Disclosure Requirements for Business Combinations (IFRS 3)

Disclosure requirements relating to business combinations are set out in paragraphs IFRS 3.59-63,B64-67. Additionally, paragraph IAS 7.40 also lists disclosure requirements for obtaining and losing control of subsidiaries or other businesses, but these can be met by complying with IFRS 3 requirements.

Interestingly, disclosure requirements of IFRS 13 relating to fair value measurements generally do not apply to fair value of assets and liabilities recognised on business combination. So there is no need to provide them unless specifically required by IFRS 3 (eg. for non-controlling interest). Illustrative disclosures included in IFRS 3.IE72 confirm this view. Additionally, IFRS 13 states (IFRS 13.91) that its disclosure requirements relate to fair value measurements after initial recognition.

Arguably the most discussed disclosure requirements concern pro-forma information. IFRS 3.B64(q) requires disclosure of revenue and net income of the target since the acquisition date as well as 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.

There is no guidance on how the pro-forma information should be prepared. A simple arithmetical sum will probably not provide meaningful information. The following adjustments should be considered:

All intragroup transactions should be eliminated in the pro-forma information as it is done on consolidation when preparing actual results.

Pro-forma information should be prepared using uniform accounting policies. If accounting policies of the target where different than those of the acquirer, relevant adjustments to historical results should be made.

If there are any assets recognised on acquisition by the acquirer, depreciation/amortisation charge relating to those assets should be included in net income from the beginning of the period. It’s the same for additional charge relating to fair value adjustments for assets already recognised by the target.

If the acquisition was financed through debt, increased borrowing costs should be included in the pro-forma information from the beginning of the period.

Synergy benefits are often a major reason for a business combination. They however need time to be effected after the acquisition and taking them into account for pro-forma information would make this information not comparable with actual results reported immediately after the acquisition. Therefore, synergy benefits are usually excluded from pro-forma information.

However, if there are specific material synergy benefits effected immediately after the acquisition, they can be included in pro-forma information. In such a case, disclosure is crucial.

Some of the above adjustments are more judgemental than others. A description of assumptions used in preparation of pro-forma information will be very useful to users of financial statements. They would also happily see pro-forma information of combined entities for comparative period(s), but IASB decided not to add this requirement to IFRS 3. But it is not forbidden either, so for very significant acquisitions entities may want to add pro-forma information also for comparative period(s).

Disclosures relating to business combinations are on the IASB’s agenda. The IASB plans to require additional disclosures relating to management’s objectives for the acquisition and explanation about how the acquisition has performed against those objectives in subsequent periods. See the project page for more information.

See other pages relating to IFRS 3:

Scope of IFRS 3
Accounting for Business Combinations
Disclosure Requirements for Business Combinations

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