Advanced Accounting – Business Combinations: Business combinations and the acquisition method (IFRS 3) — Identifying the Combination and the Acquirer
Learn how IFRS 3 decides what counts as a business combination and which party is the acquirer, and why that choice shapes the numbers.
Try 3 questions
1. Under IFRS 3, what single feature makes a transaction a business combination?
- An acquirer obtains control of a business
- Two firms combine their share capital
- A buyer pays cash for another company
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Answer: An acquirer obtains control of a business
IFRS 3 defines a business combination as a transaction or event in which an acquirer obtains control of one or more businesses; the payment method and legal form do not decide it.
2. A company buys a single office building with no staff, processes or service contracts attached. How is this accounted for?
- As a business combination with goodwill
- As a business combination without goodwill
- As an asset acquisition, with no goodwill
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Answer: As an asset acquisition, with no goodwill
With no substantive process, the building is not a business, so its cost is assigned to the assets acquired and no goodwill can arise.
3. Since IFRS 3 was amended in 2018, what must an acquired set include, at minimum, to count as a business?
- An input and a substantive process
- A workforce and a customer base
- Inputs, processes and existing outputs
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Answer: An input and a substantive process
A business needs at least an input and a substantive process that together significantly contribute to the ability to create outputs; outputs themselves are not required.
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