1.1.1 Post-implementation review

In June 2015, the IASB completed the post-implementation review (PIR) of IFRS 3. The PIR was conducted in two phases. The first phase, which consisted of an initial assessment of all the issues that arose on the implementation of IFRS 3 and a consultation with interested parties about those issues, identified the main questions to be addressed in the PIR of IFRS 3. In the second phase the IASB considered the comments received from a Request for Information – Post-Implementation Review: IFRS 3 Business Combinations, along with the information gathered through other consultative activities and a review of relevant academic studies.

In June 2015, the IASB issued its Report and Feedback Statement – Post-implementation Review of IFRS 3 Business Combinations (RFS), which summarised the PIR process, the feedback received and conclusions reached by the IASB. The review of academic literature provided evidence that generally supported the current requirement on business combinations accounting, particularly in relation to the usefulness of reported goodwill, other intangible assets and goodwill impairment. However, investors expressed mixed views on certain aspects of the current accounting, including subsequent accounting for goodwill, separate recognition of intangible assets, measurement of non-controlling interests and subsequent accounting for contingent consideration. Also, many investors do not support the current requirements on step acquisitions and loss of control, and are asking for additional information about the subsequent performance of an acquired business. Many preparers, auditors and regulators identified implementation challenges in the requirements. In particular, applying the definition of a business, measuring the fair value of contingent consideration, contingent liabilities and intangible assets, testing goodwill for impairment on an annual basis and accounting for contingent payments to selling shareholders who become employees.¹

Taking into account all of the evidence collected, the IASB decided to add to its research agenda the following areas of focus, assessed as being of high significance:

• effectiveness and complexity of testing goodwill for impairment;
• subsequent accounting for goodwill (i.e. impairment-only approach compared with an amortisation and impairment approach);
• challenges in applying the definition of a business;
• identification and fair value measurement of intangible assets such as customer relationships and brand names.²

The narrow scope amendments issued by the IASB in October 2018 help entities determine whether an acquired set of activities and assets is a business or not. The amendments clarified the minimum requirements to be a business, removed the assessment of a market participant's ability to replace missing elements, and narrowed the definition of outputs. They also added guidance to assess whether an acquired process is substantive and introduced an optional concentration test to permit a simplified assessment. New illustrative examples were also added to explain application of the amended requirements (see 3.2 below).

The other three areas of high significance listed above are being considered by the IASB within its Goodwill and Impairment research project. In July 2018, the IASB set three research objectives for the research project:

• to explore ways to improve disclosure requirements to enable investors to assess whether a business combination was a good investment decision and whether, after the acquisition, the acquired business is performing as was expected at the time of the acquisition;
• to improve the calculation of value in use in IAS 36 – Impairment of Assets; and
• to simplify the accounting for goodwill.³

In addition, at that meeting, the IASB tentatively decided to issue a discussion paper as the research project's next step.

In June 2019, following further discussions, the IASB reached its preliminary views of what to include in the forthcoming discussion paper. These are summarised in the table below:⁴

At the time of writing, the IASB's work plan indicated that Discussion Paper is expected in the fourth quarter of 2019.⁵

1.1.2 Proposed amendments to IFRS 3 – Reference to the Conceptual Framework

In May 2019, the IASB published for public consultation proposed narrow-scope amendments to IFRS 3. The amendments would update the reference in IFRS 3 to an old version of the Board's Conceptual Framework (the 1989 Framework), that is used by acquirers for determining what constitutes an asset or a liability acquired in a business combination. The exposure draft proposes to update IFRS 3 so it refers to the latest version of the Conceptual Framework, issued in March 2018 (2018 Conceptual Framework). The definitions of assets and liabilities in the 2018 Conceptual Framework are different from those in the 1989 Framework. The 2018 Conceptual Framework clarifies the definition of an asset, removing the requirement for ‘expected’ future economic benefits. It instead defines an asset as a present economic resource controlled by the entity as a result of past events and defines an economic resource as a right that has the ‘potential’ to produce economic benefits. Similarly, the 2018 Conceptual Framework removes from the definition of a liability the requirement for ‘expected’ outflows of resources. It instead requires that an obligation has the ‘potential’ to require the entity to transfer an economic resource to another party.⁶ Therefore, replacing the reference from the 1989 Framework to the 2018 Conceptual Framework could increase the population of assets and liabilities qualifying for recognition in a business combination. In the IASB's view, this would not create a problem if those assets and liabilities would continue to meet recognition criteria after the acquisition date. However, since after the acquisition date IFRS 3 requires an acquirer to account for most types of assets and liabilities recognised in a business combination in accordance with other applicable IFRSs, some assets or liabilities recognised in a business combination might not qualify for recognition subsequently. In such cases, the acquirer would have to derecognise the asset or liability and recognise a resulting loss or gain immediately after the acquisition date (so-called ‘day 2’ loss or gain).⁷ That loss or gain would not represent an economic loss or gain, and would not be a faithful representation of any aspect of the acquirer's financial performance. To address this, the IASB proposes an exception to the recognition principle of IFRS 3. The exception would apply to liabilities and contingent liabilities that would be within the scope of IAS 37 – Provisions, Contingent Liabilities and Contingent Assets – or IFRIC 21 – Levies – if they were incurred separately rather than assumed in a business combination.⁸

For provisions and contingent liabilities within the scope of IAS 37, the exception would require an acquirer to apply IAS 37 (instead of the definition in the 2018 Conceptual Framework) to determine whether a present obligation exists at the acquisition date, as a result of past events. For levies within the scope of IFRIC 21, the exception would require an acquirer to apply IFRIC 21 to determine whether the obligating event that gave rise to a liability to pay the levy had occurred by the acquisition date.⁹

The IASB also proposes amendments to IFRS 3 to identify more precisely the requirements in IAS 37 that do not apply in determining which contingent liabilities to recognise at the acquisition date. A present obligation identified applying the proposed exception might meet the definition of a contingent liability. This would be the case if it were not probable that an outflow of resources embodying economic benefits would be required to settle the obligation, or if the amount of the obligation could not be measured with sufficient reliability. The amendments clarify that if a present obligation identified applying the proposed exception met the definition of a contingent liability, it should be recognised under IFRS 3, even if it is not probable at the acquisition date that an outflow of resources embodying economic benefits will be required to settle the obligation.¹⁰ In the IASB's view, the obligations recognised as liabilities applying the proposed amendments to IFRS 3 would be the same as those recognised applying IFRS 3 at present.¹¹ The amendments are proposed to stand until the IASB decides whether and how to amend IAS 37 to align it with the 2018 Conceptual Framework.

2.2.1 Formation of a joint arrangement

The scope exception of IFRS 3 for the formation of a joint arrangement relates only to the accounting in the financial statements of the joint arrangement, i.e. the joint venture or joint operation (see Chapter 11 at 7.6.5 for details), and not to the accounting for the joint venturer's or joint operator's interest in the joint arrangement. [IFRS 3.BC61B‑BC61D].

By contrast, a particular type of arrangement in which the owners of multiple businesses agree to combine their businesses into a new entity (sometimes referred to as a roll-up transaction) does not include a contractual agreement requiring unanimous consent to decisions about the relevant activities. Majority consent on such decisions is not sufficient to create a joint arrangement. Therefore, such arrangements should be accounted for by the acquisition method. [IFRS 3.BC60].

2.2.2 Acquisition of an asset or a group of assets that does not constitute a business

Although the acquisition of an asset or a group of assets is not within the scope of IFRS 3, in such cases the acquirer has to identify and recognise the individual identifiable assets acquired (including intangible assets) and liabilities assumed. The cost of the group is allocated to the individual identifiable assets and liabilities on the basis of their relative fair values at the date of purchase. These transactions or events do not give rise to goodwill. [IFRS 3.2]. Thus, existing book values or values in the acquisition agreement may not be appropriate.

The cost of the group of assets is the sum of all consideration given and any non-controlling interest recognised. If the non-controlling interest has a present ownership interest and is entitled to a proportionate share of net assets upon liquidation, the acquirer has a choice to recognise the non-controlling interest at its proportionate share of net assets or its fair value; in all other cases, non-controlling interest is recognised at fair value, unless another measurement basis is required in accordance with IFRS. An example could be the acquisition of an incorporated entity that holds a single property, where this is assessed not to be a business (see Chapter 7 at 3.1.1).

It may be difficult to determine whether or not an acquired asset or a group of assets constitutes a business (see 3.2 below), yet this decision can have a considerable impact on an entity's reported results and the presentation of its financial statements; accounting for a business combination under IFRS 3 differs from accounting for an asset(s) acquisition in a number of important respects:

• goodwill or a gain on bargain purchase only arise on business combinations;
• assets acquired and liabilities assumed are generally accounted for at fair value in a business combination, while they are generally assigned a carrying amount based on their relative fair values in an asset acquisition;
• directly attributable acquisition-related costs are expensed if they relate to a business combination, but are generally capitalised as part of the cost of the asset in an asset acquisition;
• while deferred tax assets and liabilities must be recognised if the transaction is a business combination, they are not recognised under IAS 12 – Income Taxes – if it is an asset acquisition (see Chapter 35);
• where the consideration is in the form of shares, IFRS 2 – Share-based Payment – does not apply in a business combination, but will apply in an asset acquisition;
• another difference may arise where the transaction involves contingent consideration. While IFRS 3 provides guidance on the accounting for contingent consideration in the acquisition of a business (see 7.1 below), IAS 16 – Property, Plant and Equipment – and IAS 38 provide no clear guidance on accounting for contingent consideration in an asset(s) acquisition (see Chapter 17 at 4.5 and Chapter 18 at 4.1.9); and
• disclosures are much more onerous for business combinations than for asset acquisitions.

