Scope of IFRS 3 Business Combinations

IFRS 3 covers accounting for business combinations which are defined as transactions or other events in which an acquirer obtains control of one or more businesses. Excluded from the scope are:

  • combinations of entities under common control (which are on the IASB’s agenda, see this useful snapshot),
  • acquisitions of assets that do not constitute a business,
  • formation of a joint arrangement in the financial statements of the joint arrangement itself (formation of a joint arrangement from the perspective of an investor is not a business combination by definition because no party controls a joint arrangement),
  • acquisition by an investment entity of an investment in a subsidiary that is required to be measured at fair value through profit or loss.

What is a business combination?

A business combination is a transaction in which one entity obtains control of one or more businesses. A business is a mixture of inputs (e.g. assets, contracts, employees) and processes capable of converting these inputs into outputs (products, services or other income from ordinary activities). Note that the definition of a business was amended in 2018 (effective from 2020) and currently does not include references to lower costs or other economics benefits as outputs of a business.

Starting from 2020, IFRS 3 introduced an optional concentration test under which a transaction is treated as an asset acquisition if substantially all of the fair value of the gross assets acquired is concentrated in a single asset (or a group of similar assets) (IFRS 3.B7A-B7B).

I recommend this summary by Grant Thornton on definition of a business. See also paragraphs IFRS 3.B7-B12 for more discussion.

Example: start-up company

Acquirer Company (AC) acquired Target Company (TC), a start-up company that developed a new social network app. TC does not generate any revenue yet. TC should be considered a business as it has inputs (employees, social network app) and processes (operational processes for developing and maintaining the social network app). TC is capable of producing output in the form of e.g. advertising revenue.

Business combination can be effected in a variety of ways due to economic, tax or legal reasons. The most common are transferring cash, assuming liabilities and issuing equity instruments to owners of the business being acquired. For other examples given by IFRS 3, see paragraphs IFRS 3.B5-B6.

More about IFRS 3

See other pages relating to IFRS 3:

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

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