IFRS 3 (Revised)- Groups of Entities (D-1.3)

Fair valuing of assets and liabilities

Key Points from IFRS 3 (Revised) on Business Combinations:

Comprehensive Recognition: All identifiable assets and liabilities of the acquiree must be included in the consolidated financial statements.
Fair Value Measurement: Most assets are recognized at fair value, with some exceptions like deferred tax and pension obligations.
Intangible Asset Recognition: The standard emphasizes the recognition of intangible assets like brands, licenses, customer relationships, and other previously overlooked items.
Contingent Assets and Liabilities: Contingent assets are not recognized, while contingent liabilities are measured at fair value and re-measured after the acquisition date.
Limited Restructuring Provisions: Restructuring provisions can only be recognized if the acquiree already has a detailed liability at the acquisition date, which is rare in most business combinations.
12-Month Adjustment Period: Acquirers have a maximum of 12 months to finalize acquisition accounting, with no exceptions for deferred tax assets or contingent consideration changes. Adjustments against goodwill are only allowed within this period.
NCI Measurement and Disclosure: When NCI is measured at fair value, the valuation methods and disclosures related to previously held equity interests and gains/losses are required.

Summary

IFRS 3 (Revised) aims to enhance the relevance and reliability of financial reporting for business combinations. It emphasizes comprehensive recognition of assets and liabilities, including previously under-recognized intangibles. The standard provides clear guidance on NCI measurement and introduces a strict 12-month adjustment period. By adhering to these principles, companies can provide more accurate and transparent financial information to stakeholders.

Example

Company A acquires 80% of Company B for $1 billion. The fair value of Company B's identifiable net assets is $800 million, including $100 million of previously unrecognized customer relationships.

Under IFRS 3 (Revised):
- Goodwill: $1 billion (consideration) - $800 million (net assets) = $200 million
- NCI (assuming fair value method): $250 million (if determined to be the fair value of the 20% not owned)
Key Considerations:
- The recognition of $100 million in customer relationships would significantly impact goodwill.
- The 12-month adjustment period would limit the time for post-acquisition adjustments to the initial accounting.
- The choice of NCI measurement method (fair value vs. proportionate share) would affect the overall accounting for the acquisition.