The accounting differences above will not only affect the accounting as of the acquisition date, but will also have an impact on future depreciation, possible impairment and other costs.

In November 2017, the Interpretations Committee issued an agenda decision that clarified how an entity accounts for the acquisition of a group of assets that does not constitute a business. More specifically, the submitter of the request asked for clarity on how to allocate the transaction price to the identifiable assets acquired and liabilities assumed when:

1. the sum of the individual fair values of the identifiable assets and liabilities is different from the transaction price; and
2. the group includes identifiable assets and liabilities initially measured both at cost and at an amount other than cost.

The Interpretations Committee concluded that a reasonable reading of the requirements in paragraph 2(b) of IFRS 3 on the acquisition of a group of assets that does not constitute a business results in one of the following two approaches:

1. Under the first approach, an entity accounts for the acquisition of the group as follows:
   1. it identifies the individual identifiable assets acquired and liabilities assumed that it recognises at the date of the acquisition;
   2. it determines the individual transaction price for each identifiable asset and liability by allocating the cost of the group based on the relative fair values of those assets and liabilities at the date of the acquisition; and then
   3. it applies the initial measurement requirements in applicable IFRSs to each identifiable asset acquired and liability assumed. The entity accounts for any difference between the amount at which the asset or liability is initially measured and its individual transaction price applying the relevant requirements.
2. Under the second approach, for any identifiable asset or liability initially measured at an amount other than cost, an entity initially measures that asset or liability at the amount specified in the applicable standard. The entity deducts from the transaction price of the group the amounts allocated to the assets and liabilities initially measured at an amount other than cost, and then allocates the residual transaction price to the remaining identifiable assets and liabilities based on their relative fair values at the date of the acquisition.

The Interpretations Committee also concluded that an entity should apply its reading of the requirements consistently to all such acquisitions and an entity would also disclose the selected approach applying paragraphs 117–124 of IAS 1 – Presentation of Financial Statements – if that disclosure would assist users of financial statements in understanding how those transactions are reflected in reported financial performance and financial position.¹²

2.2.3 Business combinations under common control

The application guidance in Appendix B to IFRS 3 gives some guidance on accounting for business combinations involving entities or businesses under common control and therefore excluded from the requirements of the standard. [IFRS 3.B1‑B4]. These arrangements are discussed further in Chapter 10.

3.2.1 Inputs, processes and outputs

The application guidance to IFRS 3 describes the components of a business as inputs and processes applied to those inputs that have the ability to contribute to the creation of outputs. The three elements are described as follows:

• Input

  Any economic resource that creates outputs or has the ability to contribute to the creation of outputs when one or more processes are applied to it. Examples include non-current assets (including intangible assets or rights to use non-current assets), intellectual property, the ability to obtain access to necessary materials or rights and employees.

• Process

  Any system, standard, protocol, convention or rule is a process if, when applied to an input or inputs, it either creates or has the ability to contribute to the creation of outputs. Examples include strategic management processes, operational processes and resource management processes. These processes typically are documented, but the intellectual capacity of an organised workforce having the necessary skills and experience following rules and conventions may provide the necessary processes that are capable of being applied to inputs to create outputs. Accounting, billing, payroll and other administrative systems typically are not processes used to create outputs so their presence or exclusion generally will not affect whether an acquired set of activities and assets is considered a business.

• Output

  The result of inputs and processes applied to those inputs that provide goods or services to customers, generate investment income (such as dividends or interest) or generate other income from ordinary activities. [IFRS 3.B7].

Although businesses usually have outputs, outputs need not be present at the acquisition date for an integrated set of activities and assets to be identified as a business. [IFRS 3.B8]. The nature of the elements of a business varies by industry and by the structure of an entity's operations (activities), including the entity's stage of development. Established businesses often have many different types of inputs, processes and outputs, whereas new businesses often have few inputs and processes and sometimes only a single output (product). Nearly all businesses also have liabilities, but a business need not have liabilities. Furthermore, an acquired set of activities and assets that is not a business as defined, might have liabilities. [IFRS 3.B9].

3.2.2 Assessment whether acquired set of activities and assets constitutes a business

To assess whether a transaction is the acquisition of a business, an entity may apply first a quantitative concentration test (also known as a screening test). The entity is not required to apply the test but may elect to do so separately for each transaction or other event.

If the concentration test is met, the set of activities and assets is determined not to be a business and no further assessment is required. Otherwise, or if the entity elects not to apply the test, the entity shall perform the qualitative analysis of whether an acquired set of assets and activities includes at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. [IFRS 3.B7A].

The concentration test is further discussed at 3.2.3 below and assessment of whether an acquired process is substantive is considered at 3.2.4 below.

3.2.3 Concentration test

IFRS 3 sets out an optional concentration test designed to simplify the evaluation of whether an acquired set of activities and assets is not a business. An acquired set of activities and assets is not a business if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. IFRS 3 notes that for the purposes of the concentration test:

1. gross assets acquired exclude cash and cash equivalents, deferred tax assets, and goodwill resulting from the effects of deferred tax liabilities;
2. the fair value of the gross assets acquired includes any consideration transferred (plus the fair value of any non-controlling interest and the fair value of any previously held interest) in excess of the fair value of net identifiable assets acquired. The fair value of the gross assets acquired may normally be determined as the total obtained by adding the fair value of the consideration transferred (plus the fair value of any non-controlling interest and the fair value of any previously held interest) to the fair value of the liabilities assumed (other than deferred tax liabilities), and then excluding the items identified in subparagraph (a) above. However, if the fair value of the gross assets acquired is more than that total, a more precise calculation may sometimes be needed;
3. a single identifiable asset includes any asset or group of assets that would be recognised and measured as a single identifiable asset in a business combination;
4. if a tangible asset is attached to, and cannot be physically removed and used separately from, another tangible asset (or from an underlying asset subject to a lease, as defined in IFRS 16), without incurring significant cost, or significant diminution in utility or fair value to either asset (for example, land and buildings), those assets are considered a single identifiable asset;
5. when assessing whether assets are similar, an entity considers the nature of each single identifiable asset and the risks associated with managing and creating outputs from the assets (that is, the risk characteristics);
6. the following are not considered similar assets:
   1. a tangible asset and an intangible asset;
   2. tangible assets in different classes (for example, inventory, manufacturing equipment and automobiles) unless they are considered a single identifiable asset in accordance with the criterion in subparagraph (d) above;
   3. identifiable intangible assets in different classes (for example, brand names, licences and intangible assets under development);
   4. a financial asset and a non-financial asset;
   5. financial assets in different classes (for example, accounts receivable and investments in equity instruments); and
   6. identifiable assets that are within the same class of asset but have significantly different risk characteristics. [IFRS 3.B7B].

In addition, IFRS 3 clarifies that the requirements above do not modify the guidance on similar assets in IAS 38; or the meaning of the term ‘class’ in IAS 16, IAS 38 and IFRS 7 – Financial Instruments: Disclosures. [IFRS 3.B7C].

Examples 9.1 and 9.2 below illustrate application of the guidance on the concentration test to the specific scenarios.

The Illustrative Examples to IFRS 3 on application of definition of a business contain further illustrations of the application of the concentration test, including approach to the determination of the fair value of the gross assets acquired. [IFRS 3.IE73‑123].

3.2.4 Assessing whether an acquired process is substantive

The existence of a process (or processes) is what distinguishes a business from a set of activities and assets that is not a business. Consequently, the Board decided that to be considered a business, an acquired set of activities and assets must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. [IFRS 3.B8].

IFRS 3 also clarifies that an acquired contract is an input and not a substantive process. Nevertheless, an acquired contract, for example, a contract for outsourced property management or outsourced asset management, may give access to an organised workforce. An entity assesses whether an organised workforce accessed through such a contract performs a substantive process that the entity controls, and thus has acquired. Factors to be considered in making that assessment include the duration of the contract and its renewal terms. [IFRS 3.B12D(a)].

In addition, the Basis for Conclusions on IFRS 3 clarifies that presence of more than an insignificant amount of goodwill is not a relevant indicator that the acquired process is substantive. [IFRS 3.B12D(a)].

IFRS 3 includes guidance to help entities to assess whether an acquired process is substantive. That guidance seeks more persuasive evidence when there are no outputs because the existence of outputs already provides some evidence that the acquired set of activities and assets is a business. [IFRS 3.BC21M]. However, if an acquired set of activities and assets has outputs, continuation of revenue does not on its own indicate that both an input and a substantive process have been acquired. [IFRS 3.B8A].

If a set of activities and assets does not have outputs at the acquisition date, an acquired process (or group of processes) shall be considered substantive only if:

1. it is critical to the ability to develop or convert an acquired input or inputs into outputs; and
2. the inputs acquired include both an organised workforce that has the necessary skills, knowledge, or experience to perform that process (or group of processes) and other inputs that the organised workforce could develop or convert into outputs. Those other inputs could include:
   1. intellectual property that could be used to develop a good or service (e.g. technology);
   2. other economic resources that could be developed to create outputs (e.g. in-process research and development projects); or
   3. rights to obtain access to necessary materials or rights that enable the creation of future outputs (e.g. real estate and mineral interests). [IFRS 3.B12B].

