What is a Business Combination?
A Business Combination is a “transaction or other event in which an acquirer obtains control of one or more businesses”. IFRS 3 Business Combinations states how an acquirer should recognise and measure the acquisition of another business, and the recognition and measurement of any goodwill.
Examples of business combinations include:
- Buying shares
- Buying assets
- Legal mergers of two previously unrelated
- Reverse acquisitions, and
- Establishment of a new entity to control the combined entities
The following aren’t business combinations:
- Joint ventures
- Entities under common control
- The acquisition of assets or a group of assets which is not a business. This is just a standard asset acquisition
Business combinations may be effected by the:
- Transfer of cash
- Transfer of shares (equity instruments)
- Transfer of assets, or
- A combination of the above
What is Control?
Before the introduction of IFRS 10 Consolidated Financial Statements, control was assumed once an acquirer held more than 50% of the shares in the acquiree. Now under IFRS 10, we must take a look at whether or not the acquirer could control the business of an acquiree even if it doesn’t own the full 50% or more. This could happen say if a company owned 47% of the shares in the acquiree, and the remaining shareholders were all individuals with small holdings. If they wanted to team together to control the acquiree, it would take them a great deal of effort, which simply wouldn’t be practical. So in this instance we assume the company with 47% of the shares has control over the acquiree.
Indicators of control include:
- More than 50% of the voting rights in a company
- The power to govern the affairs of a company by statute or agreement, and
- The power to appoint the majority of directors to the company
What is Fair Value?
Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s-length transaction.