IFRS 3

IFRS 3 is an International Financial Reporting Standard (IFRS) issued by the International Accounting Standards Board (IASB) that outlines the accounting requirements for business combinations.^[1] It replaced the previous "pooling of interests" method with a single framework: the Acquisition Method.^[2] The standard ensures that an acquirer recognizes the identifiable assets acquired and liabilities assumed at their fair value at the acquisition date.^[3]

The Acquisition Method

An entity must account for every business combination by applying the acquisition method, which involves four distinct steps:^[4]

1. Identifying the Acquirer

One of the combining entities must be identified as the acquirer—the entity that obtains control of the acquiree.^[5]

2. Determining the Acquisition Date

This is the date on which the acquirer legally and effectively obtains control of the acquiree. This is critical because it marks the point at which fair values are measured and the acquiree’s results are consolidated.^[6]

3. Recognizing and Measuring Assets and Liabilities

The acquirer recognizes, separately from goodwill, the identifiable assets acquired, the liabilities assumed, and any non-controlling interest (NCI) in the acquiree.^[7]

Practical Example: Identifying Intangible Assets (Example 1) When an entity acquires a brand-name clothing company, it must recognize the "Brand Name" as an intangible asset separate from goodwill, even if the acquiree had not recognized it in its own financial statements, provided it meets the separability or contractual-legal criteria.^[8]

4. Recognizing Goodwill or a Gain from a Bargain Purchase

The acquirer recognizes Goodwill as of the acquisition date, measured as the excess of (a) over (b) below:^[9]

• (a) The sum of the consideration transferred (fair value), the amount of any NCI, and the fair value of any previously held equity interest.
• (b) The net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed.

Treatment of Acquisition Outcomes

Outcome	Accounting Treatment	IFRS Reference
Goodwill	Recognized as an intangible asset; subject to annual impairment testing rather than amortization.	IFRS 3.32; IAS 36
Bargain Purchase	The "negative goodwill" (gain) is recognized immediately in profit or loss (P&L) after reassessing the values.	IFRS 3.34; IFRS 3.BC371

Key Concepts

Business vs. Asset Acquisition

IFRS 3 only applies if the acquired set of activities and assets constitutes a "business." In 2018, the IASB issued amendments to clarify the definition of a business, including an optional "concentration test" to simplify the assessment.^[10] If the acquired set is not a business, it is accounted for as a simple asset acquisition.

Non-Controlling Interest (NCI)

For each business combination, the acquirer can choose to measure NCI at either:^[11]

1. Fair Value: Also known as the "Full Goodwill" method.
2. Proportional Share: The NCI's proportionate share of the acquiree’s identifiable net assets.

Practical Example: Measuring NCI (Example 11) If an entity acquires 80% of a company for CU800 and the fair value of the 20% NCI is CU200, the Full Goodwill method would value the NCI at CU200, while the Proportional Share method might value it differently based on the net assets (e.g., if net assets are CU900, NCI would be CU180).^[12]

Contingent Consideration

If the purchase price includes a "bonus" payable to the sellers if certain profit targets are met, the acquirer must estimate the fair value of this contingent consideration at the acquisition date and include it in the total consideration transferred.^[13]

The IFRS consolidation suite is a group of accounting standards that define how companies report their relationships with subsidiaries, joint arrangements, and other investees.^[14] It consists of three specific standards: IFRS 10, IFRS 11, and IFRS 12.^[15]

Consolidated Balance Sheet (IFRS 3/10)

The following table illustrates the elimination of the investment in a subsidiary against its equity at the date of acquisition, demonstrating the technical transition from individual statements to a consolidated view.^[16]

Example of Initial Consolidation

Item	Parent (Pre-Cons.)	Subsidiary (FV)	Elimination	Consolidated
Investment in Subsidiary	1,000	0	-1,000 (a)	0
Other Assets	4,000	1,200		5,200
Goodwill	0	0	+200 (c)	200
Total Assets	5,000	1,200		5,400
Equity (Parent)	3,000	0		3,000
Equity (Subsidiary)	0	800	-800 (a)	0
Non-controlling Interest	0	0	+400 (b)	400
Liabilities	2,000	400		2,400
Total Equity & Liab.	5,000	1,200		5,400

Consolidated Position (IFRS 3)

Component	Elimination Impact	Reference
Net Assets (Fair Value)	**Dr** Equity (Subsidiary)	IFRS 3.18
Goodwill	**Dr** Asset	IFRS 3.32
Consideration Transferred	**Cr** Investment (Parent)	IFRS 10.B86
Non-controlling Interest	**Cr** Equity (NCI)	IFRS 3.19

Notes on Elimination

• (a) Elimination of the parent's investment (Credit) against the subsidiary's equity (Debit).
• (b) Recognition of Non-controlling Interest (NCI) as a separate component of equity.
• (c) Recognition of Goodwill (Debit) resulting from the excess of consideration transferred over net identifiable assets.^[17]

References

1. IFRS 3.1; IFRS 3.BC1.
2. IFRS 3.4; IFRS 3.BC21.
3. IFRS 3.18; IFRS 3.BC198.
4. IFRS 3.5; IFRS 3.BC80.
5. IFRS 3.7; IFRS 10.Appendix A.
6. IFRS 3.8–9; IFRS 3.BC106.
7. IFRS 3.10; IFRS 3.BC121.
8. IFRS 3.B31; IFRS 3.IE Example 1.
9. IFRS 3.32; IFRS 3.BC312.
10. IFRS 3.B7; IFRS 3.BC21A.
11. IFRS 3.19; IFRS 3.BC205.
12. IFRS 3.IE Example 11; IFRS 3.BC209.
13. IFRS 3.39; IFRS 3.BC343.
14. "Manual of accounting – IFRS 2024". PwC. Retrieved 2025-12-22.
15. "IFRS: Consolidation suite of standards". KPMG. Retrieved 2025-12-22.
16. PKF International Ltd (2024). Wiley 2025 Interpretation and Application of IFRS Standards. John Wiley & Sons. pp. 612–645.
17. Hachmeister, Dirk; Fechner, Michael (2018). "Konzernrechnungslegung nach IFRS". Department of Accounting and Finance (Lecture Materials). University of Hohenheim.