If a set of activities and assets has outputs at the acquisition date, an acquired process (or group of processes) shall be considered substantive if, when applied to an acquired input or inputs, it:

1. is critical to the ability to continue producing outputs, and the inputs acquired include an organised workforce with the necessary skills, knowledge, or experience to perform that process (or group of processes); or
2. significantly contributes to the ability to continue producing outputs and:
   1. is considered unique or scarce; or
   2. cannot be replaced without significant cost, effort, or delay in the ability to continue producing outputs. [IFRS 3.B12C].

Difficulties in replacing an acquired organised workforce may indicate that the acquired organised workforce performs a process that is critical to the ability to create outputs. [IFRS 3.B12D(b)].

IFRS 3 also clarifies that a process (or group of processes) is not critical if, for example, it is ancillary or minor within the context of all the processes required to create outputs. [IFRS 3.B12D(c)].

3.2.5‘Capable of’ from the viewpoint of a market participant

IFRS 3 clarifies that an acquired set of activities and assets does not need to include all of the inputs or processes necessary to operate that set of activities and assets as a business, i.e. it does not need to be self-sustaining. [IFRS 3.B8]. The definition of a business in IFRS 3 requires that inputs, and processes applied to those inputs, have the ‘ability to contribute to the creation of outputs’ rather than the ‘ability to create outputs'. [IFRS 3.BC21F]. Determining whether a set of activities and assets is a business shall be based on whether the integrated set is capable of being conducted and managed as a business by a market participant. Therefore, it is not a relevant consideration whether a vendor operated a transferred set as a business or whether a buyer intends to operate it as a business. [IFRS 3.B11]. The acquired set would be a business, even if an acquirer stops all the operations of the acquiree and disposes of assets acquired as a scrap, if any other market participant would be able to operate the acquired set as a business. Under IFRS 3, a market participant would be able to operate an acquired set as a business, if it includes at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. However, if an acquirer obtains control of an input or set of inputs without any processes, the acquired input(s) would not be considered a business, even if a market participant had all the processes necessary to operate the input(s) as a business. It is not a relevant consideration whether market participants would be capable of replacing any missing inputs or processes, for example by integrating the acquired activities and assets. [IFRS 3.BC21H-21I].

3.2.6 Identifying business combinations

Significant judgement is required in determining whether an acquired set of activities and assets constitute a business. The following are examples from extractive industries and real estate that illustrate the issues.

In the real estate industry, IAS 40 notes that where ancillary services (i.e. processes) are provided and they are insignificant to the overall arrangement, this will not prevent the classification of the asset as investment property. [IAS 40.11]. The guidance on ancillary services, [IAS 40.11‑14], is intended to distinguish an investment property from an owner-occupied property, not whether a transaction is a business combination or an asset acquisition. Entities acquiring investment properties must assess whether the property is a business applying the requirements of IFRS 3. [IAS 40.14A].

Therefore, evaluating whether it is a real estate business where certain processes are transferred involves assessing those processes in the light of the guidance in IFRS 3.

The illustrative examples to IFRS 3 provide further illustrations of the application of principles of IFRS 3 to specific scenarios.

3.2.7 Development stage entities

Development stage entities may qualify as businesses, and their acquisitions accounted for as business combinations because outputs are not required at the acquisition date. The IASB concluded that if the set has no outputs, to qualify as a business the set should include not only a process that is critical to the ability to develop or convert the acquired input or inputs into outputs, but also both an organised workforce that has the necessary skills, knowledge or experience to perform that process, and other inputs that the acquired organised workforce could develop or convert into outputs. [IFRS 3.B12B]. The IASB observed that many entities in the development stage will meet this criterion because technology, intellectual property, or other assets are being developed into a good or service. [IFRS 3.BC21Q].

The application of this guidance may be particularly relevant to transactions in the life sciences industry. This is illustrated in the following examples.

3.2.8 Definition of a business: what changes with the adoption of amendments

After the amendments issued in October 2018, which are effective for annual periods beginning on or after 1 January 2020 (with early application permitted), IFRS 3 continues to adopt a market participant's perspective to determine whether an acquired set of activities and assets is a business (see 3.2.5 above). However, the amendments:

• Clarified the minimum requirements for a business

Prior to the amendments IFRS 3 required integrated set of assets and activities to be qualified as a business to contain inputs and processes that have the ability to create outputs. The amended definition states that for a qualification as a business an integrated set of activities and assets must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output. Thus, under the amended definition a business can exist without including all of the inputs and processes needed to create outputs. [IFRS 3.BC21F].

• Removed the assessment of whether market participants are capable of replacing any missing elements

Prior to the amendments, IFRS 3 stated that a business need not include all of the inputs or processes that the seller used in operating that business, ‘if market participants are capable of acquiring the business and continuing to produce outputs, for example, by integrating the business with their own inputs and processes’. The IASB, however, decided to base the assessment on what has been acquired in its current state and condition, rather than on whether market participants are capable of replacing any missing elements, for example, by integrating the acquired activities and assets. Therefore, the reference to such integration was deleted from IFRS 3. Instead, the amendments focus on whether acquired inputs and acquired substantive processes together significantly contribute to the ability to create outputs. [IFRS 3.BC21H, BC21I].

• Narrowed the definitions of a business and outputs

Previously, outputs were defined as returns in the form of dividends, lower costs or other economic benefits provided directly to investors or other owners, members or participants. As part of the amendments to IFRS 3, the IASB narrowed the definition of outputs to focus on goods or services provided to customers, investment income (such as dividends or interest) or other income from ordinary activities. The definition of a business in Appendix A of IFRS 3 was amended accordingly. The Board believes that the previous reference to lower costs and other economic benefits provided directly to investors did not help to distinguish between an asset and a business. For example, many asset acquisitions may be made with the motive of lowering costs but may not involve acquiring a substantive process. Therefore, this wording was excluded from the definition of outputs and the definition of a business. [IFRS 3.BC21S].

• Introduced an optional fair value concentration test

Whilst applying the definition of a business might involve significant judgement, many respondents to the PIR of IFRS 3 noted that there was little or no guidance to identify situations where an acquired set of activities and assets is not a business. To address those concerns, the IASB introduced an optional fair value concentration test that was absent in the previous version of IFRS 3. The purpose of this test is to permit a simplified assessment of whether an acquired set of activities and assets is not a business (see 3.2.3 above for details of new requirements). [IFRS 3.BC21T].

• Added guidance to help entities assess whether an acquired process is substantive

The PIR of IFRS 3 also revealed difficulties in assessing: whether the acquired processes are sufficient to constitute one of the elements of a business; whether any missing processes are so significant that an acquired set of activities and assets is not a business; and, how to apply the definition of a business when the acquired set of activities and assets does not generate revenue. In response, the IASB added guidance to help entities assess whether an acquired process is substantive. That guidance requires more persuasive evidence when there are no outputs because the existence of outputs already provides some evidence that the acquired set of activities and assets is a business. (see 3.2.4 above for details of new requirements). [IFRS 3.BC21l-21R].

4.1.1 New entity formed to effect a business combination

A new entity formed to effect a business combination is not necessarily the acquirer. This will depend among others on whether it has issued equity interests or paid cash. If it has issued equity interests, one of the combining entities is to be identified as the acquirer by applying the guidance described above. [IFRS 3.B18].

If a new entity transfers cash or other assets or incurs liabilities as consideration, it may be the acquirer. IFRS 3 does not specify in what circumstances this may be the case but it is clear that ‘control’ is the fundamental concept when identifying an acquirer. Generally, a new entity that was formed to effect a business combination other than through the issue of shares will be identified as an acquirer if this new entity is an extension of the party (or parties) that ultimately gains control of the combining entities. The determination of whether such a new entity is an extension of the selling party (or parties) or the party (or parties) that ultimately gains control over the combining entities, requires a thorough analysis of all the facts and circumstances. This analysis requires an assessment of the purpose and design of the transaction. Sometimes, even if the transaction results in a change of control, the underlying substance of the transaction may be for a purpose other than a party or parties to gain control of an entity. In such a situation, even if a new entity transfers cash or other assets and/or incurs liabilities as consideration, it may be appropriate to conclude that this new entity is not an extension of the party (or parties) ultimately gaining control and, therefore cannot be identified as an acquirer (see Example 9.11 below). However, when the purpose and design of the transaction indicate that its underlying substance is to gain control over the business by the new ultimate controlling party (or parties), then this new entity is an extension of such party (or parties) and, therefore, would likely be identified as an acquirer. An example of the latter is a situation where the newly formed entity (‘Newco’) is used by a group of investors or another entity to acquire a controlling interest in a target entity in an arm's length transaction.

Another specific situation in which a Newco might be identified as the acquirer is illustrated in Example 9.10 below, where a parent uses a Newco to facilitate a public flotation of shares in a group of subsidiary companies. Although a Newco incorporated by the existing parent of the subsidiaries concerned would not generally be identified as the acquirer, in this particular situation the critical distinguishing factor is that the acquisition of the subsidiaries was conditional on an Initial Public Offering (‘IPO’) of Newco. This means that there has been a substantial change in the ownership of the subsidiaries by virtue of the IPO and indicates that the purpose and design of the transaction is to achieve a change in control over the transferred business. The Interpretations Committee discussed similar fact patterns¹⁴ but has subsequently observed that accounting for arrangements involving the creation of a newly formed entity is too broad to be addressed through an interpretation or an annual improvement. The Interpretations Committee concluded that it would be better considered within the context of a broader project on accounting for common control transactions.¹⁵ In December 2017, the IASB tentatively decided that the scope of its project on business combinations under common control would include transfers of businesses under common control that are conditional on a future IPO.¹⁶ At the time of writing, the project is on the IASB's active agenda with the next step likely to be a discussion paper in the first half of 2020 (see Chapter 10 at 6).¹⁷

Whether a Newco formed to facilitate an IPO is capable of being identified as an acquirer depends on the facts and circumstances and ultimately requires judgement. If, for example, Entity A incorporates Newco and arranges for it to acquire Sub 1 and Sub 2 prior to the IPO proceeding, Newco might be viewed as an extension of Entity A or possibly an extension of Sub 1 or Sub 2. This is because the IPO and the reorganisation may not be seen as being part of one integral transaction, and therefore the transaction would be a combination of entities under common control (see Chapter 10 at 4.4). In that situation, Newco would not be the acquirer.

