The document discusses IFRS 3 Business Combinations and the acquisition method for accounting for business combinations. It provides an overview of IFRS 3 and the key steps in the acquisition method, including identifying the acquirer, determining the acquisition date, recognizing and measuring the identifiable assets acquired and liabilities assumed at fair value, recognizing and measuring goodwill or gain from a bargain purchase, and accounting for non-controlling interests. It also provides an illustration of calculating goodwill and non-controlling interests under IFRS 3.

1. IFRS 3

2. Presentation
Agenda
1. Objective
2. Distinction between IFRS 3 & IFRS 10
3. Determining business combination
4. Acquisition method : Overview
5. Acquisition method : 4 Steps
6. Illustration : Goodwill & Non- controlling Interest
7. Additional guidance : Specific transactions

3. The objective of IFRS 3 Business
combination is to improve the Relevance,
reliability and comparability of the
information that a reporting entity
provides in its financial statements about
a Business combination and its effects.
More specifically,
IFRS 3 establishes
principles and
requirements for
how the acquirer
1. Recognizes and measures the IDENTIFIABLE ASSETS
acquired , the LIABILITIES assumed and
ANY NON CONTROLLABLE INTEREST.
2. Recognizes and measures the GOODWILL acquired in the
business combination, or a gain from a bargain purchase.
3. Determine what INFORMATION TO DISCLOSE about a
business combination.

4. Both standards deals with Business Combinations and their Financial
Statements.
But while IFRS 10 DEFINES A
CONTROL and prescribes
specific CONSOLIDATION
PROCEDURES, IFRS 3 IS
MORE ABOUT THE
MEASURMENT OF THE ITEMS
in the consolidated financial
statements such as Goodwill,
Non controlling interest etc.,
NOTE
If you need to deal
with the consolidation,
then YOU NEED TO
APPLY BOTH
STANDARDS not just
one or the other

5. Any investor who acquires some investment needs to determine whether this
transaction or event is a business combination or not.
IFRS 3 requires that assets and liabilities acquired NEED TO CONSTITUTE A
BUSINESS, otherwise its not a business combination and an investor needs
to account for the transaction in line with other IFRS.
A business consists of 3 elements :
1. INPUT: Any economic resource that creates or can create outputs when one or
more processes are applied to it (E.g. non current assets etc.,)
2. PROCESS: Any system, standard, protocol, convention or rule that when
applied to an input(s), creates outputs ( E.g. management process, workforce
etc.,)
3. OUTPUT: The results of inputs and processes applied to those inputs that
provide or can provide a return in the form of dividends, lower costs or other
economic benefits directly to investors or other owners.

7. Once the investor acquires a subsidiary, it has to account for each combination by
applying THE ACQUISITION METHOD
ISSUE
Now you may ask what
is the difference
between the acquisition
method and
consolidation
procedures?
SOLUTION
The acquisition method is
simply a part of all
consolidation procedures
one need to perform
When u prepare your
consolidated financial
statements, you must start
with the correct
application of the
acquisition method, and
then continue with
eliminating mutual intra-
group transactions etc.,

8. Identify the Acquirer.
Determining the Acquisition
Date.
Recognizing and
measuring measures the
IDENTIFIABLE ASSETS
acquired , the LIABILITIES
assumed and ANY NON
CONTROLLABLE
INTEREST in the acquiree.
Recognizing and measuring
GOODWILL or A GAIN FROM A
BARGAIN PURCHASE.

9. Most of the time, it’s straight forward –
the acquirer is usually INVESTOR WHO
ACQUIRES an investment or subsidiary.
Sometimes, it is not so clear. The most common example is a merger.
When two companies merge together and create just 1 company, the
acquirer is usually the bigger one- with the larger fair value.
However, IFRS 3 provides the application guidance in its appendix.

10. The ACQUISITION DATE is the date on which the acquirer obtains
control of the acquiree.
It is generally the
date on which the
acquirer legally
transfers the
consideration
(= The payment for
the investment),
acquires the assets
and assumes the
liabilities of the
acquiree – THE
CLOSING DATE.
However, it can be earlier or
later than the closing date,
too. It depends on the
contractual agreement, if
something like that exists.

11. 3.1 ACQUIRED ASSETS AND
LIABILITIES
An investor OR acquirer shall recognize all identifiable
assets acquired, liabilities assumed and Non controlling
interests in the acquiree separately from Goodwill.
Care should be taken, because sometimes, There’s some
unrecognized asset in an acquiree, and an investor
needs to recognize this asset if it meets the criteria for
the recognition. For example, a subsidiary can have
some unrecognized internally generated intangible
assets meeting separability criterion. In such a case, an
acquirer needs to recognize these assets, too

12. All assets and liabilities are
MEASURED AT ACQUISITION-DATE FAIR
VALUE. Often, investors need to perform
“FAIR VALUE ADJUSTMENTS”
at acquisition date, because assets and liabilities
are often valued in a different way – either at cost
less accumulated depreciation, at amortized cost,
etc.

