Question

how to determine whether a transaction is a business combination based on AASB3/IFRS3.

Explain in 2000 words

Answer 1

Determining Whether a transaction is a business combination or not:

• Business combinations can occur in various ways, such as by transferring cash, incurring liabilities, issuing equity instruments (or any combination thereof), or by not issuing consideration at all (i.e. by contract alone)
• Business combinations can be structured in various ways to satisfy legal, taxation or other objectives, including one entity becoming a subsidiary of another, the transfer of net assets from one entity to another or to a new entity
• The business combination must involve the acquisition of a business, which generally has three elements:
  • Inputs – an economic resource (e.g. non-current assets, intellectual property) that creates outputs when one or more processes are applied to it
  • Process – a system, standard, protocol, convention or rule that when applied to an input or inputs, creates outputs (e.g. strategic management, operational processes, resource management)
  • Output – the result of inputs and processes applied to those inputs

Method of accounting for business combinations

Acquisition method

The acquisition method (also known as  'purchase method' ) is used for all business combinations.

Steps in applying the acquisition method are:

1. Identification of the 'acquirer'
2. Determination of the 'acquisition date'
3. Recognition and measurement of the identifiable assets acquired, the liabilities assumed and any non-controlling interest (NCI, formerly called minority interest) in the acquiree
4. Recognition and measurement of goodwill or a gain from a bargain purchase