A business combination is the bringing together of separate entities or businesses into one reporting entity. The Result of nearly all business combinations is that one entity i.e. the acquirer, obtains control of one or more other businesses.

Scope of IFRS 3

IFRS 3 defines a business combination as the bringing together of separate entities or businesses into one reporting entity, and requires the purchase method of accounting to be applied to all such transactions, with limited exceptions, for example business combinations between entities under common control and combinations involving two or more mutual entities

If an entity obtains control of one or more entities that are not businesses, the bringing together of those entities is not a business combination.

Purchase Method of Accounting as per IFRS 3

IFRS 3 states that financial reporting for Business Combinations should be done as per the purchase method of accounting. Under the purchase method of accounting, the acquires identifiable assets and liabilities should be measured at their fair value on the acquisition date, a method that requires significantly more effort than the pooling of interests method and will usually result in the recognition of goodwill or negative goodwill on acquisition.

As per IFRS 3, the Acquirer should measure the cost of the business combination as the total of the fair values at the date of exchange of the assets given, liabilities incurred and equity instruments issued by the acquirer in exchange for control of the acquire and any costs directly attributable to the business combination incurred by the acquirer.

If the Equity Instruments are issued as consideration for the acquisition, the market price of those equity instruments at the date of exchange is considered to provide the best evidence of fair value.  Where the market price does not exist or is not considered as a reliable evidence of the fair value, other valuation techniques are used to determine the fair value.

Disclosure Requirements of IFRS 3

IFRS 3 requires the acquirer to disclose information that enable users of its financial statements to evaluate the nature and financial effect of the business combination that occur during the current reporting period or after the reporting date but before the financial statements are authorised for issue.  After a business combination, the acquirer must disclose any adjustments recognised in the current reporting period that relate to the business combinations that occurred in the current or previous reporting periods.

The above summary has been prepared on the basis of the IFRS 3 as issued by the IASB and the full version of IFRS 3 – Business Combinations can be downloaded from