A business combination is the merging of two or more separate entities into one. Nearly all business combinations result in the acquirer gaining control of one or more other businesses. Audit firms in Dubai will help you with IFRS.
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Scope of IFRS 3
UAE entities that come together into one reporting entity are defined as a business combination under IFRS 3 and are subject to the purchase method of accounting. A business combination is defined as one that brings together two or more UAE companies under common control or involves two or more mutual entities. An entity acquiring control of non-business entities is not a business combination.
What is the objective of IFRS 3?
IFRS 3 Business Combinations aims to make the information about a business combination and its effects in financial statements more relevant, more reliable, and more comparable.
In particular, IFRS 3 specifies how the acquirer should:
- Accounting for acquisitions, liabilities assumed, and non-controlling interests.
- Acknowledges and measures the goodwill acquired from the business combination or bargain purchase.
- Establishes how much information to share.
What is the difference between IFRS 10 and IFRS 3?
IFRS 10 and IFRS 3 Business Combinations may seem like they are the same thing, but that’s not entirely true. Each addresses business combinations and financial statements. Although IFRS 10 prescribes specific consolidation procedures, IFRS 3 compares the items in the consolidated balance sheet, such as goodwill and non-controlling interests. Consolidation calls for both standards, not one or the other.
Purchase Method of Accounting as per IFRS 3
Accounting for Business Combinations should follow the purchase method of accounting, as stated in IFRS 3. Using the purchase method of accounting, the acquired identifiable assets and liabilities should be determined on the acquisition date at their fair value, a method that takes much more effort than the pooling of interests’ method, and always results in positive or negative goodwill recognition at the acquisition date.
IFRS 3 specifies that acquisition costs constitute the total of the fair values at the exchange dates of assets received, liabilities incurred, and equity instruments issued by the acquirer in exchange for control of the acquirer, plus any direct costs incurred by the acquirer.
Fair value is determined based on the market price of those equity instruments at the date of exchange if they are issued as consideration for acquisition. Other valuation techniques that accounting services in UAE employ when the market price does not exist or is not considered reliable evidence of fair value.
IFRS-3 Disclosure Requirements
It is required that the acquirer disclose information that enables users to assess the nature of and financial impact of a business combination that occurs during the current reporting period and after the date of the financial statements but before they are published. Also, any adjustments recorded in the current reporting period that relate to the business combinations that have occurred in the previous reporting period must be disclosed.
Is IFRS a Business Combination
Investors who acquire investments must evaluate whether this event or transaction is a business combination or not. Under IFRS 3, acquired assets and liabilities must constitute a business, otherwise, it is not a business combination. Further, the investor must account for the transaction based on other IFRS.
A business comprises the following:
Input
An asset or resource that creates or can produce outputs when a process is applied to it, such as non-current assets.
Process
An input that creates outputs when a standard, protocol, convention, or rule is applied, e.g. management processes.
Output
Investors or other owners gain financial returns from the inputs and processes applied to those inputs.
Using IFRS 3 Acquisition Method
When the investor acquires a subsidiary, it must use the acquisition method to account for all business combinations.
How do consolidation and acquisition procedures differ from each other? You need to perform acquisitions as part of all consolidation procedures.
So, you must apply the acquisition method correctly to your consolidated financial statements, and then eliminate mutual intragroup transactions afterward.
The acquisition method involves the following:
- Recognize the acquirer.
- Evaluating the acquisition date.
- Identifying and evaluating gain or goodwill from a bargain purchase.
- Identifying and assessing identifiable assets acquired liabilities, and non-controlling interest.
Reporting Business Combinations and Avoiding Surprises
Reporting business combination is a major move. A significant amount of effort and time is required to gather, assemble, and evaluate all the data needed for reporting in the financial statements under IFRS 3. There are different ways through which financial statements can be planned and executed.
So, what is Next for IFRS 3?
Currently, IASB is carrying out a study on business combinations under common control. IASB agrees that some requirements are absent, which has led to a lot of diversity in practice.
To conclude
We hope the information in this guide has shed some light on IFRS. If you wish to talk more about any issues discussed here, kindly contact accounting and financial services, Audit firms in Dubai.