Example 9.11 below illustrates a situation where, despite the fact that the transaction results in a change of control, the purpose and design indicate that the substance of the transaction was to achieve something other than gaining control. Assessing the purpose and design of a transaction is a judgement that requires careful consideration of all facts and circumstances.

4.1.2 Stapling arrangements

In 2014, the Interpretations Committee considered whether an acquirer identified for the purpose of IFRS 3 is a parent for the purpose of IFRS 10 in circumstances in which a business combination is achieved by contract alone, such as a stapling arrangement, with no combining entity obtaining control of the other combining entities. When considering this issue, the Interpretations Committee thought that the guidance outlined in paragraph B15(a) of IFRS 3, i.e. that the acquirer is usually the combining entity whose owners as a group receive the largest portion of the voting rights in the combined entity, would be relevant to identifying which of the combining entities is the acquirer in the stapling transaction considered.¹⁸

5.5.1 Operating leases in which the acquiree is the lessor

If the acquiree is a lessor in an operating lease, i.e. it has an item of property, plant and equipment that is leased to another party, there is no requirement for the acquirer to recognise intangible assets or liabilities if the terms of the lease are favourable or unfavourable relative to market terms and prices. Instead, off-market terms are reflected in the acquisition-date fair value of the asset (such as a building or a patent) subject to the lease. [IFRS 3.B42]. The IASB sought to avoid any inconsistency with the fair value model in IAS 40, which requires the fair value of investment property to take into account rental income from current leases. [IFRS 3.BC146].

The requirement to reflect the off-market terms in the fair value of the asset subject to an operating lease in which the acquiree is the lessor applies to any type of asset, to the extent market participants would take them into consideration when pricing the asset, and is not restricted to investment properties accounted for under the fair value model in IAS 40. Based on the requirements of IAS 16 and IAS 38, an entity would be required to adjust the depreciation or amortisation method for the leased asset so as to reflect the timing of the cash flows attributable to the underlying leases. [IFRS 3.BC148].

5.5.2 Intangible assets

Identifiable intangible assets may have to be recognised by an acquirer although they have not previously been recognised by the acquiree. [IFRS 3.B31]. IFRS 3 and IAS 38 give guidance on the recognition of intangible assets acquired in a business combination.

IFRS 3 and IAS 38 both define an ‘intangible asset’ as ‘an identifiable non-monetary asset without physical substance’. [IFRS 3 Appendix A, IAS 38.8]. The definition requires an intangible asset to be ‘identifiable’ to distinguish it from goodwill. [IAS 38.11]. Both standards regard an asset as identifiable if it:

1. is separable, i.e. capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, identifiable asset or liability, regardless of whether the entity intends to do so (the ‘separability’ criterion); or
2. arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations (the ‘contractual-legal’ criterion). [IFRS 3 Appendix A, IAS 38.12].

IFRS 3 provides the following application guidance.

• Separability

An intangible asset is separable even if the acquirer has no intention of selling, licensing or otherwise exchanging it. An acquired intangible asset is separable if there is evidence of exchange transactions for that type of asset or an asset of a similar type, even if those transactions are infrequent and regardless of whether the acquirer is involved in them. For example, customer and subscriber lists are frequently licensed and thus separable. Even if an acquiree believes its customer lists have characteristics that distinguish them from others, this would not generally prevent the acquired customer list being considered separable. However, if confidentiality terms or other agreements prohibit an entity from selling, leasing or otherwise exchanging information about its customers, then the customer list would not be separable. [IFRS 3.B33].

An intangible asset may be separable from goodwill in combination with a related contract, identifiable asset or liability. Two examples are given by IFRS 3:

1. market participants exchange deposit liabilities and related depositor relationship intangible assets in observable exchange transactions. Therefore, the acquirer should recognise the depositor relationship intangible asset separately from goodwill; or
2. an acquiree owns a registered trademark and documented but unpatented technical expertise used to manufacture the trademarked product. When it sells the trademark, the owner must also transfer everything else necessary for the new owner to produce a product or service indistinguishable from that produced by the former owner. Because the unpatented technical expertise must be separated from the acquiree or combined entity and sold if the related trademark is sold, it meets the separability criterion. [IFRS 3.B34].

• Contractual-legal

An intangible asset that meets the contractual-legal criterion is identifiable, and hence accounted for separately from goodwill, even if the asset is not transferable or separable from the acquiree or from other rights and obligations. For example:

1. an acquiree owns and operates a nuclear power plant. The licence to operate the power plant is a separate intangible asset, even if the acquirer cannot sell or transfer it separately from the power plant itself. IFRS 3 goes on to say that an acquirer may recognise the operating licence and the power plant as a single asset for financial reporting purposes if their useful lives are similar; or
2. an acquiree owns a technology patent that it has licensed to others for their exclusive use outside the domestic market, for which it has received a specified percentage of future foreign revenue. Both the technology patent and the related licence agreement meet the contractual-legal criterion for separate recognition even if it would not be practical to sell or exchange them separately from one another. [IFRS 3.B32].

Accordingly, under IFRS 3, intangible assets are recognised separately from goodwill if they are identifiable, i.e. they either are separable or arise from contractual or other legal rights. [IFRS 3.B31]. They must be assigned an acquisition-date fair value.

5.5.2.F Determining the fair values of intangible assets

Little guidance relating to fair value remains in IFRS 3 as it is now included in IFRS 13 (discussed at 5.3 above and in Chapter 14). IAS 38 states that the fair value of an intangible asset will reflect market participants’ expectations at the acquisition date about the probability that the expected future economic benefits embodied in the asset will flow to the entity. [IAS 38.33]. Like IFRS 3, IAS 38 incorporates IFRS 13's definition of fair value (see 5.3 above). [IAS 38.8].

There are three broad approaches to valuing intangible assets that correspond to the valuation approaches referred to in IFRS 13. [IFRS 13.62]. These are the market, income and cost approaches. The diagram below shows these valuation approaches, together with some of the primary methods used to measure the fair value of intangible assets that fall under each approach, shown in the boxes on the right.

IFRS 13 does not limit the types of valuation techniques an entity might use to measure fair value. Instead the standard indicates that entities should use valuation techniques that are appropriate in the circumstances and for which sufficient data are available, which may result in the use of multiple valuation techniques. Regardless of the technique(s) used, a fair value measurement should maximise the use of relevant observable inputs and minimise the use of the unobservable inputs. [IFRS 13.61]. The resulting fair value measurement should also reflect an exit price, i.e. the price to sell an asset. [IFRS 13.2].

In practice, the ability to use a market-based approach is very limited as intangible assets are generally unique and are not typically traded. For example, there are generally no observable transactions for unique rights such as brands, newspaper mastheads, music and film publishing rights, patents or trademarks noted in paragraph 78 of IAS 38, i.e. a number of the intangible assets that IFRS 3 and IAS 38 require an acquirer to recognise in a business combination.

The premise of the cost approach is that an investor would pay no more for an intangible asset than the cost to recreate it. The cost approach reflects the amount that would be required currently to replace the service capacity of an asset (i.e. current replacement cost). It is based on what a market participant buyer would pay to acquire or construct a substitute asset of comparable utility, adjusted for obsolescence. Obsolescence includes physical deterioration, technological (functional) and economic obsolescence so it is not the same as depreciation under IAS 16. [IFRS 13.B8, B9]. This approach is most often used for unique intangible assets constructed by the entity, e.g. internally-developed software.

Income-based approaches are much more commonly used. These involve identifying the expected cash flows or economic benefits to be derived from the ownership of the particular intangible asset, and calculating the fair value of an intangible asset at the present value of those cash flows. These are discussed further below.

For each asset, there may be several methodologies that can be applied. The methods used will depend on the circumstances, as the assets could result in additional revenue, cost savings, or replacement time. A discounted cash flow method may be used, for example, in determining the value of cost-savings that will be achieved as a result of having a supply contract with advantageous terms in relation to current market rates.

Two income-based methods that are commonly used to value intangible assets are:

• the Multi Period Excess Earnings Method (‘MEEM’); and
• the Relief from Royalty method.

The MEEM is a residual cash flow methodology that is often used in valuing the primary intangible asset acquired. The key issue in using this method is how to isolate the income/cash flow that is related to the intangible asset being valued.

As its name suggests, the value of an intangible asset determined under the MEEM is estimated through the sum of the discounted future excess earnings attributable to the intangible asset. The excess earnings is the difference between the after-tax operating cash flow attributable to the intangible asset and the required cost of invested capital on all other assets used in order to generate those cash flows. These contributory assets include property, plant and equipment, other identifiable intangible assets and net working capital. The allowance made for the cost of such capital is based on the value of such assets and a required rate of return reflecting the risks of the particular assets. As noted at 5.5.4 below, although it cannot be recognised as a separate identifiable asset, an assembled workforce may have to be valued for the purpose of calculating a ‘contributory asset charge’ in determining the fair value of an intangible asset under the MEEM.

