IFRS 3 Business Combinations sets out how an entity accounts for obtaining control of an existing business, whether it buys shares or net assets. It establishes how the acquirer recognises and measures the identifiable assets acquired, the liabilities assumed and any non-controlling interest, how it measures goodwill or a gain from a bargain purchase, and what it discloses (IFRS 3.1). Every business combination is accounted for by one method: the acquisition method (IFRS 3.4).
What is a business combination, and what is out of scope?
A business combination is a transaction or other event in which an acquirer obtains control of one or more businesses. So-called "mergers of equals" are business combinations too (IFRS 3, Appendix A). Control can be obtained by transferring cash or other assets, incurring liabilities, issuing equity interests, or without any consideration, for example by contract alone (IFRS 3.B5).
The Standard does not apply to (IFRS 3.2, 2A):
- the formation of a joint arrangement, in the financial statements of the joint arrangement itself;
- the acquisition of an asset or group of assets that is not a business: the cost is allocated to the identifiable assets and liabilities on the basis of their relative fair values, and no goodwill arises;
- combinations of entities under common control, where the same party controls them before and after the combination and that control is not transitory (IFRS 3.B1); and
- an investment entity's acquisition of a subsidiary that it must measure at fair value through profit or loss.
When is an acquired set a "business"?
A business is an integrated set of activities and assets capable of being conducted and managed to provide goods or services to customers, or to generate investment income or other income from ordinary activities (IFRS 3, Appendix A). Its elements are inputs, processes applied to them, and outputs (IFRS 3.B7).
- Outputs are not required, but the set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs (IFRS 3.B8). Continuing revenue does not on its own show that (IFRS 3.B8A).
- The market participant view governs, not how the seller operated the set or what the buyer intends (IFRS 3.B11).
- Without outputs, a process is substantive only if it is critical to converting the acquired inputs into outputs and the inputs include an organised workforce with the necessary skills plus other inputs it could develop (IFRS 3.B12B). With outputs, a process is substantive if it is critical to continuing production and comes with an organised workforce, or if it significantly contributes to continuing production and is unique, scarce or not replaceable without significant cost, effort or delay (IFRS 3.B12C).
The optional concentration test
This simplified test is optional and can be elected transaction by transaction. If it is met, the set is not a business and no further assessment is needed; otherwise the full assessment follows (IFRS 3.B7A). The test is met if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets (IFRS 3.B7B):
- Gross assets exclude cash and cash equivalents, deferred tax assets, and goodwill resulting from the effects of deferred tax liabilities.
- Land and the building on it count as one asset if they cannot be separated without significant cost.
- Not similar: a tangible and an intangible asset, a financial and a non-financial asset, or assets in different classes.
Example: buying land and a building with furniture of negligible value, where substantially all of the fair value sits in the property. The test is met, so this is an asset acquisition and no goodwill arises.
The acquisition method: four steps
Applying the acquisition method requires (IFRS 3.5):
- identifying the acquirer;
- determining the acquisition date;
- recognising and measuring the identifiable assets acquired, the liabilities assumed and any non-controlling interest; and
- recognising and measuring goodwill or a gain from a bargain purchase.
The acquirer and the acquisition date
Each combination has one acquirer (IFRS 3.6): the entity that obtains control as defined in IFRS 10 Consolidated Financial Statements (IFRS 3.7). If that does not settle it, the acquirer is usually the entity that transfers the cash or incurs the liabilities (IFRS 3.B14). In a share exchange it is usually the issuer, considering relative voting rights after the combination, the composition of the board and senior management, and who paid a premium (IFRS 3.B15). The legal issuer can turn out to be the accounting acquiree, which is called a reverse acquisition (IFRS 3.B19).
The acquisition date is the date control is obtained (IFRS 3.8): usually the closing date, though it can be earlier or later depending on the agreement and the facts (IFRS 3.9). Every component of goodwill is measured at that date.
Assets acquired and liabilities assumed
The acquirer recognises, separately from goodwill, the identifiable assets acquired, the liabilities assumed and any non-controlling interest (IFRS 3.10), and measures the assets and liabilities at their acquisition-date fair values (IFRS 3.18). In practice:
- Assets the acquiree never recognised are recognised, such as an internally developed brand, patent or customer relationship (IFRS 3.13), provided the intangible asset is separable or arises from contractual or legal rights (IFRS 3.B31).
- An assembled workforce is not an identifiable asset; its value is subsumed into goodwill (IFRS 3.B37).
- Expected restructuring costs that the acquirer is not obliged to incur are not liabilities at the acquisition date (IFRS 3.11).
- Receivables are measured at fair value, with no separate loss allowance for expected credit losses at the acquisition date (IFRS 3.B41).
