Business Combination

Business combination AASB 3 as amended by the International Accounting Standards Board (IASB) incorporates IFRS 3. In this case, most of the paragraphs used in AASB 3 standard are not included in IFRS 3. The sections used in AASB 3 but missing in IFRS 3 are identified by an “Aus” prefix then followed with the IASB 3 paragraph and then the decimal number. The primary objective of the standard is to provide the acquirer with the requirements and principles applicable during business combination.

Business Combination


According to Shalev (2009), business combinations can be defined as the bringing together into one two or more businesses. In this case, business combinations come into existence through acquisitions or an existing control. Business combinations involve the identification of the “acquirer” then followed by the allocation of the combination costs at the fair value of the acquirer’s liabilities, assets, and contingent liabilities. AASB 3 standard provides the guidelines to be used in the determination of the fair value of the assets and liabilities during business combinations. However, goodwill in the course of business combination is recognized separately from other identifiable intangible assets. The paper is going to provide the steps and guidelines necessary during business combinations according to the AASB 3 standard.

Exclusions from AASB 3 standard for business combination

The first exclusion from the standard is the case of joint arrangements. Joint arrangements refer to the formal agreements entered by parties who have a common interest in business. The second case of exclusion from the standard is, when a company purchases assets not part of the business and does not meet the requirements of the AASB 3 standard. In this relation, the acquirer will recognize and identify those assets that are “identifiable” and the assumed liabilities at their fair values on the date of purchase. Goodwill in such purchases is prohibited. The third exclusion is where the entities that come together have a common control or interest (Cheung, Evans & Wright, 2008). Therefore, the liabilities assumed and the assets acquired must constitute an entity, in this case, the above are excluded from the AASB 3 standard for the business combination which defines an entity as comprising of processes and inputs to generate an output.

Acquisition method for combination business implications

According to Shalev (2009), the acquisition method for business combination requires entities to identify and recognize a potential acquirer. In this case, one of the parties during business combination is the acquirer and the other the acquired. The acquisition date refers to the time of control by the acquirer on the acquire business’ assets and liabilities. For the purpose of the identifiable assets and the liabilities assumed by the acquirer, they are usually accounted for in the date of acquisition. The main exemptions from the application of the acquisition method include

• Deferred tax on liabilities and assets are measured and recognized according to the AASB 119 accounting standard on income taxes

• Employee benefits are accounted for according to AASB 119 which is an accounting standard on the employee benefits.

• Reacquired rights are accounted for by contractual terms.

• On the date of acquisition, those assets classified as “held-for- sale” are accounted for under the AASB 5 accounting standard.

The acquisition method for business combination entitles the holders, a share of the business’ net assets at their market value based on present ownership. Also, the non-controlling interests have the right to a share of the realized amount of the identifiable assets of the acquired. Goodwill recognized should be reassessed by the acquirer to ensure the assets realized by the requirements of the AASB 3 accounting standard. In this case, the acquisition method accounts for contingent consideration on their fair value on the date of purchase.

The acquisition method for business combination requires the acquirer to finalize all the accounts that relate to the business combination within a year after the date of purchase. Also, any arrangements between the acquired and the acquirer after the date of acquisition are not part of business combination hence not accounted for in the acquisition method. Therefore, the acquisition process requires all the liabilities assumed and assets acquired to be accounted for at their fair value on the date of purchase.

How the acquired is identified during business combination

According to AASB 3, business combinations are done about the needs and wants of the acquirer. Therefore, the primary task of the acquirer is to determine a potential “acquiree”. In the case of the direct acquisition, there is little information on the acquirer as the entity deals directly with a vendor during the acquisition process. However during acquisition, the acquirer should identify other specific factors other than the business transaction. For instance, the acquirer should consider factors like the voting power, the percentage of management position in the new business formation, and also the terms of exchange of the equity interests. Therefore, the various factors to be considered in business combination makes the process of identifying a potential acquirer hard as it ‘s hard to determine the best factor to choose from, however, during business combination, the acquirer has a dominant control in the combination (Wines, Dagwell, & Windsor, 2007).

Assets’ fair value determination during business combination

PPE fair value realized out of business combination are recorded at their market values. Market value refers to the price the product will fetch in the valuation date. In this case, PPE is usually measured at cost. The intangible assets during business combination are accounted for at their discounted estimates. Also, other intangibles are valued at their fair value based on their discounted cash flows. Investments during business combination are based their market price. The market price for investments is determined by the estimated amount on which the property will be exchanged on valuation. Moreover, inventories are valued at their selling price less the cost of sale to get a profit margin. However, in the case of financial assets, they are valued at their fair value through the income statement. In this case, valuation of financial assets is based on discounted cash flows using the discount rates and in the case of financial securities held to maturity is valued at their fair value.

Also, receivables excluding work in progress (WIP) in the business combination are valued at their present value. In the case of derivatives, they are valued at their fair value based on the market price. However, in situations where the market for the derivatives is not available, the current forward and contractual rate is used to estimate the fair value of the derivatives. However, for the non-derivatives, fair value is determined based on interest cash flows.

Main reasons why fair value is used during business combinations

The key reason why fair value accounting is used during business combination is that, it unifies the accounting information and makes it relevant. In this case, fair value can be used to calculate and test goodwill during business combinations. Additionally, fair value can be used to account accurately for financial instruments like stock options. Therefore, the broad application of the fair value is on the finance theory-specifically on the idea that fair value amounts are reliable and efficient during the business combination according to AASB 3.

The treatment of goodwill arising from business combination

Wines, Dagwell & Windsor (2007) state that, AASB 3 gives companies the option to account for the minority interests based on their proportionate share of assets and liabilities at full fair value. In this case, AASB 3 accounts for goodwill using the method of total fair value unlike IFRS 3. In this regards, goodwill can be determined in two ways;

First, goodwill can be accounted for as “full goodwill”, in this method, goodwill is shared with the minority interests in both the controlling interest and the subsidiary. Second, goodwill is calculated through the “partial goodwill” method. In this approach, NCI is realized at their share of the identifiable assets excluding the goodwill (Bloom, 2009).

In conclusion, business combinations are achieved /accomplished in stages. Before full control is obtained, the acquirer will account for the investment of the acquired by applying the IAS 28 standard on “investments in joint ventures”, IFRS 11 on “Joint arrangements” and IAS 39 on “financial instruments”. These standards are used as part of the business combination. In this case, the acquirer will measure interests at their fair value. The amount realized will then be used in the calculation of goodwill, and any gain or loss is treated as either income or expense in the comprehensive income.


Bloom, M. (2009). Accounting for goodwill. Abacus45(3), 379-389.

Cheung, E., Evans, E., & Wright, S. (2008). The adoption of IFRS in Australia: The case of AASB 3 (IAS 3) Intangible Assets. Australian Accounting Review18(3), 248-256.

Chalmers, K., Clinch, G., & Godfrey, J. M. (2008). Adoption of international financial reporting standards: impact on the value relevance of intangible assets. Australian Accounting Review18(3), 237-247.

Shalev, R. (2009). The information content of business combination disclosure level. The Accounting Review84(1), 239-270.

Wines, G., Dagwell, R., & Windsor, C. (2007). Implications of the IFRS goodwill accounting treatment. Managerial Auditing Journal22(9), 862-880.