IFRS 3 — Business Combinations is the International Financial Reporting Standard that governs how an acquirer accounts for buying another business. It mandates the acquisition method and determines how the purchase price is allocated across the acquired assets and liabilities, with goodwill as the residual. It is the IFRS counterpart of U.S. GAAP's ASC 805, and the two have been largely converged since the late-2000s standard-setting projects.
The acquisition method
IFRS 3 requires every business combination to be accounted for using the acquisition method, which has four steps:
- Identify the acquirer — the entity that obtains control.
- Determine the acquisition date — the date control passes.
- Recognize and measure the identifiable assets acquired and liabilities assumed at fair value — including identifiable intangibles (brands, customer relationships, technology) that the seller may never have recorded, separated out from goodwill. This is the purchase price allocation.
- Recognize goodwill (or a bargain-purchase gain) as the residual.
The goodwill residual
Goodwill is what remains after the consideration is allocated to identifiable net assets:
Goodwill = Consideration transferred + Non-controlling interest + FV of any previously held interest − FV of identifiable net assets acquired
Under IFRS 3, goodwill is not amortized. Instead it is tested for impairment at least annually (and whenever indicators arise), under IAS 36, at the cash-generating-unit level. If the consideration is less than the fair value of net identifiable assets, the difference is a bargain purchase, recognized as a gain in profit or loss.
Key features
- Fair value throughout. Assets and liabilities — and any contingent consideration — are measured at fair value on the acquisition date.
- Non-controlling interest (NCI). Where the acquirer buys less than 100%, IFRS 3 permits NCI to be measured either at fair value ("full goodwill") or at its proportionate share of net assets (a notable optional difference from U.S. practice).
- Acquisition costs expensed. Deal costs (advisory, legal) are expensed, not capitalized into the purchase price.
- Measurement period. Provisional amounts can be adjusted for up to one year as better information about acquisition-date facts emerges.
Why it matters in M&A
IFRS 3 turns a negotiated price into the opening balance sheet of the combined company, and its choices ripple through future earnings: how much is assigned to amortizing intangibles versus non-amortizing goodwill affects post-deal profit, and the impairment regime means an overpayment can resurface later as a write-down. For globally listed acquirers, IFRS 3 (alongside ASC 805 for U.S. filers) is the framework every deal's accounting must satisfy.
See also
- ASC 805 — Business Combinations — The U.S. GAAP standard governing accounting for business combinations. Largely converged with IFRS 3 since 2008.
- Goodwill — The intangible asset recorded when a buyer pays more than the fair value of net assets.
- Purchase price allocation — The process of assigning an acquisition’s price to the assets and liabilities acquired.
- Intangible assets in M&A — Identifiable non-physical assets — customer relationships, brands, technology, contracts — recognised separately from goodwill in purchase price allocation.
- Goodwill impairment — A write-down of goodwill when its carrying amount exceeds its recoverable amount. Tested at least annually under both IFRS and U.S. GAAP.
- Bargain purchase — An acquisition in which the fair value of net identifiable assets exceeds the consideration paid. The excess is recognised immediately in earnings rather than deferred as goodwill.