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How Do I Account for Business Combinations in IFRS?

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  • Written By: A. Garrett
  • Edited By: John Allen
  • Last Modified Date: 23 November 2016
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The protocol for reporting business combinations determines how an acquiring company recognizes the assets, liabilities, and non-controlling interests associated with the company it is purchasing. Goodwill associated with the acquiring a company must also be listed. Additionally, an international financial reporting standards (IFRS) accountant must include certain information that allows investors, financial advisers, and government regulators to evaluate the potential effects of such a merger.

Business combinations should be accounted for using the acquisition method in accordance to IFRS. IFRS is a set of financial reporting standards that seeks to ensure that the data included in financial statements regarding business combinations is accurate, reliable, and relevant. Business combinations in IFRS transactions are those in which a company acquires another business or organization.

The acquisition method used in accounting for business combinations in IFRS is a four-step process. First, the acquirer must be properly identified and the acquisition date determined. Then, the identifiable assets, liabilities, and non-controlling interests associated with the merger must be recognized. An IFRS accountant must also measure the consideration offered by the acquirer in exchange for the company. Finally, goodwill must be measured.

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Use of business combinations in IFRS accounting require assets and liabilities to be recognized at fair market value instead of the value placed on them by acquirers. Unless the acquirer purchases 100% of the business, whatever non-controlling interests exist must be recognized. Non-controlling interests represent any equity in the company that does not belong to the acquiring company. The IFRS accountant preparing the report can measure such interest based on fair market value or asset proportion.

Consideration is the value promised to the seller by the acquiring company in exchange for control of the seller’s business. Rules for business combinations in IFRS state that consideration can be cash, cash equivalents, stock in the parent company, and any promised payments or actions in the future. IFRS accounting requires any shares issued to be represented at fair value. Any future payments or consideration should be discounted to reflect present value at the acquisition date.

Goodwill is future economic gains that may be generated from assets acquired in the transaction. An IFRS accountant can determine goodwill according to business combinations in IFRS standards by subtracting the amount of consideration offered by the acquiring company from the fair value placed on the assets held by the entity being sold. Financial reports issued by the parent company must list goodwill as an asset and place it in a separate category on the balance sheet.

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