The Relief from Royalty method is often used to calculate the value of a trademark or trade name. This approach is based on the concept that if an entity owns a trademark, it does not have to pay for the use of it and therefore is relieved from paying a royalty. The amount of that theoretical payment is used as a surrogate for income attributable to the trademark. The valuation is arrived at by computing the present value of the after-tax royalty savings, calculated by applying an appropriate royalty rate to the projected revenue, using an appropriate discount rate. The legal protection expenses relating to the trademark and an allowance for tax at the appropriate rate are deducted. The Relief from Royalty method was applied by adidas AG in its 2015 financial statements.

It may be that the value of an intangible asset will reflect not only the present value of the future post-tax cash flows as indicated above, but also the value of any tax benefits (sometimes called ‘tax amortisation benefits’) that might generally be available to the owner if the asset had been bought separately, i.e. not as part of a business combination. adidas AG discloses in the extract above that fair value of trademarks and similar rights includes a tax amortisation benefit. Whether such tax benefits are included will depend on the nature of the intangible asset and the relevant tax jurisdiction. If tax amortisation benefits are included, an asset that has been purchased as part of a business combination may not actually be tax-deductible by the entity, either wholly or in part. This therefore raises a potential impairment issue that is discussed in Chapter 20 at 8.3.1.

In the extract below, Allied Electronics Corporation discloses in its annual financial statements the use of the Relief from Royalty method for valuation of trade names and the Multi-Period Excess Earnings Method to value customer relationships acquired in business combinations.

Because fair value is an exit price, the acquirer's intention in relation to intangible assets, e.g. where the acquirer does not intend to use an intangible asset of the acquiree is not taken into account in attributing a fair value. This is explicitly addressed in IFRS 3 and IFRS 13 and discussed at 5.5.6 below and in Chapter 14 at 10.1.

5.5.3 Reacquired rights

A reacquired right, that is a right previously granted to the acquiree to use one or more of the acquirer's recognised or unrecognised assets, must be recognised separately from goodwill. Reacquired rights include a right to use the acquirer's trade name under a franchise agreement or a right to use the acquirer's technology under a technology licensing agreement. [IFRS 3.B35].

A reacquired right is not treated as the settlement of a pre-existing relationship. Reacquisition of, for example, a franchise right does not terminate the right. The difference is that the acquirer, rather than the acquiree by itself, now controls the franchise right. The IASB also rejected subsuming reacquired rights into goodwill, noting that they meet both contractual-legal and separability criteria and therefore qualify as identifiable intangible assets. [IFRS 3.BC182‑BC184].

Guidance on the valuation of such reacquired rights, and their subsequent accounting, is discussed at 5.6.5 below.

Although the reacquired right itself is not treated as a termination of a pre-existing relationship, contract terms that are favourable or unfavourable relative to current market transactions are accounted for as the settlement of a pre-existing relationship. The acquirer has to recognise a settlement gain or loss. [IFRS 3.B36]. Guidance on the measurement of any settlement gain or loss is discussed at 11.1 below.

5.5.4 Assembled workforce and other items that are not identifiable

The acquirer subsumes into goodwill the value of any acquired intangible asset that is not identifiable as at the acquisition date.

5.5.5 Assets with uncertain cash flows (valuation allowances)

Under IFRS 3, the acquirer may not recognise a separate provision or valuation allowance for assets that are initially recognised at fair value. Because receivables, including loans, are to be recognised and measured at fair value at the acquisition date, any uncertainty about collections and future cash flows is included in the fair value measure (see Chapter 49 at 3.3.4). [IFRS 3.B41]. Therefore, although an acquiree may have assets, typically financial assets such as receivables and loans, against which it has recognised a provision or valuation allowance for impairment or uncollectible amounts, an acquirer cannot ‘carry over’ any such valuation allowances nor create its own allowances in respect of those financial assets.

Subsequent measurement of financial instruments under IFRS 9 is dealt with in Chapter 50. Chapter 51 at 7.4 deals specifically with the interaction between the initial measurement of debt instruments acquired in a business combination and the impairment model of IFRS 9.

5.5.6 Assets that the acquirer does not intend to use or intends to use in a way that is different from other market participants

An acquirer may intend not to use an acquired asset, for example, a brand name or research and development intangible asset or it may intend to use the asset in a way that is different from the way in which other market participants would use it. IFRS 3 requires the acquirer to recognise all such identifiable assets, and measure them at their fair value determined in accordance with their highest and best use by market participants (see 5.3 above and in Chapter 14 at 10.1). This requirement is applicable both on initial recognition and when measuring fair value less costs of disposal for subsequent impairment testing. [IFRS 3.B43]. This means that no immediate impairment loss should be reflected if the acquirer does not intend to use the intangible asset to generate its own cash flows, but market participants would.

However, if the entity is not intending to use the intangible asset to generate cash flows, it is unlikely that it could be regarded as having an indefinite life for the purposes of IAS 38, and therefore it should be amortised over its expected useful life. This is likely to be relatively short.

5.5.7 Investments in equity-accounted entities

An acquiree may hold an investment in an associate, accounted for under the equity method (see Chapter 11 at 3). There are no recognition or measurement differences between an investment that is an associate or a trade investment because the acquirer has not acquired the underlying assets and liabilities of the associate. Accordingly, the fair value of the associate should be determined on the basis of the value of the investment, rather than the underlying fair values of the identifiable assets and liabilities of the associate. The impact of having listed prices for investments in associates when measuring fair value is discussed further in Chapter 14 at 5.1.1. Any goodwill relating to the associate is subsumed within the carrying amount for the associate rather than within the goodwill arising on the overall business combination. Nevertheless, although this fair value is effectively the ‘cost’ to the group to which equity accounting is applied, the underlying fair values of the various identifiable assets and liabilities also need to be determined to apply equity accounting (see Chapter 11 at 7).

This also applies if an acquiree holds an investment in a joint venture that under IFRS 11 is accounted for under the equity method (see Chapter 12 at 7).

5.5.8 Assets and liabilities related to contacts with customers

As part of a business combination, an acquirer may assume liabilities or acquire assets recognised by the acquiree in accordance with IFRS 15, for example, contract assets, receivables or contract liabilities.

Under IFRS 15, if a customer pays consideration, or an entity has a right to an amount of consideration that is unconditional (i.e. a receivable), before the entity transfers a good or service to the customer, the entity presents a contract liability. [IFRS 15.106]. An acquirer recognises a contract liability (e.g. deferred revenue) related to a contract with a customer that it has assumed if the acquiree has received consideration (or the amount is due) from the customer. To determine whether to recognise a contract liability, however, an acquirer may also need to consider the definition of a performance obligation in IFRS 15. That is, at the acquisition date, the acquirer would identify the remaining promised goods and services in a contract with a customer and evaluate whether the goods and services it must transfer to a customer in the future are an assumed performance obligation for which the acquired entity has received consideration (or the amount is due). This is important because the consideration received (or the amount due) may relate to a satisfied or partially satisfied performance obligation for which no (or not all) revenue was recognised pre-combination (e.g. due to variable consideration being constrained). Since it was not party to the acquiree's performance pre-combination, an acquirer may need to consider how that affects its financial statements. For example, whether any consideration received that relates to the acquiree's pre-combination performance should be presented as revenue or other income.

Chapter 28 at 3 provides additional guidance on identifying performance obligations in a contract with a customer. If a contract liability for an assumed performance obligation is recognised, the acquirer derecognises the contract liability and recognises revenue as it provides those goods or services after the acquisition date.

In accordance with the requirements in IFRS 3, at the date of acquisition, an assumed contract liability is measured at its fair value, which would reflect the acquiree's obligation to transfer some (if advance covers only a portion of consideration for the remaining promised goods and services) or all (if advance covers full consideration for the remaining promised goods and services) of the remaining promised goods and services in a contract with a customer, as at the acquisition date. The acquirer does not recognise a contract liability or a contract asset for the contract with customer that is an executory contract (see Chapter 26 at 1.3) at the acquisition date. However, for executory contracts with customers with terms that are favourable or unfavourable relative to the market terms, the acquirer recognises either a liability assumed or an asset acquired in a business combination (see 5.5.2.A above). The fair value is measured in accordance with the requirements in IFRS 13 and may require significant judgement. One method that might be used in practice to measure fair value of the contract liability is a cost build-up approach. That approach is based on a market participant's estimate of the costs that will be incurred to fulfil the obligation plus a ‘normal’ profit margin for the level of effort or assumption of risk by the acquirer after the acquisition date. The normal profit margin also should be from the perspective of a market participant and should not include any profit related to selling or other efforts completed prior to the acquisition date.

In addition to the contract liability, an acquirer may also assume refund liabilities of the acquiree. Under IFRS 15, an entity recognises a refund liability if the entity receives consideration from a customer and expects to refund some or all of that consideration to the customer, including refund liabilities relating to a sale with a right of return. [IFRS 15.55]. A refund liability, therefore, is different from a contract liability and might be recognised even if at the acquisition date no contract liability should be recognised. Under IFRS 3, refund liabilities are also measured at their fair value at the acquisition date with fair value determined in accordance with the requirements of IFRS 13. The requirements in IFRS 13 for measuring the fair value of liabilities are discussed in more detail in Chapter 14 at 11.

If an entity performs by transferring goods or services to a customer before the customer pays consideration or before payment is due, the entity presents a contract as a contract asset, excluding amounts presented as receivable. [IFRS 15.107]. Contract assets represent entity's rights to consideration in exchange for goods or services that the entity has transferred to a customer when that right is conditioned on something other than the passage of time (e.g. the entity's future performance). [IFRS 15.105] (see also Chapter 32 at 2.1.1).

