the change of control happened as well. Therefore, in this specific example, it is appropriate to consider
Newco as an extension of Entity A rather than as extension of the former bondholders and, therefore, not to
identify Newco as the acquirer.
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4.1.2 Stapling
arrangements
In 2014, the Interpretations Committee considered whether an acquirer identified for
the purpose of IFRS 3 is a parent for the purpose of IFRS 10 in circumstances in which
a business combination is achieved by contract alone, such as a stapling arrangement,
with no combining entity obtaining control of the other combining entities. When
considering this issue, the Interpretations Committee thought that the guidance
outlined in paragraph B15(a) of IFRS 3, i.e. that the acquirer is usually the combining
entity whose owners as a group receive the largest portion of the voting rights in the
combined entity, would be relevant to identifying which of the combining entities is the
acquirer in the stapling transaction considered.33
4.2
Determining the acquisition date
The next step in applying the acquisition method is determining the acquisition date,
‘the date on which the acquirer obtains control of the acquiree’. [IFRS 3.8, Appendix A]. This
is generally the ‘closing date’, i.e. the date on which the acquirer legally transfers the
consideration, acquires the assets and assumes the liabilities of the acquiree. [IFRS 3.9].
However, although the standard refers to the ‘closing date’, this does not necessarily
mean that the transaction has to be closed or finalised at law before the acquirer obtains
control over the acquiree.
The acquirer might obtain control on a date that is either earlier or later than the closing
date. If a written agreement provides that the acquirer obtains control of the acquiree
on a date before the closing date, the acquisition date might precede the closing date.
[IFRS 3.9]. This does not mean that the acquisition date can be artificially backdated or
otherwise altered, for example, by the inclusion of terms in the agreement indicating
that the acquisition is to be effective as of an earlier date, with the acquirer being
entitled to profits arising after that date, even if the purchase price is based on the net
asset position of the acquiree at that date.
The Basis for Conclusions accepts that, for convenience, an entity might wish to
designate an acquisition date at the beginning or end of a month, the date on which it
closes its books, rather than the actual acquisition date during the month. Unless events
between the ‘convenience’ date and the actual acquisition date result in material
changes in the amounts recognised, that entity’s practice would comply with the
requirements of IFRS 3. [IFRS 3.BC110].
The date control is obtained will be dependent on a number of factors, including
whether the acquisition arises from a public offer or a private deal, is subject to approval
by other parties, or is effected by the issue of shares.
For an acquisition by way of a public offer, the date of acquisition could be:
• when the offer has become unconditional because sufficient irrevocable
acceptances have been received; or
• the date that the offer closes.
In a private deal, the date would generally be when an unconditional offer has been
accepted by the vendors.
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Thus, where an offer is conditional on the approval of the acquiring entity’s shareholders,
until that approval has been received, it is unlikely that control will have been obtained.
Where the offer is conditional upon receiving some form of regulatory approval, then it
will depend on the nature of that approval. If it is a substantive hurdle, such as obtaining
the approval of a competition authority, it is unlikely that control is obtained prior to that
approval. However, where the approval is merely a formality, or ‘rubber-stamping’
exercise, then this would not preclude control having been obtained at an earlier date.
Where the acquisition is effected by the issue of shares, then the date of control will
generally be when the exchange of shares takes place.
However, whether control has been obtained by a certain date is a matter of fact, and all
pertinent facts and circumstances surrounding a business combination need to be considered
in assessing when the acquirer has obtained control. To evaluate whether control has been
obtained the acquirer would need to apply the guidance in IFRS 10 (see Chapter 6 at 3).
5
RECOGNITION AND MEASUREMENT OF ASSETS
ACQUIRED, LIABILITIES ASSUMED AND NON-
CONTROLLING INTERESTS
The next step in applying the acquisition method involves recognising and measuring
the identifiable assets acquired, the liabilities assumed and any non-controlling interest
in the acquiree.
5.1 General
principles
The identifiable assets acquired and liabilities assumed of the acquiree are recognised
as of the acquisition date and measured at fair value as at that date, with certain limited
exceptions. [IFRS 3.10, 14, 18, 20].
Any non-controlling interest in the acquiree is to be recognised at the acquisition date.
Non-controlling interests that are present ownership interests and entitle their holders
to a proportionate share of the entity’s net assets in the event of liquidation can be
measured on one of two bases:
• at fair value at that date; or
• at the non-controlling interest’s proportionate share of the acquiree’s net
identifiable assets.
