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Business Combination

In: Business and Management

Submitted By herlina07
Words 1899
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Prepared by Emma Holmes

The nature of a business combination
IFRS 3 defines a business combination as ‘the bringing together of separate entities or businesses into one reporting entity’. A ‘business’ is not just a group of assets, rather, it is an entity able to produce output. Three general forms of business combination are as follows (assuming the existence of 2 companies – A Ltd and B Ltd):

Accounting for a business combination: basic principles
IFRS 3 prescribes the purchase method in accounting for a business combination. The key steps in this method are:

The above steps result in determining the existence of any goodwill or excess on combination.

1

Accounting for a business combination: identifying the acquirer
The business combination is viewed from the perspective of the acquirer The acquirer is “the combining entity that obtains control of the other combining entities or businesses”

Accounting for a business combination: selecting the right date
The following dates are relevant to a business combination: Acquisition date

Agreement date

Date of exchange

Accounting for a business combination: determination of fair value
IFRS 3 requires that the fair value of assets, liabilities and contingent liabilities is determined in performing the relevant calculations in a business combination. Fair value is basically market value Fair value is determined by judgement, estimation and a three-level ‘fair value hierarchy’ as follows:

Note the similarities between these requirements and those of IAS 38, relating to intangible assets.

2

Accounting for the cost of a business combination
The acquirer measures the cost of a business combination as the fair values (at the date of exchange) of:

PLUS

Accounting for the cost of a business combination: forms of consideration
The consideration paid by the acquirer may consist of one...

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