The value of acquired contracts with customers may be recognized in multiple assets and liabilities (e.g. receivables, contract assets, right of return assets, intangible assets, contract liabilities, refund liabilities).

Under IFRS 3 at the date of acquisition, all acquired assets related to the contract with customers are measured at their fair value at that date determined under IFRS 13. The IFRS 13 requirements for measuring the fair value of assets are discussed in more detail in Chapter 14 at 5.

When measuring the fair value of acquired contracts with customers, an acquirer should verify that all of the components of value have been considered (i.e. an acquirer should verify that none of the components of value have been omitted or double counted). An acquirer also should verify that all of the components are appropriately reflected in the fair value measurement. After the date of acquisition, an acquirer applies IFRS 15 to account for any of the acquiree's assets, liabilities, income and expenses that fall within that standard's scope. [IFRS 3.54]. Because IFRS 15 does not measure revenue (or any assets or liabilities within its scope) on a fair value basis, so-called ‘day 2’ measurement differences may arise post-combination. Neither IFRS 3 nor IFRS 15 specify how to account for such differences and, therefore, the acquirer may need to develop an accounting policy in accordance with IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors.

5.6.1 Contingent liabilities

IAS 37 defines a contingent liability as:

1. a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity; or
2. a present obligation that arises from past events but is not recognised because:
   1. it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or
   2. the amount of the obligation cannot be measured with sufficient reliability. [IFRS 3.22, IAS 37.10].

5.6.2 Income taxes

In developing IFRIC 23 – Uncertainty over Income Tax Treatments, the Interpretation Committee considered whether the Interpretation should address the accounting for tax assets and liabilities acquired or assumed in a business combination when there is uncertainty over income tax treatments. It noted that IFRS 3 applies to all assets acquired and liabilities assumed in a business combination and concluded that on this basis the Interpretation should not explicitly address tax assets and liabilities acquired or assumed in a business combination. [IFRIC 23.BC23].

Nonetheless, IFRS 3 requires an entity to account for deferred tax assets and liabilities that arise as part of a business combination by applying IAS 12. [IFRS 3.24]. Accordingly, the Interpretation applies to such assets and liabilities when there is uncertainty over income tax treatments that affect deferred tax. [IFRIC 23.BC24].

IFRS 3 suggests that current tax should be measured at fair value, which differs from the subsequent measurement required by IFRIC 23. Entities must consider whether the application of IFRS 3 fair value requirements to current tax assets and liabilities (which may result in possible Day 2 gains and losses) takes precedence over the requirements of IFRIC 23 for the subsequent measurement and deferred tax assets and liabilities. We believe either approach is acceptable, provided that it is applied consistently (see also Chapter 33 at 9.1.1).

As mentioned above, IFRS 3 requires the acquirer to recognise and measure, in accordance with IAS 12, a deferred tax asset or liability, arising from the assets acquired and liabilities assumed in a business combination. [IFRS 3.24]. The acquirer is also required to account for the potential tax effects of temporary differences and carryforwards of an acquiree that exist at the acquisition date or arise as a result of the acquisition in accordance with IAS 12. [IFRS 3.25].

IAS 12 requires that:

1. acquired deferred tax benefits recognised within the measurement period (see 12 below) reduce the goodwill related to that acquisition if they result from new information obtained about facts and circumstances existing at the acquisition date. If the carrying amount of goodwill is zero, any remaining deferred tax benefits are to be recognised in profit or loss; and
2. all other acquired tax benefits realised are to be recognised in profit or loss, unless IAS 12 requires recognition outside profit or loss. [IAS 12.68]

It will therefore be necessary to assess carefully the reasons for changes in the assessment of deferred tax made during the measurement period to determine whether it relates to facts and circumstances at the acquisition date or if it is a change in facts and circumstances since acquisition date. As an anti-abuse clause, if the deferred tax benefits acquired in a business combination are not recognised at the acquisition date but are recognised after the acquisition date with a corresponding gain in profit or loss, paragraph 81 (k) of IAS 12 requires a description of the event or change in circumstances that caused the deferred tax benefits to be recognised.

IAS 12 also requires that tax benefits arising from the excess of tax-deductible goodwill over goodwill for financial reporting purposes is accounted for at the acquisition date as a deferred tax asset in the same way as other temporary differences. [IAS 12.32A].

The requirements of IAS 12 relating to the deferred tax consequences of business combinations are discussed further in Chapter 33 at 12.

5.6.3 Employee benefits

IFRS 3 requires the acquirer to recognise and measure a liability (or asset, if any) related to the acquiree's employee benefit arrangements in accordance with IAS 19 – Employee Benefits (see Chapter 35), rather than at their acquisition-date fair values. [IFRS 3.26, BC296‑BC300].

5.6.4 Indemnification assets

The seller in a business combination may contractually indemnify the acquirer for the outcome of the contingency or uncertainty related to all or part of a specific asset or liability. These usually relate to uncertainties as to the outcome of pre-acquisition contingencies, e.g. uncertain tax positions, environmental liabilities, or legal matters. The amount of the indemnity may be capped or the seller will guarantee that the acquirer's liability will not exceed a specified amount.

IFRS 3 considers that the acquirer has obtained an indemnification asset. [IFRS 3.27].

From the acquirer's perspective, the indemnification is an acquired asset to be recognised at its acquisition-date fair value. However, IFRS 3 makes an exception to the general principles in order to avoid recognition or measurement anomalies for indemnifications related to items for which liabilities are either not recognised or are not required to be measured at fair value (e.g. uncertain tax positions related to recognised deferred tax assets and liabilities). [IFRS 3.BC302‑BC303]. Accordingly, under IFRS 3 the acquirer measures an indemnification asset on the same basis as the indemnified item, subject to the need for a valuation allowance for uncollectible amounts, if necessary.

• If the indemnification relates to an asset or a liability that is measured at fair value, the acquirer will recognise the indemnification asset at its fair value. The effects of uncertainty about future cash flows (i.e. the collectability of the asset) are included in the fair value measure and a separate valuation allowance is not necessary (see 5.5.5 above). [IFRS 3.27].
• The indemnification may relate to an asset or liability that is not measured at fair value. A common example is an indemnification pertaining to a deferred tax liability that is measured in accordance with IAS 12, rather than at its fair value (see 5.6.2 above). If the indemnified item is recognised as a liability but is measured on a basis other than fair value, the indemnification asset is recognised and measured using consistent assumptions, subject to management's assessment of collectability and any contractual limitations on the indemnified amount. [IFRS 3.27‑28].
• If the indemnified item is not recognised as a liability at the date of acquisition, the indemnification asset is not recognised. An indemnification could relate to a contingent liability that is not recognised at the acquisition date because its fair value is not reliably measurable, [IFRS 3.28], or it is only a possible obligation at that date (see 5.6.1 above).

Thereafter, the indemnification asset continues to be measured using the same assumptions as the indemnified liability or asset. [IFRS 3.57]. Thus, where the change in the value of the related indemnified liability or asset has to be recognised in profit or loss, this will be offset by any corresponding change in the value recognised for the indemnification asset. The acquirer derecognises the indemnification asset only when it collects the asset, sells it or otherwise loses the right to it. [IFRS 3.57].

5.6.5 Reacquired rights

Reacquired rights (see 5.5.3 above) are valued on the basis of the remaining contractual term of the related contract, regardless of whether market participants would consider potential contractual renewals when measuring their fair value. [IFRS 3.29].

If the terms of the contract giving rise to the reacquired right are favourable or unfavourable relative to current market transactions for the same or similar items, this is accounted for as the settlement of a pre-existing relationship and the acquirer has to recognise a settlement gain or loss. [IFRS 3.B36]. Guidance on the measurement of any settlement gain or loss is discussed at 11.1 below. An example of accounting for the settlement gain or loss on the acquisition of a reacquired rights is illustrated in Example 9.28 below.

After acquisition, the intangible asset is to be amortised over the remaining contractual period of the contract, without including any renewal periods. [IFRS 3.55, BC308]. As the reacquired right is no longer a contract with a third party it might be thought that the acquirer could assume indefinite renewals of its contractual term, effectively making the reacquired right an intangible asset with an indefinite life. However, the IASB considers that a right reacquired from an acquiree has, in substance, a finite life. [IFRS 3.BC308].

If the acquirer subsequently sells a reacquired right to a third party, the carrying amount of the intangible asset is to be included in determining the gain or loss on the sale. [IFRS 3.55, BC310].

5.6.6 Assets held for sale

Non-current assets or disposal groups classified as held for sale at the acquisition date in accordance with IFRS 5 – Non-current Assets Held for Sale and Discontinued Operations – are measured at fair value less costs to sell (see Chapter 4 at 2.2). [IFRS 3.31]. This avoids the need to recognise a loss for the selling costs immediately after a business combination (a so-called Day 2 loss).

5.6.7 Share-based payment transactions

Liabilities or equity instruments related to the acquiree's share-based payments are measured in accordance with IFRS 2 (referred to as the ‘market-based measure’), rather than at fair value, as are replacement schemes where the acquirer replaces the acquiree's share-based payments with its own. [IFRS 3.30, IFRS 13.6]. The measurement rules of IFRS 2 are not based on the fair value of the award at a particular date; measuring share-based payment awards at their acquisition-date fair values would cause difficulties with the subsequent accounting in accordance with IFRS 2. [IFRS 3.BC311].