The main exceptions
The recognition and measurement principles have limited exceptions (IFRS 3.21). The main ones:
| Item | Treatment at the acquisition date |
|---|---|
| Contingent liabilities | Recognised if a present obligation arising from past events whose fair value can be measured reliably, even if an outflow is not probable (IFRS 3.23) |
| Contingent assets | Not recognised (IFRS 3.23A) |
| Income taxes | Under IAS 12 (IFRS 3.24) |
| Employee benefits | Under IAS 19 (IFRS 3.26) |
| Indemnification assets | On the same basis as the indemnified item (IFRS 3.27–28) |
| Leases where the acquiree is lessee | Lease liability at the present value of the remaining payments, as if the lease were new (IFRS 3.28B) |
| Share-based payment | Using the IFRS 2 method (IFRS 3.30) |
| Assets held for sale | Fair value less costs to sell under IFRS 5 (IFRS 3.31) |
Non-controlling interests: two measurement options
For each combination, the acquirer measures non-controlling interests that are present ownership interests, entitling their holders to a proportionate share of net assets on liquidation, at either (IFRS 3.19):
- fair value; or
- the proportionate share of the recognised amounts of the acquiree's identifiable net assets.
Other components of non-controlling interests are measured at fair value unless another Standard requires otherwise (IFRS 3.19). Fair value may come from a quoted price in an active market or, failing that, from other valuation techniques (IFRS 3.B44). Per-share values can differ between the acquirer's interest and the non-controlling interest because of a control premium or a discount for lack of control (IFRS 3.B45). Because the NCI amount enters the goodwill equation, the choice changes goodwill directly.
Goodwill or a gain from a bargain purchase
Goodwill is an asset representing future economic benefits arising from other assets acquired that are not individually identified and separately recognised (IFRS 3, Appendix A). It is measured as the excess of (a) over (b) (IFRS 3.32):
- (a) consideration transferred (generally at fair value) + the amount of any non-controlling interest + in a step acquisition, the fair value of the acquirer's previously held interest.
- (b) the net identifiable assets acquired and liabilities assumed at the acquisition date.
On the consideration side:
- Consideration transferred is the sum of the fair values of the assets transferred, the liabilities incurred to former owners and the equity interests issued (IFRS 3.37), including contingent consideration at fair value (IFRS 3.39).
- Acquisition-related costs such as advisory, legal and valuation fees are expensed as incurred; costs to issue debt or equity are dealt with under IAS 32 and IFRS 9 (IFRS 3.53).
- Separate transactions, such as settling a pre-existing relationship or remunerating employees for future services, are accounted for outside the combination (IFRS 3.51–52).
Bargain purchase. If (b) exceeds (a), the acquirer first reassesses whether it has identified all assets and liabilities and reviews its measurement procedures (IFRS 3.36). Any excess that remains is recognised as a gain in profit or loss attributed to the acquirer, not as revenue (IFRS 3.34).
After acquisition. Goodwill is not amortised. It is measured at its initial amount less accumulated impairment losses (IFRS 3.B63) and tested for impairment annually (IAS 36.10).
Worked example: goodwill under both NCI options
Illustrative figures only:
- Company A acquires 80% of Company B for 1,000,000 in cash and obtains control.
- B's net assets are 700,000 at carrying amount and 900,000 at fair value, including customer relationships B never recognised (150,000) and a fair value uplift on a building (50,000).
- The fair value of the 20% non-controlling interest, estimated using a valuation technique, is 230,000.
- Deal advisory fees are 30,000.
- Deferred tax is ignored for simplicity; in practice it is measured under IAS 12 and changes goodwill (IFRS 3.24).
| Line item | Proportionate share | Fair value |
|---|---|---|
| Consideration transferred | 1,000,000 | 1,000,000 |
| Non-controlling interest | 180,000 | 230,000 |
| Total (a) | 1,180,000 | 1,230,000 |
| Less (b) | (900,000) | (900,000) |
| Goodwill | 280,000 | 330,000 |
Proportionate share = 20% × 900,000 = 180,000, and the 50,000 difference in goodwill equals the difference between the two NCI amounts. The acquisition in the consolidated statements under the first option (summarised):
| Line item | Debit | Credit |
|---|---|---|
| Identifiable net assets (line by line) | 900,000 | |
| Goodwill | 280,000 | |
| Cash | 1,000,000 | |
| Non-controlling interest | 180,000 |
The fees are an expense, not part of goodwill: Dr expenses 30,000, Cr cash 30,000 (IFRS 3.53).
