Accounting for Business Combinations

Chapter 1

Business Combinations (Part 1)

    • A business combination is one in which an acquirer obtains control of one or more businesses.
    • Control is presumed to exist when an investor holds more than 50% interest in the acquiree’s voting rights.
    • Business combinations are accounted for using the acquisition method. This method requires the following:
    1. Identifying the acquirer;
    2. Determining the acquisition date;
    3. Recognizing and measuring goodwill (or negative goodwill) - this requires accounting for the following:
    1. Consideration transferred,
    2. Non-controlling interest,
    3. Previously held equity interest, and
    4. Identifiable assets acquired and liabilities assumed.


    • The acquirer (parent) is the entity that obtains control after the business combination. The controlled entity is the acquiree (subsidiary).
    • The acquisition date is the date on which the acquirer obtains control of the acquiree (e.g., the closing date).
    • Goodwill is computed using the following formula:


    Consideration transferred


    Non-controlling interest in the acquiree


    Previously held equity interest in the acquiree




    Less: Fair value of net identifiable assets acquired


    Goodwill / (Gain on a bargain purchase)



    • The consideration transferred is measured at fair value.
    • NCI is measured either at fair value or the NCI’s proportionate share in the acquiree’s net identifiable assets.
    • A “gain on a bargain purchase” is recognized in profit or loss in the year of acquisition only after reassessment of the assets acquired and liabilities assumed in the business combination.
    • Only identifiable assets acquired are recognized. Unidentifiable assets are not recognized.
    • Acquisition-related costs are expensed, except costs of issuing equity and debt instruments. Acquisition-related costs do not affect the measurement of goodwill.
    • Restructuring provisions are generally not recognized as part of business combination, but rather as post-combination expenses of the combined entity when the costs are incurred.