Additional guidance given in IFRS 3 for accounting for the replacement of share-based payment awards (i.e. vested or unvested share-based payment transactions) in a business combination is discussed at 7.2 and 11.2 below. Any equity-settled share-based payment transactions of the acquiree that the acquirer does not exchange for its own share-based payment transactions will result in a non-controlling interest in the acquiree being recognised, as discussed at 8.4 below.

5.6.8 Leases in which the acquiree is the lessee

IFRS 3 requires the acquirer to measure the acquired lease liability as if the lease contract were a new lease at the acquisition date. That is, the acquirer applies IFRS 16's initial measurement provisions, using the present value of the remaining lease payments at the acquisition date. The acquirer follows the requirements for determining the lease term, lease payments and discount rate as discussed in Chapter 23 at 4.

IFRS 3 also requires the acquirer to measure the right-of-use asset at an amount equal to the recognised liability, adjusted to reflect the favourable or unfavourable terms of the lease, relative to market terms. Because the off-market nature of the lease is captured in the right-of-use asset, the acquirer does not separately recognise an intangible asset or liability for favourable or unfavourable lease terms relative to market terms.

Under IFRS 3, the acquirer is not required to recognise right-of-use assets and lease liabilities for leases with lease terms which end within 12 months of the acquisition date and leases for low-value assets acquired in a business combination. As indicated in the Basis for Conclusions for IFRS 16, the IASB considered whether to require an acquirer to recognise assets and liabilities relating to off-market terms for short-term leases and leases of low-value assets. However, the IASB observed that the effect of off-market terms would rarely be material for short-term leases and leases of low-value assets and so decided not to require this. [IFRS 3.BC298].

5.6.9 Insurance contracts within the scope of IFRS 17

IFRS 17 replaces IFRS 4 and is effective for reporting periods beginning on or after 1 January 2021, with early application permitted. IFRS 17 introduces a new exception to measurement principles in IFRS 3. Under IFRS 3, as amended by IFRS 17, the acquirer in a business combination shall measure a group of contracts within the scope of IFRS 17 as a liability or asset in accordance with paragraphs 39 and B93-B95 of IFRS 17, at the acquisition date.²⁵

7.1.1 Initial recognition and measurement

Contingent consideration is recognised at its fair value as part of the consideration transferred in exchange for the acquiree. [IFRS 3.39].

IFRS 13 has specific requirements with respect to measuring fair value for liabilities. An entity has to determine the price it would need to pay to transfer the liability to a market participant at the measurement date. An entity must assume that the market participant would fulfil the obligation (i.e. it would not be settled or extinguished). [IFRS 13.34(a)]. The specific requirements are discussed in detail in Chapter 14 at 11. In light of these requirements, it is likely that the fair value of contingent consideration will need to be measured ‘from the perspective of a market participant that holds the identical item as an asset at the measurement date’. [IFRS 13.37]. That is, the entity measures the fair value of the liability by reference to the fair value of the corresponding asset held by the counterparty.

The initial measurement of the fair value of contingent consideration is based on an assessment of the facts and circumstances that exist at the acquisition date. Although the fair value of some contingent payments may be difficult to measure, it is argued that ‘to delay recognition of, or otherwise ignore, assets or liabilities that are difficult to measure would cause financial reporting to be incomplete and thus diminish its usefulness in making economic decisions’. [IFRS 3.BC347]. Information used in negotiations between buyer and seller will often be helpful in estimating the fair value of the contingent consideration. [IFRS 3.BC348].

An estimate of zero for the fair value of contingent consideration would not be reliable. [IFRS 3.BC349]. Equally, it would be inappropriate to assume an estimate of 100% for the acquisition-date fair value of the obligation to make the payments under the contingent consideration arrangement.

The fair value of contingent consideration will be measured in accordance with IFRS 13 which does not limit the valuation techniques an entity might use. However, there are two commonly used approaches to estimating the fair value of contingent consideration that an entity might consider:

• the probability-weighted average of payouts associated with each possible outcome (‘probability-weighted payout approach’); or
• the payout associated with the probability-weighted average of outcomes (‘deterministic approach’).

Entities should consider the relationship between the underlying performance metric or outcome and the payout associated with that metric or outcome to determine whether a probability-weighted payout or deterministic approach should be used. A contingent consideration arrangement can be characterised as having either a linear or non-linear relationship between outcomes and payouts. With a linear payout, the relationship between the underlying outcomes and the associated payouts is constant whereas in a non-linear payout the relationship between the underlying outcomes and the associated payouts is not constant. In situations where the payout structure is non-linear, using the deterministic approach is unlikely to give a reliable result.

The method that arguably gives the most reliable result in all circumstances is the probability-weighted payout approach. This method requires taking into account the range of possible outcomes, the payouts associated with each possible outcome and the probability of each outcome arising. The probability-weighted payout is then discounted. This approach is illustrated in the following example.

Since the liability must be measured at fair value, selecting the discount rate to be applied also requires significant judgement to assess the underlying risks associated with the outcomes and the risks of payment (see 7.1.1.A below for further discussion). The entity's own credit risk will need to be taken into account when measuring fair value, which could include adjusting the discount rate. In addition, IFRS 13 indicates that in those situations where the identical item is held by another party as an asset, the fair value of the liability should be determined from the perspective of a market participant that holds this asset. This guidance applies even if the corresponding asset is not traded or recognised for financial reporting purposes. As such, when determining the fair value of a contingent consideration liability, one should consider market participants’ assumptions related to the item when held as an asset. The IASB and the FASB indicated that ‘in an efficient market, the price of a liability held by another party as an asset must equal the price for the corresponding asset. If those prices differed, the market participant transferee (i.e. the party taking on the obligation) would be able to earn a profit by financing the purchase of the asset with the proceeds received by taking on the liability. In such cases, the price for the liability and the price for the asset would adjust until the arbitrage opportunity was eliminated.’ [IFRS 13.BC89].

IFRS 3 also recognises that, in some situations, the agreement may give the acquirer the right to the return of previously transferred consideration if specified future events occur or conditions are met. Such a right falls within the definition of ‘contingent consideration’, and is to be accounted for as such by recognising an asset at its acquisition-date fair value. [IFRS 3.39‑40, Appendix A].

7.1.2 Classification of a contingent consideration obligation

Most contingent consideration obligations are financial instruments, and many are derivative instruments. Some arrangements oblige the acquirer to deliver equity securities if specified future events occur, rather than, say, making additional cash payments.

The classification of a contingent consideration obligation that meets the definition of a financial instrument as either a financial liability or equity is to be based on the definitions in IAS 32 (see Chapter 47). [IFRS 3.40].

These requirements, and the impact of subsequent measurement and accounting (which is discussed further at 7.1.3 below), are summarised in the diagram below.

Contingent consideration will often meet the definition of a financial liability. This includes those arrangements where the acquirer is obliged to deliver equity securities because IAS 32 defines a financial liability to include ‘a contract that will or may be settled in the entity's own equity instruments’ and is:

• ‘a non-derivative for which the entity is or may be obliged to deliver a variable number of the entity's own equity instruments’; or
• ‘a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity's own equity instruments’. [IAS 32.11].

Most contingent consideration arrangements that are to be settled by delivering equity shares will involve a variable number of shares; e.g. an arrangement obliges the acquirer to issue between zero and 1 million additional equity shares on a sliding scale based on the acquiree's post-combination earnings. This arrangement will be classified as a financial liability. Only in situations where the arrangement involves issuing, say, zero or 1 million shares depending on a specified event or target being achieved would the arrangement be classified as equity. Where the arrangement involves a number of different discrete targets that are independent of one another, which if met will result in additional equity shares being issued as further consideration, we believe that the classification of the obligation to provide such financial instruments in respect of each target is assessed separately in determining whether equity classification is appropriate. However, if the targets are interdependent, the classification of the obligation to provide such additional equity shares should be based on the overall arrangement, and as this is likely to mean that as a variable number of shares may be delivered, the arrangement would be classified as a financial liability.

7.1.3 Subsequent measurement and accounting

The IASB has concluded that subsequent changes in the fair value of a contingent consideration obligation generally do not affect the fair value of the consideration transferred to the acquiree. Subsequent changes in value relate to post-combination events and changes in circumstances of the combined entity and should not affect the measurement of the consideration transferred or goodwill. [IFRS 3.BC357].

Accordingly, IFRS 3 requires that changes in the fair value of contingent consideration resulting from events after the acquisition date such as meeting an earnings target, reaching a specified share price, or meeting a milestone on a research and development project are accounted for as follows:

• contingent consideration classified as equity is not subsequently remeasured (consistent with the accounting for equity instruments generally), and its subsequent settlement is accounted for within equity;
• other contingent consideration that either is within the scope of IFRS 9 or within the scope of other standards (e.g. a consideration payable is a non-financial liability) is remeasured at fair value at each reporting date and changes in fair value are recognised in profit or loss. [IFRS 3.58].

The IASB also decided that any gain or loss resulting from changes in the fair value of a contingent consideration arrangement classified as a liability, that are recognised in profit or loss should include changes in own credit risk. [IFRS 3.BC360I].

If the changes are the result of additional information about the facts and circumstances that existed at the acquisition date, they are measurement period adjustments and are to be accounted for as discussed at 12 below. [IFRS 3.58].

7.4.1 Business combinations by contract alone

In a business combination achieved by contract alone ((c) above), IFRS 3 requires that the acquirer attributes to the owners of the acquiree the amount of the acquiree's net assets recognised under the standard (see 2.1 above). In other words, the equity interests in the acquiree held by parties other than the acquirer are a non-controlling interest in the acquirer's consolidated financial statements, even if it results in all of the equity interests in the acquiree being attributed to the non-controlling interest. [IFRS 3.44].

