Definition of a Business (Amendments to IFRS 3 Business Combinations) was issued on 22 October 2018 and is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 January 2020.
The amendments are intended to assist an entity to determine whether it has acquired a business or a group of assets. To summarise, the amendments:
- clarify the minimum attributes that an acquired set of activities and assets must include to be considered a business
- narrow the definitions of a business and of outputs
- remove the assessment of whether market participants are capable of replacing any missing inputs or processes and continuing to produce outputs
- introduce an optional fair value concentration test.
IFRS 3 – Business Combination
According to IFRS 3, a business combination is accounted for by applying the acquisition method and may give rise to goodwill. It requires that the purchase price of an acquisition is allocated to the identifiable assets acquired and liabilities assumed at fair values, i.e. identifying intangible assets such as brand names, customer relationships and recognizing their values on acquisition date.
This process is referred as Purchase price allocation (PPA):
- Determine the fair value of consideration transferred;
- Measure all existing assets and liabilities of the target company to fair values;
- Identify if there are any intangible assets;
- Determine the fair value of acquired identifiable intangible assets; and
- Allocate the remaining consideration to goodwill
This can be written in simplified equation form as follows:
| Goodwill = | Consideration transferred+ | Amount of non-controlling interests + | Fair value of previous equity interests – | Net assets recognised |
In particular, an acquirer needs to address complex valuation issues such as valuation of contingent assets and liabilities and fair value measurement of the identifiable intangible assets at acquisition date such as customer relationships, patents, brand names, etc. You are advised to consult your experts on relevant requirements and applications.
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