All other components of non-controlling interests are measured at their acquisition-
date fair values, unless another measurement basis is required by IFRSs. [IFRS 3.10, 19].
See 8 below.
5.2
Recognising identifiable assets acquired and liabilities assumed
To qualify for recognition, an item acquired or assumed must be:
(a) an asset or liability at the acquisition date; and
(b) part of the business acquired (the acquiree) rather than the result of a separate
transaction. [IFRS 3.BC112].
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The identifiable assets acquired and liabilities assumed must meet the definitions of
assets and liabilities in the IASC’s Framework for the Preparation and Presentation of
Financial Statements adopted by the IASB in 2001 (‘Framework (2001)’ ). [CF(2001) 4.4].
In March 2018, the IASB issued the revised Conceptual Framework for Financial
Reporting (‘Framework’). The revised version includes comprehensive changes to the
previous Conceptual Framework, issued in 1989 and partly revised in 2010. In
particular, definitions of assets and liabilities have been changed. However, the IASB
made a consequential amendment to IFRS 3 that specifies that acquirers are required
to apply the definitions of an asset and a liability and supporting guidance in the IASC’s
Framework for the Preparation and Presentation of Financial Statements adopted by
the IASB in 2001 rather than the Conceptual Framework for Financial Reporting issued
in 2018 (see Chapter 2). The IASB recognised that in some cases
applying the revised
definitions would change which assets and liabilities would qualify for recognition in a
business combination. As a consequence, post-acquisition accounting required by other
standards could lead to immediate derecognition of such assets or liabilities, causing
‘Day 2 gains or losses’ to arise, which do not depict economic gains or losses. The IASB,
therefore, plans to assess how IFRS 3 can be updated for the revised definitions without
these unintended consequences.
Applying definitions in Framework (2001) means that costs that the acquirer expects
but is not obliged to incur in the future cannot be provided for. For example, the entity’s
plans to reorganise the acquiree’s activities (e.g. plans to exit from an activity, or
terminate the employment of or relocate employees) are not liabilities at the acquisition
date. These costs will be recognised by the acquirer in its post-combination financial
statements in accordance with other IFRSs. [IFRS 3.11]. Liabilities for restructuring or exit
activities can only be recognised if they meet the definition of a liability at the
acquisition date. [IFRS 3.BC132]. Although the standard no longer contains the explicit
requirements relating to restructuring plans, the Basis for Conclusions clearly indicate
that the requirements for recognising liabilities associated with restructuring or exit
activities remain the same. [IFRS 3.BC137]. This is discussed further at 11.4 below.
The first condition for recognition makes no reference to reliability of measurement or
probability as to the inflow or outflow of economic benefits. This is because the IASB
considers them to be unnecessary. Reliability of measurement is a part of the overall
recognition criteria in the Framework which include the concept of ‘probability’ to
refer to the degree of uncertainty that the future economic benefits associated with an
asset or liability will flow to or from the entity. [IFRS 3.BC125-BC130]. Thus, identifiable
assets and liabilities are recognised regardless of the degree of probability that there will
be inflows or outflows of economic benefits. However, in recognising a contingent
liability, IFRS 3 requires that its fair value can be measured reliably (see 5.6.1.A below).
The second condition requires that the identifiable assets acquired and liabilities
assumed must be part of the exchange for the acquiree, rather than the result of separate
transactions. [IFRS 3.12]. Explicit guidance is given in the standard for making such an
assessment as discussed at 11 below. An acquirer may recognise some assets and
liabilities that had not previously been recognised in the acquiree’s financial statements,
e.g. intangible assets, such as internally-generated brand names, patents or customer
relationships. [IFRS 3.13].
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combinations
617
Guidance on recognising intangible assets and operating leases, as well as items for
which IFRS 3 provides limited exceptions to the recognition principles and conditions
are discussed at 5.5 and 5.6 below.
5.3
Acquisition-date fair values of identifiable assets acquired and
liabilities assumed
The general principle is that the identifiable assets acquired and liabilities assumed are
measured at their acquisition-date fair values. In this chapter, reference to fair value
means fair value as measured by IFRS 13.
IFRS 13 provides guidance on how to measure fair value, but it does not change when
fair value is required or permitted under IFRS. IFRS 13 is discussed in detail in
Chapter 14. IFRS 3 allows some assets and liabilities to be measured at other than fair
value on initial recognition, as described at 5.6 below.
IFRS 13 defines ‘fair value’ as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the
measurement date under current market conditions. It is explicitly an exit price.
[IFRS 13.2].
