Business Combination

The merger and acquisitions are quite common as some of the larger corporations are seeking business opportunities beyond organic growth. IFRS 3 : Business Combinations provides guidance on the accounting part of a business combination, however this is deemed as complicated exercise.

Generally, a business combination arising from acquisition of businesses from unrelated operating entities should be accounted for in accordance with IFRS 3. Some key steps of the acquisition method covered by IFRS 3 are as follows.

Complexities of Business Combinations

In view of the complexities of business combinations, there could be many financial reporting areas that will be impacted by the terms and conditions in the sales and purchase arrangements. Some common examples are listed below.

• Purchase consideration could involve contingent consideration such as earn-out payment which is subject to attainment of future performance of the acquired operating entity. Subsequent changes in the fair value of the contingent consideration will impact on the post-acquisition earnings of the acquirer.
  
• Challenges in identifying the identifiable intangible assets such as customer contracts, brand etc which require direct involvement of a valuation expert.
  
• Challenges in identifying the contingent liabilities by reviewing the correspondences with authorities, customers and suppliers.
  
• Valuation experts should be appointed early in estimating the fair values of the assets and liabilities to be acquired, otherwise the goodwill amount will be overstated.
  
• Completion of the accounting for a business combination should be within 12 months from the acquisition date based on the guidance of IFRS 3.