Did you know?- Business Combination (IFRS 3)

RSM ACCOUNTING SERIES: BUSINESS COMBINATION (IFRS 3)

Did you know that:
IFRS 3 only applies to transactions between entities that are not under common control wherein an acquired group of assets and liabilities meets the definition of a business.

This is an application of substance over form.

The following steps are required in applying the accounting and reporting requirements of IFRS 3.

Step 1: Determine whether the transaction qualifies as a business :

A business combination involves obtaining control of a business or businesses. As per IFRS 10, an investor controls an investee when the investor is exposed or has rights to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. In most cases, this involves obtaining the majority of voting rights.

To qualify as a business, the acquisition must have, at a minimum:

An input + A substantive process = Ability to contribute to the creation of outputs

An Input; An input is any economic resource that can contribute to the creation of outputs when one or more processes are applied to it. For example; Non-current assets, intangible assets, and intellectual property.

A substantive process:  A system that when applied to inputs is capable of creating outputs.

Outputs: An output is the result of inputs and processes applied to those inputs that provide goods or services to customers, or generate investment or other income.

IFRS 3 also contains an optional ‘concentration test’ to help entities determine if an acquisition is a business. To apply the test, the entity should determine 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. If it is, then the assets acquired do not constitute a business.