TheIFRS 3 Business Combinations bring to the fore the accounting which is required if an acquirer gains control and management of a business. This usually happens in the case of an acquisition or merger. A revamped variant of IFRS 3 was announced in the year 2008 that could be applied to business combinations.
IFRS is used when two or more businesses combine to form a common commercial entity through which business transactions can be performed. These could be merges, acquisitions or amalgamations. They are nothing but business combinations. IFRS is applied to devise a combined and integrated set of designs and plans that can be controlled and manoeuvred to provide superior services to customers to provide commodities or utilities to buyers, creating investment returns like results or producing other forms of revenue from regular activities.
The IFRS 3 should be used at the time of creating detailed finance accounts for organisational alliances but should not apply to:
IFRS 3 renders added direction to whether a simple business transaction qualifies as valid a business combination. To meet the statutory and regulatory requirements of being a business combination, there are certain essential elements that the combination must meet. The entire amalgamation process must be carried out and accounted for as per the requirements of the business. The guidance also includes within its gambit:
The age-old acquisition method is also known as the purchase method as defined in the IFRS Version, 2004 can be used for all kinds of business combinations.
Here are the most rudimentary procedures involved in the acquisition method:
The acquirer is Determined and identified. The 'acquisition date' is selected after careful evaluation. Identifying and measuring the relatable assets which are created, the liabilities taken in any form as well as any non-managed properties. This is also called a minority interest in the acquirer.
The direction provided in the body of the Financial Statements can be utilized to demarcate the acquiring entity in an organizational transaction, i.e. the business entity which is formed as a result obtains management and supervision of the entity which is being acquired.
If the guidance in IFRS 10 does not manifestly account for the particular business body can be called an acquirer, IFRS 3 also gives supplementary direction which is then deemed as:
It is important to give due consideration to all the important elements and the most pertinent facts and circumstances when setting the date of acquiring, i.e. the date on which it attains management of the subsidiary. The take-over date is usually earlier than the closing date.
The IFRS 3 fails on certain accounts. It does not extend a detailed directive on the identification of the acquisition date. The date which is identified should also be reflective of the prevalent factual circumstances. Here are some of the most important elements of the acquisition date:
This date can also become unconditional when there is a controlling interest.
At certain times, when there is a change in the BOD of the company or the essential structure of the organization.
IFRS 3 also puts forth some important principles regarding the identification and ascertaining of aspects culmination out of multiple business combinations:
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