IFRS 3:Accounting For Business Combination

Since 31 March 2004,IFRS 3 (Accounting for Business Combinations) is mandatory for companies to account for any business combinations.

You might be wondering why IFRS 3 has any involvement with this brand article.

The answer is simple:you will notice that in any business combination there is always an element of purchased goodwill which can be quite colossal.

As investor,this large acquired goodwill might not omen well. –could it be due to bad negotiation/deal or the intangibles like brands and others are not been properly valued. Furthermore,don’t forget that goodwill is subjected to the impairment test hence any material impairment of that goodwill in the future will again be read as an indication of a poor deal.

To be more precise to answer what is goodwill:IFRS 3 actually has given the definition which is as follows:

“Goodwill represents a payment made by the acquiring entity in anticipation of future economic benefits from assets that are not capable of being individually identified and separately recognized”.

Acquired goodwill represents the difference between the purchase consideration and the total of the fair values of all the acquired assets and liabilities.

So,once again,even this Accounting standard lend support to ensure intangibles assets and brands should be properly valued in the books.

A few basics on IFRS 3:

• The acquiring entity must recognise all the identifiable assets,liabilities and contingent liabilities of the acquired entity,irrespective of whether they were recognised in that entity’s balance sheet,at fair value where it can be measured,where it is probable that:
• future economic benefits from a tangible asset will flow to the acquirer and
• an outflow of resources will be required to settle a liability

• In the case of intangible assets and contingent liabilities,it is sufficient that they are identifiable and that their fair values can be measured reliably. If so,they must be recognised.

• If the residual goodwill turns out to be negative,then the negative goodwill is taken straight to profit.
• The intangible assets have to be assigned useful lives.
• If there is no foreseeable limit to the period of future cash flows from the asset,it should be assigned an indefinite life,in which case there is no amortisation charge. Normally for brands and mastheads
• For all other intangible assets,the useful life is defined by the period of future cash flows and depends on factors like technological advances,length of patent protection,etc. Such assets must be amortised over that life,normally on a straight line basis.
• For intangibles with indefinite lives,it is necessary to review annually the value of intangibles for any impairment. If the calculated fair value of the intangible is lower than its book value,that value must be written down to the impaired value. If,in future years,the fair value increases again,the write down can be reversed.
• Goodwill is always considered to have an indefinite life and is also subject to annual impairment testing,but this differs from that for intangibles in two respects.
• Firstly,any impairment of goodwill is deemed to be permanent and cannot be reversed in the future.
• Secondly,goodwill does not,directly,generate cash flows. It must be assigned to a cash generating unit and it is the total value of all the assets,including goodwill,of the cash generating unit that is compared to its fair value. In the event of a shortfall,the goodwill is reduced in value by a charge to profit.
• Goodwill should be assigned to cash generating units at the level at which management monitors goodwill. In practice,management frequently doesn’t manage goodwill other than at group level,so that the reporting segments define the upper limits for cash generating units. If it can be argued that the cash flows within a segment are inter-related,for instance if the segment comprises vertically production and sales and distribution units,it should be possible to assign goodwill at the segment level.
• Identifying intangible assets and contingent liabilities will be a key area. Valuations of these assets and liabilities will need to be supported and consideration given to the use of appropriate internal,or external,expertise to provide supporting evidence.

• Technical Summary Of IFRS 3 Business Combinations
• Technical Summary Of IAS 36 Impairment of Assets
• International Financial Reporting Standards(IFRS) Versus International Accounting Standards (IAS)
• Technical Summary Of IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
• Technical Summary Of IFRS 6 Exploration for and Evaluation of Mineral Resources
• Technical Summary Of IFRS 2 Share Based Payment
• Listing Of Technical Summaries Of IFRS &IAS