The measurement period
If the initial accounting is incomplete at the end of the reporting period, the acquirer reports provisional amounts and adjusts them retrospectively for new information about facts that existed at the acquisition date. The measurement period ends when the acquirer obtains that information or learns it is not obtainable, and cannot exceed one year from the acquisition date (IFRS 3.45). An adjustment to an asset or liability is offset in goodwill (IFRS 3.48), and comparatives are revised (IFRS 3.49). Afterwards, only error corrections under IAS 8 are allowed (IFRS 3.50).
Changes in the fair value of contingent consideration caused by post-acquisition events, such as meeting an earnings target, are not measurement-period adjustments. Equity-classified contingent consideration is not remeasured; other contingent consideration is measured at fair value at each reporting date, with changes in profit or loss (IFRS 3.58).
Step acquisitions
A business combination achieved in stages occurs when the acquirer obtains control of an entity in which it already held an interest, for example 35% followed by a further 40% (IFRS 3.41). The acquirer remeasures its previously held interest at acquisition-date fair value and recognises the difference in profit or loss or other comprehensive income, as appropriate (IFRS 3.42).
Example (B's net assets still 900,000): if A had held 30% of B (carrying amount 250,000; fair value 300,000) and then bought another 50% for 600,000, it recognises a 50,000 remeasurement gain, and goodwill with proportionate NCI is 600,000 + 180,000 + 300,000 − 900,000 = 180,000.
The same applies when a party to a joint operation that is a business obtains control of it: it remeasures its entire previously held interest (IFRS 3.42A). The acquisition method also applies when control is obtained without transferring consideration, for example when the acquiree buys back its own shares or minority veto rights lapse (IFRS 3.43).
Key disclosures
The acquirer discloses information that lets users evaluate the nature and financial effect of a combination (IFRS 3.59). For each combination this includes (IFRS 3.B64):
- the acquiree's name and description, the acquisition date, the percentage of voting interests acquired and the reasons for the combination;
- a qualitative description of the factors that make up goodwill, such as expected synergies; the fair value of the consideration by class; and details of contingent consideration;
- the amounts recognised for each major class of assets and liabilities, and the NCI amount with its measurement basis; and
- the acquiree's revenue and profit since the acquisition date, and the combined entity's figures as if the acquisition had occurred at the start of the year.
A reconciliation of the carrying amount of goodwill from the beginning to the end of the period is also required (IFRS 3.B67).
What has changed in IFRS 3?
- Definition of a business. In October 2018 the IASB narrowed and clarified the definition and introduced the concentration test (IFRS Foundation). The amendment applies to combinations with an acquisition date on or after the beginning of the first annual period beginning on or after 1 January 2020 (IFRS 3.64P).
- Reference to the Conceptual Framework. In May 2020 the Standard's reference was updated to the Conceptual Framework issued in March 2018 (IFRS Foundation). The amendment requires present obligations for items within IAS 37 or IFRIC 21 to be identified under those requirements (IFRS 3.21B), and explicitly prohibits recognising contingent assets (IFRS 3.23A). It applies from the first annual period beginning on or after 1 January 2022 (IFRS 3.64Q).
- IFRS 18. IFRS 18 Presentation and Disclosure in Financial Statements made consequential amendments to IFRS 3 that apply with it for annual periods beginning on or after 1 January 2027 (IFRS Foundation: changes in the 2026 edition).
- Proposals under discussion. In March 2024 the IASB published the Exposure Draft Business Combinations—Disclosures, Goodwill and Impairment, proposing better disclosures about the performance of acquisitions and changes to the goodwill impairment test in IAS 36. As of its September 2026 meeting the IASB was still redeliberating, so these are not requirements (IFRS Foundation: project page).
- Common control. In November 2023 the IASB decided not to develop requirements for business combinations under common control and discontinued the project (IFRS Foundation); such combinations remain outside IFRS 3 (IFRS 3.2(c)).
How it fits with other Standards
IFRS 10 defines control and when consolidation starts, IFRS 13 Fair Value Measurement defines the fair value used throughout a combination, and IFRS 12 sets the disclosures about subsidiaries and non-controlling interests. For how deals change the numbers, see Assessing the impact of mergers and acquisitions on financial statements.
A practical tool
After an acquisition, the Consolidated Financial Statements and Group Trial Balance Merging workbook organises the combine-and-eliminate steps in one file.
Sources
- IFRS Foundation: IFRS 3 Business Combinations. References in brackets are to paragraphs of the Standard and its appendices.
- IFRS Foundation: IAS 36 Impairment of Assets.
- IFRS Foundation: Changes in this edition (2026).
- IFRS Foundation project pages: Business Combinations—Disclosures, Goodwill and Impairment, Definition of a Business, Updating a Reference to the Conceptual Framework, Business Combinations under Common Control.