Accounting for Business Combinations in Accordance with International Financial Reporting Standards
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Accounting for Business Combinations in Accordance
with International Financial Reporting Standards (IFRS)
by Shân Kennedy
The International Accounting Standards Board (IASB) has introduced requirements in the last few years to
make those involved in business combinations more accountable for the transactions that have taken place.
All business combinations must now be accounted for using the acquisition accounting method.
The intangible assets arising from a business combination must be identified and recognized
separately from purchased goodwill.
Purchased goodwill is no longer permitted to be amortized; instead, it must be tested for impairment
The accounting for business combinations under IFRS is governed by four key standards:
IFRS 3, Business Combinations;
IAS (International Accounting Standards) 27, Consolidated Financial Statements;
IAS 36, Impairment of Assets;
IAS 38, Intangible Assets.
IFRS 3 sets out the requirements to be followed in accounting for a business combination. Its introduction in
2004 represented a substantial change from the standard it superseded, IAS 22. IFRS 3 signaled the end
of the benign method of accounting for business combinations known as “merger accounting.” Instead, all
business combinations must be accounted for using the acquisition accounting method. This requires that
both acquirer and acquiree are identified for each transaction, that a fair value exercise is performed on the
acquiree’s assets and liabilities, and that purchased goodwill arising from the transaction is capitalized in the
A further consequence of the introduction of IFRS 3 is that intangible assets must be recognized separately
from purchased goodwill instead of being subsumed within purchased goodwill. Purchased goodwill itself
is not amortized, but must be reviewe