This free, guided checker walks your finance team through the key decision points for IFRS 3 Business Combination and Goodwill. Answer a few questions to see the likely treatment and the evidence to document.
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This tool is a high-level IFRS screening aid for general information only and is not accounting, audit or legal advice. Conclusions require entity-specific evidence and judgement - confirm the treatment with your advisor.
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A business combination arises when an acquirer obtains control of one or more businesses; asset acquisitions that do not constitute businesses are outside IFRS 3 and are accounted for as asset purchases. Test for an input plus a substantive process under IFRS 3.B7-B12D, and consider the optional concentration test in IFRS 3.B7A, which short-cuts to an asset acquisition when substantially all fair value sits in one asset or a group of similar assets. The distinction drives goodwill, deferred tax, and transaction cost treatment, so document it first.
Account for the purchase as an asset acquisition: allocate the cost to the individual identifiable assets and liabilities based on their relative fair values, with no goodwill recognised (IFRS 3.2(b)).
Official guidance: IFRS issued standards
The acquirer is usually the entity that transfers cash or other assets, issues equity, or holds the largest minority voting interest; reverse acquisitions require special identification analysis. Start with the IFRS 10 control definition per IFRS 3.7, then apply the IFRS 3.B14-B18 factors when control is not obvious. In share-for-share deals where the legal acquiree's shareholders end up with the majority, IFRS 3.B19 reverse-acquisition accounting flips the roles.
Complete the acquirer identification required by IFRS 3.6-7 before measuring consideration, NCI, or goodwill; apply the reverse-acquisition guidance in IFRS 3.B19 where the legal acquirer is the accounting acquiree.
Official guidance: IFRS issued standards
Control is generally obtained on the closing date when voting rights transfer, board appointments take effect, and the acquirer can direct relevant activities of the acquiree. IFRS 3.9 acknowledges control can pass earlier or later than closing when a written agreement so provides, so read the sale and purchase agreement's conditions precedent carefully. The acquisition date anchors every fair value measurement in the deal, including the equity price used for share consideration.
Establish the IFRS 3.8-9 acquisition date before initial measurement; all fair value measurements, NCI, and goodwill are fixed as of that date.
Official guidance: IFRS issued standards
Consideration includes cash, equity instruments, contingent consideration, and previously held equity interests remeasured to fair value with any gain or loss recognised in profit or loss. Contingent consideration is recognised at acquisition-date fair value and classified as liability or equity under IFRS 3.39-40, which controls whether it is later remeasured through profit or loss (IFRS 3.58). Acquisition-related costs are not consideration - they are expensed as incurred under IFRS 3.53.
Remeasure all consideration components to acquisition-date fair value under IFRS 3.37 and 3.39, and remeasure previously held equity interests through profit or loss under IFRS 3.42.
Official guidance: IFRS issued standards
IFRS 3.19 permits the choice for each business combination: measure present-ownership NCI components at fair value or at the proportionate share of the acquiree's identifiable net assets. The election changes recognised goodwill and how much of a future IAS 36 impairment is absorbed by NCI, so model both before electing. Other components of NCI are measured at fair value unless another IFRS requires a different basis.
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Official guidance: IFRS issued standards
PPA requires recognition of intangible assets separately from goodwill when they meet the separable or contractual-criteria tests, including customer relationships and technology not previously recorded. IFRS 3.B31-B34 explains the identifiability tests and IFRS 3.IE lists typical intangibles such as brands, order backlog, and licences. Watch the recognition and measurement exceptions in IFRS 3.22-31A for income taxes, employee benefits, leases, reacquired rights, and share-based payment.
Complete the purchase price allocation - recognition under IFRS 3.10-13 and acquisition-date fair value measurement under IFRS 3.18 - before computing goodwill or a bargain purchase gain.
Official guidance: IFRS issued standards
IFRS 3 requires recognition of contingent liabilities assumed in a business combination at fair value when a present obligation exists, even if the acquiree had not recognised them previously. This is a deliberate exception to IAS 37: probability of outflow affects measurement, not recognition, at the acquisition date (IFRS 3.22-23). Pair each recognised contingency with any seller indemnification asset, which is measured on the same basis (IFRS 3.27-28).
Extend the PPA to contingent liabilities at fair value under IFRS 3.23 and recognise any related indemnification assets under IFRS 3.27-28.
Official guidance: IFRS issued standards
Goodwill represents future economic benefits from assets that are not individually identified and separately recognised; it is tested annually for impairment under IAS 36 rather than amortised. The IFRS 3.32 formula compares consideration transferred plus NCI plus any previously held interest against the net of the identifiable assets acquired and liabilities assumed. Rerun the arithmetic after every PPA adjustment because deferred tax and intangible recognition move goodwill directly.
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Official guidance: IFRS issued standards
A bargain purchase gain arises when net assets exceed consideration; reassess identification of assets, liabilities, and measurement before recognising the gain in profit or loss. IFRS 3.36 requires the acquirer to first verify it has identified all assets and liabilities and to review the measurement procedures for consideration, NCI, previously held interests, and the identifiable net assets. Genuine bargains are rare and typically arise from forced or distressed sales (IFRS 3.35).
Reconcile the IFRS 3.32 arithmetic - consideration, NCI, previously held interests, and net identifiable assets - before recognising goodwill or a bargain purchase gain.
Official guidance: IFRS issued standards
Temporary differences from fair value uplifts create deferred tax liabilities or assets that adjust goodwill rather than profit or loss at the acquisition date under the IFRS 3 and IAS 12 interaction. Note the asymmetry in IAS 12.15(a): no deferred tax liability is recognised on the initial recognition of goodwill itself. Recognised intangibles with no tax base are the largest recurring source of acquisition-date deferred tax liabilities.
Recognise deferred tax on the PPA fair value adjustments under IFRS 3.24-25 and IAS 12.19 before finalising goodwill.
Official guidance: IFRS issued standards
Adjustments to provisional amounts during the measurement period are retrospectively applied as if known at the acquisition date, with corresponding goodwill or bargain purchase adjustments. The period ends when the acquirer receives the information it was seeking or learns it is unobtainable, and never exceeds one year from the acquisition date (IFRS 3.45). After that, changes are corrections of errors under IAS 8 only (IFRS 3.50) - post-acquisition performance never flows into goodwill.
Open a measurement-period tracker; IFRS 3.45-46 permits retrospective adjustment of provisional amounts only within one year of the acquisition date and only for facts existing at that date.
Official guidance: IFRS issued standards
Finalise consolidation entries, NCI presentation, and IFRS 3 disclosures including acquisition-date fair values, goodwill, and bargain purchase gain if applicable. The IFRS 3.B64 disclosure package covers the acquiree description, consideration components, major asset and liability classes, and the qualitative factors behind goodwill or the reasons for a bargain gain. Keep the goodwill CGU allocation ready for the first IAS 36 impairment test.
Recognise goodwill under IFRS 3.32 and test it at least annually for impairment at the cash-generating-unit level under IAS 36.10(b) and IAS 36.80-90. Recognise the bargain purchase gain in profit or loss on the acquisition date after completing the IFRS 3.36 reassessment (IFRS 3.34).
Official guidance: IFRS issued standards
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