accounting for Goodwill / Bargain Purchase

• Goodwill = Consideration transferred
  • Fair value of non-controlling interest (if recognized)
  • Fair value of any previously held equity interest
    – Fair value of identifiable net assets
• Bargain purchase: if net assets exceed consideration, recognize a gain in profit or loss immediately.

2.5 Non-controlling Interests (NCI)

• Two measurement options at acquisition date:
  1. Fair-value method: measure NCI at fair value.
  2. Proportionate share: measure at the NCI’s proportionate share of the acquiree’s identifiable net assets.
• NCI’s share of post-acquisition profit reduces consolidated goodwill.

2.6 Post-Acquisition Measurement

• Goodwill: carried at cost less accumulated impairment (IAS 36).
• Contingent consideration classified and measured in accordance with IFRS 9 (if liability) or IFRS 3 (if equity).
• Acquiree’s assets & liabilities: subsequently accounted for under appropriate IFRS (e.g. IAS 16 for PPE, IFRS 9 for financial instruments).

2.7 Worked Example: Acquisition of Nova Ltd.

Scenario Recap: Orion Ltd. acquires 80% of Nova Ltd. for $6 000 000.
– Nova’s identifiable net assets at fair value: $5 500 000.
– No previously held interest; no contingent consideration; no NCI at fair value option.

1. Consideration transferred: $6 000 000
2. Fair value of net assets: $5 500 000
3. Goodwill = 6 000 000 – 5 500 000 = $500 000

Journal entry on consolidation:

Dr Identifiable net assets   5 500 000
Dr Goodwill                     500 000
  Cr Consideration payable    6 000 000

(Plus elimination of investment in Nova against share capital and recognition of NCI if measured.)

2.7 Strategic Approach: Business Combinations & Consolidation

Follow these steps to apply the acquisition method and prepare consolidated financial statements confidently:

1. Confirm Combination Scope
   Verify that the transaction meets the definition of a business combination under IFRS 3 (acquirer obtains control of a business).
2. Identify Acquirer & Acquisition Date
   Determine which entity gains control and on what date control is obtained (often closing date).
3. List & Measure Consideration Transferred
   Catalogue all elements (cash, equity instruments, contingent consideration) and measure each at fair value on the acquisition date.
4. Identify & Fair-Value the Acquiree’s Net Assets
   Recognise identifiable assets acquired and liabilities assumed at acquisition-date fair values, including PPE, intangibles and provisions.
5. Determine Non-Controlling Interest (NCI)
   Choose measurement basis (fair-value method or proportionate share) and calculate NCI’s share of the acquiree’s net assets.
6. Calculate Goodwill or Gain
   Goodwill = Consideration + NCI + FV of pre-existing interests – FV of identifiable net assets. If negative, recognise a bargain purchase gain.
7. Prepare Acquisition Journal Entries
   Eliminate investment against acquiree’s equity, record fair-value adjustments, goodwill (or gain) and recognise NCI: Dr Identifiable net assets XXX Dr Goodwill XXX Cr Investment in subsidiary XXX Cr Non-controlling interest XXX
8. Build Consolidation Worksheet
   Set up combined trial balances for parent and subsidiary, then apply elimination and adjustment entries on separate columns.
9. Aggregate & Eliminate
   Sum like items (assets, liabilities, revenue, expenses), eliminate investment vs. equity and intercompany balances (per Chapter 6).
10. Prepare Consolidated Financial Statements
    Draft consolidated Statement of Financial Position, Income Statement, Statement of Changes in Equity and Cash Flows, ensuring goodwill and NCI appear correctly.
11. Disclose Key Judgments & Details
    In notes, explain acquisition-date FV measurements, discount rates used for contingent consideration, policy choices for NCI and goodwill impairment testing (IAS 36).

End of Chapter 2