UK: Financial Reporting - IFRS - Business Combinations – A New Model

Last Updated: 20 March 2008
Article by Yvonne Lang

Recent revisions to IFRS 3 and IAS 27 mean that changes will be required to long-established accounting treatments and could affect the structure of future acquisitions.

The revised versions of IFRS 3 ‘Business combinations’ and IAS 27 ‘Consolidated and separate financial statements’ were issued at the beginning of the year. They are set not only to change long-established accounting practice, but also the shape of future acquisitions. The revisions mark the culmination of a joint project between the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) and, while there is considerable convergence, some differences remain. As a consequence there could still be significantly different financial reporting between companies applying IFRS and US GAAP.

Both standards come into effect for periods that begin on or after 1 July 2009. While it is possible to adopt for earlier periods, both standards must be adopted together and the revised standards cannot be implemented for periods beginning before 30 June 2007.

Measuring the cost of the business combination

As with the existing version of IFRS 3, consideration in a business combination is measured at fair value at the acquisition date. However, the revised version concentrates on what the vendor receives rather than what the acquisition costs the acquirer. Acquisition costs, such as legal and advisory fees, which have historically been included as part of the purchase consideration and, therefore, within the calculation of goodwill, will, in future, be recognised in the income statement in the period they are incurred.

Contingent consideration arrangements, such as earn-outs, are common to many acquisition agreements. While the fair value of such arrangements will continue to be included as part of the cost of the business combination, subsequent adjustments will be accounted for very differently. Adjustments are currently applied by amending the goodwill figure but, in future, they will need to be dealt with in the income statement.

Provisional fair values

At the date of acquisition, companies need to assess the fair value of the assets and liabilities acquired. Where it is not possible to make a definite assessment, companies can attribute provisional values and agree final figures within 12 months from the date of acquisition. None of this is new. However, whereas previously any adjustments to fair values were accounted for as adjustments in the period in which they were identified, under the revised IFRS 3, they will have to be treated as prior period adjustments and comparatives restated.

Non-contractual customer relationships

What might seem to be a small change in wording within the illustrative examples could have significant implications with respect to the recognition of intangible assets. Intangible assets are recognised if they arise either from a contract or are separable for non-contracted customer relations. The current wording in IFRS 3 implies that evidence of separability exists where there has been an exchange transaction for the same or similar assets. In the revised version, extension of this criteria to evidence that "other entities" have sold or transferred such assets significantly widens the scope and hence the likelihood that such relations will need separate recognition.

The demise of minority interests

Once the new standard comes into effect, the term ‘minority interest’ will be banished to the history books in so far as IFRS is concerned and will be replaced by ‘non-controlling interests’.

It is not only the name that is changing, but potentially the accounting treatment as well. Currently, at acquisition, the non-controlling interest is calculated by reference to the proportionate share of the identified net assets of the acquired entity. In what may seem an unusual move, the IASB is now offering companies a choice of how they account for their noncontrolling interests at the point control is obtained. As part of the convergence with US GAAP, the revised IFRS 3 introduces the option, on a transaction by transaction basis, to measure the non-controlling interest at fair value (US GAAP permits only fair value). In circumstances where the shares are actively traded, this fair value would be measured by reference to market value. Otherwise, a valuation technique would need to be applied.

Step acquisitions

The majority of business combinations arise in circumstances where the interest goes from 0% to 100% in one go. However, this is not always the case and accounting for so-called ‘step acquisitions’ has always left preparers reaching for their textbooks. However, the position is set to become easier as the IASB has sought to simplify the requirements. Where an entity goes from having an interest in a company (whether investment, associate or joint venture) to a position of obtaining control of that company, it will be required to re-measure to fair value its original investment. This fair value will form part of determining the total consideration given for the acquisition. To the extent that there is a gain or loss on the re-measurement, it will need to be included within the income statement.

However, once control has been obtained, further increases or decreases in ownership interest are treated as transactions with shareholders and recorded in equity. It will not be necessary to re-measure to fair value each time.

Consequential amendments to IAS 27

Certain amendments have also been made to IAS 27, primarily to reflect the new approach to changes in controlling and non-controlling interests.

Changes in a parent entity’s interest that do not result in a change of control are dealt with within equity and no adjustment is made to goodwill. When control is lost, all assets, liabilities and non-controlling interests are derecognised. Any interest that remains is recognised at its fair value on the date that control was lost.

There are also consequential amendments to both IAS 28 ‘Investments in associates’ and IAS 31 ‘Interests in joint ventures’. Where an entity ceases to have significant influence over an associate, it derecognises the associate. It also includes in the income statement the difference between the proceeds received and any retained interest and the carrying amount of the associate at the date significant influence was lost.

Smith & Williamson commentary

With the revised IFRS 3, we see a number of areas that will make understanding the cost and effect of acquisitions more difficult. In addition, greater volatility of reported earnings is highly likely, particularly in very acquisitive companies. For example, take the position of a company that makes acquisitions on a regular basis. If it also usually attributes provisional fair values, then there is the very real prospect of year upon year of prior period adjustments.

As well as introducing volatility in earnings, the change in treatment of contingent consideration is likely to lead to some interesting discussions between entities and their auditors. Companies will want to avoid unpredictable ‘costs’ in the income statement and this could lead to conflict with the requirement that deferred consideration be reflected at fair value.

Equally, the writing off of often substantial acquisition costs before the company has the benefit of the associated business activity, could result in not only volatility of results, but also impact on distributable profits.

All of these issues are likely to lead companies to look long and hard at the way in which deals are structured and their professional advisers are remunerated.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.