Where IFRS 3 requires an identifiable asset acquired or liability assumed to be
measured at its fair value at the acquisition date, although an entity applies the IFRS 13
measurement requirements, it does not need to disclose information about those
acquisition-date fair value measurements under IFRS 13. However, the IFRS 13
disclosure requirements would apply to any fair value measurement after initial
recognition, for example the fair value measurement of contingent consideration
obligation classified as a financial liability (see Chapter 14 at 20). [IFRS 13.91].
IFRS 3 specifies those assets and liabilities that are not measured at fair value, including
income taxes and employee benefits. [IFRS 3.20]. These are discussed at 5.5 and
5.6 below.
5.4
Classifying or designating identifiable assets acquired and
liabilities assumed
The acquirer must classify or designate the identifiable assets and liabilities assumed on
the basis of its own contractual terms, economic conditions, operating and accounting
policies and other relevant conditions as at the acquisition date. [IFRS 3.15].
The standard provides two exceptions:
• classification of leases in accordance with IAS 17 (however, under IFRS 16, this
exception will remain relevant only for classification of leases in which the
acquiree is the lessor, see discussion below); and
• classification of a contract as an insurance contract in accordance with IFRS 4 –
Insurance Contracts (however, IFRS 17 – Insurance Contracts, will remove this
classification exception for entities that apply that standard).34
In both of these cases, the contracts are classified on the basis of the contractual terms
and other factors at the inception of the contract or at the date of modification. This could
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be the acquisition date if the terms of the contract have been modified in a manner that
would change its classification. [IFRS 3.17].
Thus, if an acquiree is a lessee under a lease contract that has been classified
appropriately as an operating lease under IAS 17, the acquirer would continue to
account for the lease as an operating lease in the absence of any modification to the
terms of the contract. Only if, prior to or as at the acquisition date, the terms of the lease
were modified in such a way that it would be reclassified as a finance lease under IAS 17
(see Chapter 23 at 3.2.3), would the acquirer recognise the asset and the related finance
lease liability. IFRS 16 introduces a single accounting model for lessees, requiring most
leases to be recognised on the balance sheet. Therefore, based on consequential
amendments to paragraph 17 of IFRS 3 from IFRS 16, the above exception will remain
relevant only for classification of leases in which the acquiree is the lessor. IFRS 16 and
its consequential amendments are mandatory for annual periods beginning on or after
1 January 2019, although early adoption is permitted, provided IFRS 15 has been
applied, or is applied at the same date as IFRS 16 (for further guidance on IFRS 16, see
Chapter 24).
Examples of classifications or designations made by the acquirer on the basis of
conditions at the acquisition date include but are not limi
ted to:
(a) classifying financial assets and liabilities as measured at fair value through profit or
loss or at amortised cost, or as a financial asset measured at fair value through other
comprehensive income, in accordance with IFRS 9;
(b) designating a derivative instrument as a hedging instrument in accordance with
IFRS 9; and
(c) assessing whether an embedded derivative should be separated from the host
contract in accordance with IFRS 9 (which is a matter of ‘classification’ as IFRS 3
uses that term). [IFRS 3.16].
The requirements for the classification of financial assets and liabilities under IFRS 9
are discussed in Chapter 44. Although, IFRS 9 prohibits reclassifications of financial
liabilities and allows reclassifications of financial assets when, and only when, an entity
changes its business model for managing financial assets as described in Chapter 44 at 9,
these do not apply in the circumstances of a business combination. The acquirer has to
make its own classification at the acquisition date. If it has not had to consider the
classification of such assets or liabilities before, it could choose to adopt the
classification applied by the acquiree or adopt a different classification if appropriate.
However, if it already has an accounting policy for like transactions, the classification
should be consistent with that existing policy.
As discussed in Chapter 49 at 6, there are a number of conditions that need to be met
for hedge relationships to qualify for hedge accounting, in particular formal designation
and documentation, and an ongoing assessment of the designated hedge. If an acquiree
has derivative or other financial instruments that have been used as hedging instruments
in a hedge relationship, IFRS 3 requires the acquirer to make its own designation about
the hedging relationship that satisfy the conditions for hedge accounting, based on the
conditions as they exist at the acquisition date. If the hedging relationship is being
accounted for as a cash flow hedge by the acquiree, the acquirer does not inherit the
Business
combinations
619
acquiree’s existing cash flow hedge reserve, as this clearly represents cumulative pre-
acquisition gains and losses. This has implications for the assessment of hedge
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 122