13. However, there are some exceptions from fair
value measurement rule:
Contingent liabilities (IAS 37);
Income taxes (IAS 12);
Employee benefits (IAS 19);
Indemnification assets; Reacquired rights; Share-
based payment transactions (IFRS 2);
Assets held for sale (IFRS 5)

14. Non-controlling interest is the equity in a subsidiary not attributable, directly
or indirectly, to a parent.
For example,
when an investor acquires 100% share in a company, then there’s no non-
controlling interest, because the investor owns subsidiary’s equity in
full.
However, when an investor acquires less than 100%, let’s say 80%, then
there’s non- controlling interest of 20%, as the 20% of subsidiary’s net
assets belong to someone else.
IFRS 3 permits 2 METHODS OF MEASURING NON-CONTROLLING INTEREST:
1.FAIR VALUE, or
2. The PROPORTIONATE SHARE in the recognized acquiree’s net assets.

15. GOODWILL is an asset representing the future economic benefits
arising from other assets acquired in a business combination that are
not individually identified and separately recognized.
It is calculated as a difference between:
 The aggregate of:
1. The fair value of the consideration transferred;
2. The amount of any non-controlling interest;
3. In a business combination achieved in stages: the acquisition-date
fair value of the acquirer’s previously- held equity interest in the
acquiree;
AND
 The acquisition-date amounts of net assets in an Acquiree.

16. Particulars Amount (INR)
Fair value of consideration transferred XXXXXXXXXXX
Non-controlling Interest XXXXXXXXXXX
Fair value of previous equity Interest XXXXXXXXXXX
Fair value of assets acquired (XXXXXXXXXXX)
Goodwill (OR) Negative Goodwill XXXXXXXXXXX

17. The goodwill can be both positive and negative:
 If the goodwill is POSITIVE, then you shall recognize it as
an intangible asset and perform annual impairment test;
 If the goodwill is NEGATIVE, then it is a gain on a bargain
purchase.
You should:
1. Review the procedures for recognizing assets and
liabilities, non-controlling interest, previously held interest
and consideration transferred (i.e. check whether they are
error-free);
2. Recognize a gain on bargain purchase in profit or loss.

18. The above mentioned formula changes from one company to other
because of their accounting policies
The MICROFOCUS accounting policy changes the Goodwill calculation
as follows:
Particulars Amount Amount
Consideration paid XXXXX
Net assets acquired at book values XXXXXX
Fair value of adjustments to net assets, including
intangible assets recognized
XXXXXX
Fair value of net assets acquired (XXXXXX)
Goodwill
(if consideration paid <fair value of net assets
acquired)
XXXXXX

19.  The consideration transferred in exchange for
the acquiree includes any asset or liability
resulting from resulting from a contingent
consideration agreement.
 An obligation to pay contingent consideration or
a contingent right to the return of previously
transferred consideration if specified conditions
are met should be recognized at fair value
determined as at the acquisition date.

20. The Micro Focus methodology adopted in historical
acquisitions is the top down approach, which
determines the fair value of the deferred revenue by
calculating the return required by the seller of the
liability to compensate them for the costs incurred to
date in generating the deferred revenue, plus an
assumed profit on these costs, as applicable.
The Technical Accounting Team is to agree upfront with the
valuation expert the methodology to be used and basis
for assumptions made.

21. In the acquisition of TAG( The
Advocacy Group), management have
included the following elements of
selling costs:
SUPPORT RENEWALS:
The direct fully loaded
costs of the support
renewal team has been
included.
UPFRONT SUPORT :
The direct commissions
of the upfront sales team
have been included.
An allocation of
overheads.

22. For the acquisition of
Software Business,
the following costs
have been included
• SUPPORT RENEWALS: The direct fully loaded costs of the
support renewal team has been included.
• UPFRONT SUPPORT : The direct commissions of the upfront
sales team have been included. We have included the direct
and channel sales costs, but limited these costs to exclude that
of the wider supporting functions.
• An allocation of overheads have been included.
Exclusions
• Royalty costs have been excluded as these are costs paid to
third parties for their roles in the fulfillment of the contractual
agreements.

23. Other points to consider :
 Write off of any historic Goodwill/purchased Intangibles.
 Other Intangible write off (e.g. Development costs,
Software not being used going forward)
 Deferred tax liability on new purchased intangibles (Group
tax to provide).
 Any deferred rent free periods should not be recognised
on acquisition date, because it does not meet the
definition of a liability. Instead, as required by IFRS
3(2008). B29, the Group should recognise an intangible
asset if the terms of the opening lease are favorable
relative to market terms and a liability if the terms are
unfavorable relative to market terms.

24. Mommy Corp. acquires 80% share in Baby Ltd.
for the cash payment of GBP 100 000. On
the acquisition date, the aggregate value of
Baby’s identifiable assets and liabilities in
line with IFRS 3 is GBP 110,000. The fair
value of non-controlling interest (the
remaining 20% share) is GBP 25 000. This
amount was determined with the reference
of market price of Baby’s ordinary shares
before the acquisition date.

25. Goodwill and non-controlling interest have been calculated using both
methods mentioned in Step 3 and the results are in the following
table.
FAIR VALUE
(GBP)
PROPORTIONATE SHARE ON
BABY’S NET ASSETS (GBP)
Consideration
transferred
1,00,000 1,00,000
Non- controlling
Interest
25,000
(FV, reference to
market value of B’s
shares)
22,000
(20% of BABY’S net assets of GBP
1,10,000)
BABY’s net assets (1,10,000) (1,10,000)
Goodwill 15,000 12,000