This might suggest that no goodwill is to be recognised in a business combination achieved by contract alone as the second item in part (a) will be equal to part (b) of the goodwill computation set out at 6 above. However, we believe that this requirement to attribute the equity interests in the acquiree to the non-controlling interest is emphasising the presentation within equity in the consolidated financial statements. Thus, where the option of measuring non-controlling interests in an acquiree at its acquisition-date fair value is chosen, goodwill would be recognised. If the option of measuring the non-controlling interest at its proportionate share of the value of net identifiable assets acquired is chosen, no goodwill would be recognised (except to the extent any is recognised as a result of there being other equity instruments that are required to be measured at their acquisition-date fair value or other measurement basis required by IFRSs). These options are discussed at 8 below.

11.2.1 Arrangements for contingent payments to employees or selling shareholders

Whether arrangements for contingent payments to employees (or selling shareholders) are contingent consideration to be included in the measure of the consideration transferred (see 7.1 above) or are separate transactions to be accounted for as remuneration will depend on the nature of the arrangements.

Such payments are also often referred to as ‘earn-outs’. The approach to accounting for earn-out arrangements is summarised in the diagram below:

Understanding the reasons why the acquisition agreement includes a provision for contingent payments, who initiated the arrangement and when the parties entered into the arrangement may be helpful in assessing the nature of the arrangement. [IFRS 3.B54]. If it is not clear whether the arrangement for payments to employees or selling shareholders is part of the exchange for the acquiree or is a transaction separate from the business combination, there are a number of indicators in IFRS 3. [IFRS 3.B55]. These are summarised in the table below:

Although these points are supposed to be indicators, continuing employment is an exception. It is categorically stated that ‘a contingent consideration arrangement in which the payments are automatically forfeited if employment terminates is remuneration for post-combination services’. [IFRS 3.B55(a)]. In July 2016, the Interpretations Committee clarified that this conclusion assumes that the service condition is substantive.³¹ With this exception, no other single indicator is likely to be enough to be conclusive as to the accounting treatment.

The guidance in IFRS 3 expands the points in the table above, but also notes that:

1. The relevant terms of continuing employment may be included in an employment agreement, acquisition agreement or some other document. [IFRS 3.B55(a)].
2. Other pre-acquisition ownership interests may be relevant, e.g. those held by parties related to selling shareholders such as family members, who continue as key employees. [IFRS 3.B55(e)].

Where it is determined that some or all of the arrangement is to be accounted for as contingent consideration, the requirements in IFRS 3 discussed at 7.1 above should be applied. If some or all of the arrangement is post-combination remuneration, it will be accounted for under IFRS 2 if it represents a share-based payment transaction (see Chapter 34) or otherwise under IAS 19 (see Chapter 35).

The requirements for contingent payments to employees are illustrated in the following example. [IFRS 3.IE58‑IE60].

Not all arrangements relate to judgements about whether an arrangement is remuneration or contingent consideration and other agreements and relationships with selling shareholders may have to be considered. The terms of other arrangements and the income tax treatment of contingent payments may indicate that contingent payments are attributable to something other than consideration for the acquiree. These can include agreements not to compete, executory contracts, consulting contracts and property lease agreements. For example, the acquirer might enter into a property lease arrangement with a significant selling shareholder. If the lease payments specified in the lease contract are significantly below market, some or all of the contingent payments to the lessor (the selling shareholder) required by a separate arrangement for contingent payments might be, in substance, payments for the use of the leased property that the acquirer should recognise separately in its post-combination financial statements. In contrast, if the lease contract specifies lease payments that are consistent with market terms for the leased property, the arrangement for contingent payments to the selling shareholder may be contingent consideration in the business combination.

11.2.2 Share-based payment awards exchanged for awards held by the acquiree's employees

The acquirer may exchange share-based payment awards (i.e. replacement awards) for awards held by employees of the acquiree.

If the acquirer replaces any acquiree awards, the consideration transferred will include some or all of any replacement awards. Any amount not included in the consideration transferred is treated as a post-combination remuneration expense.

IFRS 3 includes application guidance dealing with replacement awards. [IFRS 3.B56‑B62]. Replacement awards are modifications of share-based payment awards in accordance with IFRS 2. Discussion of this guidance, including illustrative examples that reflect the substance of the Illustrative Examples that accompany IFRS 3, [IFRS 3.IE61‑IE71], is dealt with in Chapter 34 at 11.2.

16.1.1 Business combinations during the current reporting period

To meet the above objective, the acquirer is required to disclose the following information for each business combination that occurs during the reporting period: [IFRS 3.B64]

1. the name and a description of the acquiree;
2. the acquisition date;
3. the percentage of voting equity interests acquired;
4. the primary reasons for the business combination and a description of how the acquirer obtained control of the acquiree;
5. a qualitative description of the factors that make up the goodwill recognised, such as expected synergies from combining operations of the acquiree and the acquirer, intangible assets that do not qualify for separate recognition or other factors;
6. the acquisition-date fair value of the total consideration transferred and the acquisition-date fair value of each major class of consideration, such as:
   1. cash;
   2. other tangible or intangible assets, including a business or subsidiary of the acquirer;
   3. liabilities incurred, for example, a liability for contingent consideration; and
   4. equity interests of the acquirer, including the number of instruments or interests issued or issuable and the method of measuring the fair value of those instruments or interests;
7. for contingent consideration arrangements and indemnification assets:
   1. the amount recognised as of the acquisition date;
   2. a description of the arrangement and the basis for determining the amount of the payment; and
   3. an estimate of the range of outcomes (undiscounted) or, if a range cannot be estimated, that fact and the reasons why a range cannot be estimated. If the maximum amount of the payment is unlimited, the acquirer discloses that fact;
8. for acquired receivables:
   1. the fair value of the receivables;
   2. the gross contractual amounts receivable; and
   3. the best estimate at the acquisition date of the contractual cash flows not expected to be collected;

      The disclosures are to be provided by major class of receivable, such as loans, direct finance leases and any other class of receivables;

9. the amounts recognised as of the acquisition date for each major class of assets acquired and liabilities assumed;
10. for each contingent liability recognised in accordance with paragraph 23 of the standard (see 5.6.1 above), the information required in paragraph 85 of IAS 37 (see Chapter 26 at 7.1). If a contingent liability is not recognised because its fair value cannot be measured reliably, the acquirer discloses:
    1. the information required by paragraph 86 of IAS 37 (see Chapter 26 at 7.2); and
    2. the reasons why the liability cannot be measured reliably;
11. the total amount of goodwill that is expected to be deductible for tax purposes;
12. for transactions that are recognised separately from the acquisition of assets and assumption of liabilities in the business combination in accordance with paragraph 51 of the standard (see 11 above):
    1. a description of each transaction;
    2. how the acquirer accounted for each transaction;
    3. the amounts recognised for each transaction and the line item in the financial statements in which each amount is recognised; and
    4. if the transaction is the effective settlement of a pre-existing relationship, the method used to determine the settlement amount;
13. the disclosure of separately recognised transactions required by (l) above includes the amount of acquisition-related costs and, separately, the amount of those costs recognised as an expense and the line item or items in the statement of comprehensive income in which those expenses are recognised. The amount of any issue costs not recognised as an expense and how they were recognised are also to be disclosed;
14. in a bargain purchase (see 10 above):
    1. the amount of any gain recognised and the line item in the statement of comprehensive income in which the gain is recognised; and
    2. a description of the reasons why the transaction resulted in a gain;
15. for each business combination in which the acquirer holds less than 100 per cent of the equity interests in the acquiree at the acquisition date (i.e. there is a non-controlling interest – see 8 above):
    1. the amount of the non-controlling interest in the acquiree recognised at the acquisition date and the measurement basis for that amount; and
    2. for each non-controlling interest in an acquiree measured at fair value, the valuation techniques and significant inputs used to measure that value;
16. in a business combination achieved in stages (see 9 above):
    1. the acquisition-date fair value of the equity interest in the acquiree held by the acquirer immediately before the acquisition date; and
    2. the amount of any gain or loss recognised as a result of remeasuring to fair value the equity interest in the acquiree held by the acquirer before the business combination and the line item in the statement of comprehensive income in which that gain or loss is recognised;
17. the following information:
    1. the amounts of revenue and profit or loss of the acquiree since the acquisition date included in the consolidated statement of comprehensive income for the reporting period; and
    2. the revenue and profit or loss of the combined entity for the current reporting period as though the acquisition date for all business combinations that occurred during the year had been as of the beginning of the annual reporting period.

    If disclosure of any of the information required by this subparagraph is impracticable, the acquirer shall disclose that fact and explain why the disclosure is impracticable. IFRS 3 uses the term ‘impracticable’ with the same meaning as in IAS 8 (see Chapter 3 at 4.7).

Although it is not explicitly stated in paragraph B64 of the standard, it is evident that the above information is required to be given for each material business combination. This is due to the fact that the standard states that for individually immaterial business combinations occurring during the reporting period that are material collectively, the acquirer has to disclose, in aggregate, the information required by items (e) to (q) above. [IFRS 3.B65].

16.1.2 Business combinations effected after the end of the reporting period

If the acquisition date of a business combination is after the end of the reporting period but before the financial statements are authorised for issue, the acquirer is required to disclose the information set out in 16.1.1 above for that business combination, unless the initial accounting for the business combination is incomplete at the time the financial statements are authorised for issue. In that situation, the acquirer describes which disclosures could not be made and the reasons why they cannot be made. [IFRS 3.B66].