IFRS 3: Business Combinations

Q: What is a 'business' under IFRS 3?

A business is defined as an integrated set of activities and assets that is capable of being conducted and managed to provide returns in the form of dividends, lower costs, or economic benefits.

Q: What is the acquisition method?

The acquisition method involves identifying the acquirer, determining the acquisition date, recognizing assets acquired and liabilities assumed at fair value, and recognizing goodwill or a bargain purchase gain.

Q: How is goodwill treated under IFRS 3?

Goodwill is recognized as an intangible asset. It is not amortized but tested annually for impairment under IAS 36.

Q: Can IFRS 3 be applied to asset purchases?

No. IFRS 3 applies strictly to business combinations. Asset acquisitions are accounted for using different standards, typically IAS 16 or IAS 38.

IFRS 3 - Business Combinations

IFRS Guide>>

June 27, 2025

IFRS 3 – Business Combinations is the International Financial Reporting Standard that outlines the accounting requirements for when an entity acquires control over another, typically through a merger or acquisition.

Think of IFRS 3 as the global blueprint for how companies report mergers and acquisitions, providing a clear framework for consistency, transparency, and comparability in financial reporting.

In this article, we explore the definition, history, key provisions, accounting considerations, and FAQs of IFRS 3 – Business Combinations.

Introduction

Understanding IFRS 3 – Business Combinations is critical for entities involved in mergers and acquisitions.

This standard ensures that transactions are properly recorded and reported in a consistent and transparent manner.

What is IFRS 3 - Business Combinations?

IFRS 3 outlines how an entity that has acquired another should recognize and measure identifiable assets acquired, liabilities assumed, and any non-controlling interest in the acquiree.

It applies the acquisition method to business combinations.

A business combination refers to a transaction where an acquirer gains control of another entity.

Key objectives of IFRS 3 include:

Enhancing the relevance and comparability of financial statements.
Ensuring fair value measurement of assets and liabilities.
Recognition of goodwill or gain from a bargain purchase.

Brief History of IFRS 3

1998: IAS 22 – Business Combinations issued by IASC.

2001: IASB adopts IAS 22.

2004: IASB issues IFRS 3, replacing IAS 22 to improve reporting of business combinations.

2008: Revised IFRS 3 issued, aligning more closely with U.S. GAAP and enhancing disclosure and recognition.

2018: Amendment defines what constitutes a “business“.

2020: Reference to the Conceptual Framework updated to align with IFRS standards and avoid inconsistencies.

Major Disclosures Required by IFRS 3

Entities are required to disclose:

The nature and financial effect of the business combination
Revenue and profit or loss of the acquiree since the acquisition date
Reasons for the business combination
Amount and reasons for goodwill or a bargain purchase

When Does IFRS 3 Apply?

IFRS 3 is applicable in cases of:

Mergers and acquisitions
Consolidation of subsidiaries
Takeovers involving a change in control of a business

It does not apply to asset acquisitions or formation of joint ventures.

Key Accounting Considerations of IFRS 3 - Business Combinations

Item	Treatment
Consideration Transferred	This usually takes the form of cash,assets, equity instruments or liabilities
Goodwill	IFRS 3 recognizes goodwill as an asset and is not amortized but tested annually for impairment
Contingent Consideration	It is recognized at fair value at acquisition and remeasured through profit or loss
Acquisition-related Costs	These are expensed in profit or loss and do not form part of consideration

Key Provisions of IFRS 3 - Business Combinations

1. Definition of a Business

IFRS 3 – Business Combinations defines a business as an integrated set of activities and assets capable of being managed to provide a return. This distinction helps identify whether IFRS 3 applies.

2. Acquisition Method Requirement

IFRS 3 mandates the acquisition method, comprising:

Identification of the acquirer
Determination of the acquisition date
Recognition and measurement of identifiable assets acquired, liabilities assumed, and non-controlling interest (NCI)
Recognition and measurement of goodwill or a bargain purchase gain

3. Recognition and Measurement at Fair Value

On the acquisition date:

Assets and liabilities are recognized at fair value
NCI can be measured at either fair value or the proportionate share of the acquiree’s net assets

4. Goodwill or Bargain Purchase

Goodwill is calculated as:

Consideration Transferred + NCI + Fair Value of previously held equity interest – Net Identifiable Assets Acquired
Goodwill represents future economic benefits that are not separately identifiable. A bargain purchase arises when the net assets exceed the consideration and is recognized in profit or loss.

5. Contingent Consideration

Contingent consideration (e.g. performance-linked payouts) must:

Be measured at fair value at acquisition
Be subsequently remeasured through profit or loss if a financial liability

6. Acquisition-related Costs

Legal, advisory, and other costs related to the acquisition process must:

Be expensed in the period incurred
Not be included in the cost of the acquisition

7. Step Acquisitions

When control is gained in stages:

Previously held interests are remeasured to fair value
Resulting gains or losses are recognized in profit or loss

8. Disclosure Requirements

Extensive disclosures are mandated, including:

Name and description of the acquiree
Acquisition date and rationale
Fair value of consideration transferred and components
Details of goodwill or bargain purchase
Financial performance impact post-acquisition

FAQs on IFRS 3 - Business Combinations

1. What is the main purpose of IFRS 3?

To establish principles and requirements for how an entity recognizes and measures in its financial statements
This includes: the assets acquired, liabilities assumed, goodwill, and any resulting gain from a bargain purchase of another entity.

2. What is a “business” under IFRS 3?

A business is defined as an integrated set of activities and assets that is capable of being conducted and managed to provide returns in the form of dividends, lower costs, or economic benefits.

3. What is the acquisition method?

The acquisition method involves:

Identifying the acquirer
Determining the acquisition date
Recognizing assets acquired and liabilities assumed at fair value
Recognizing goodwill or a bargain purchase gain

4. How is goodwill treated under IFRS 3?

Goodwill is recognized as an intangible asset. It is not amortized but tested annually for impairment under IAS 36.

5. Are acquisition-related costs capitalized under IFRS 3?

No. All acquisition-related costs such as legal fees, due diligence, and advisory fees must be expensed in the period incurred.

6. What happens in a bargain purchase?

If the consideration transferred is less than the net identifiable assets acquired, the resulting difference is recognized as a gain in profit or loss.

7. How is contingent consideration accounted for?

It is measured at fair value at the acquisition date. If classified as a liability, any subsequent remeasurement is recognized in profit or loss.

8. Can IFRS 3 be applied to asset purchases?

No. IFRS 3 applies strictly to business combinations.
Asset acquisitions are accounted for using different standards, typically IAS 16 or IAS 38.

9. How does IFRS 3 impact financial reporting?

It ensures uniform treatment of acquisitions, enhancing transparency, comparability, and informed decision-making for investors and stakeholders.

10. What is the role of non-controlling interest (NCI)?

NCI represents equity in a subsidiary not attributable to the parent.
IFRS 3 allows it to be measured at fair value or the proportionate share of net assets, impacting goodwill computation.

Conclusion

IFRS 3 – Business Combinations sets the precedence and blueprint for how a business carries out mergers and acquisitions.

It ensures transparency and consistency in accounting, offering a structured approach to valuing assets, liabilities, and goodwill.

At Mugo & Co, we understand how complex the acquisition process can be.

Our team provides tailored acquisition accounting services to ensure compliance with IFRS 3 – Business Combinations and accurate financial reporting.

Call to Action

Need expert support with a business combination or IFRS compliance?

Contact Mugo & Co today for professional guidance on acquisition accounting, due diligence, and financial reporting solutions aligned with IFRS 3 – Business Combinations.