Disclosure Requirements for Business Combinations (IFRS 3)

The disclosure requirements for business combinations are outlined in IFRS 3.59-63 and IFRS 3.B64-67. Moreover, IAS 7.40 details the requirements for disclosures when obtaining or losing control of subsidiaries or other businesses. However, adhering to IFRS 3 covers these requirements.

The IASB is considering introducing further disclosure requirements related to business combinations. This will encompass details regarding the management’s objectives for the acquisition and insights into how the acquired entity has performed in comparison to those objectives in subsequent periods. More details can be found on the project’s page.

It’s noteworthy that IFRS 13’s disclosure requirements apply solely to fair value measurements after the initial recognition (IFRS 13.91). Hence, they’re not relevant to the fair value of assets and liabilities recognised during a business combination, unless IFRS 3 explicitly demands it (like for non-controlling interest). IFRS 3.IE72’s illustrative disclosures support this perspective.

Disclosure of pro-forma information

A topic of much discussion, the requirements around pro-forma information, is addressed in IFRS 3.B64(q). It mandates the disclosure of both the target’s revenue and net income since the acquisition and that of the combined entity for the current reporting period. The stipulation is as if all business combinations for the year occurred at the beginning of the annual reporting period.

There’s a lack of specific guidelines on compiling the pro-forma data. A mere arithmetic aggregation might not offer substantive insights. Hence, the following adjustments should be considered:

  • Elimination of intragroup transactions: These transactions should be eliminated from the pro-forma information, mirroring the process in actual consolidated results.
  • Alignment in accounting policies: Pro-forma data should be prepared using uniform accounting practices. If the target’s policies diverged from the acquirer’s, necessary adjustments to past results are required.
  • Depreciation and amortisation: For any assets identified and recognised on acquisition, the associated depreciation or amortisation costs should be factored into the net income from the start of the period. This also holds for any additional charges linked to fair value adjustments for assets already recognised by the target.
  • Increased borrowing costs: If debt financed the acquisition, then the increased borrowing costs need to be part of the pro-forma data from the beginning of the period.
  • Synergy benefits: These are frequently key drivers behind business combinations. However, their impact usually manifests some time post-acquisition. To include them in pro-forma information would render it non-comparable with actual immediate post-acquisition results. Consequently, they’re typically left out of pro-forma data. Yet, if specific significant synergy benefits manifest immediately post-acquisition, they can be incorporated, but transparency in such inclusion is essential.

Certain adjustments mentioned are more judgemental than others. Thus, outlining the judgements and assumptions made while preparing pro-forma information would benefit the users of financial statements. Moreover, it would be advantageous to have pro-forma information of merged entities for the comparative period(s). Although IASB hasn’t mandated this in IFRS 3, it isn’t prohibited. For significant acquisitions, entities might opt to include such data for comparative periods.

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More about IFRS 3

See other pages relating to IFRS 3:

Scope of IFRS 3
Accounting for Business Combinations

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