aCCOUNTING STANDARD AASB 3
The Australian Accounting Standards Board made Accounting Standard AASB 3 Business Combinations under section 334 of the Corporations Act 2001 on 6 March 2008.
This compiled version of AASB 3 applies to annual reporting periods beginning on or after 1 January 2018. It incorporates relevant amendments contained in other AASB Standards made by the AASB up to and including 21 January 2015 (see Compilation Details).
aCCOUNTING STANDARD AASB 3
Business Combinations
Objective
1 The objective of this Standard is to improve the relevance, reliability and comparability of the information that a reporting entity provides in its financial statements about a business combination and its effects. To accomplish that, this Standard establishes principles and requirements for how the acquirer:
(a) recognises and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree;
(b) recognises and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and
(c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.
Application
Aus1.1 This Standard applies to:
(a) each entity that is required to prepare financial reports in accordance with Part 2M.3 of the Corporations Act and that is a reporting entity;
(b) general purpose financial statements of each other reporting entity; and
(c) financial statements that are, or are held out to be, general purpose financial statements.
Aus1.2 This Standard applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2009.
[Note: For application dates of paragraphs changed or added by an amending Standard, see Compilation Details.]
Aus1.3 This Standard may be applied from the beginning of an annual reporting period that begins on or after 30 June 2007 but before 1 July 2009. If an entity applies this Standard to an annual reporting period beginning before 1 July 2009, it shall disclose that fact and apply AASB 127 Consolidated and Separate Financial Statements (as amended in March 2008) at the same time.
Aus1.4 [Deleted by the AASB]
Aus1.5 When applied or operative, this Standard supersedes:
(a) AASB 3 Business Combinations (July 2004, as amended);
(b) Interpretation 1001 Consolidated Financial Reports in relation to Pre-Date-of-Transition Dual Listed Company Arrangements issued in July 2005;
(c) Interpretation 1002 Post-Date-of-Transition Stapling Arrangements issued in December 2005; and
(d) Interpretation 1013 Consolidated Financial Reports in relation to Pre-Date-of-Transition Stapling Arrangements issued in April 2005.
Aus1.6 Where assets and liabilities are transferred to a local government from another local government at no cost, or for nominal consideration, pursuant to legislation, ministerial directive or other externally imposed requirement, paragraphs Aus63.1 to Aus63.9 shall be applied.
Reduced disclosure requirements
Aus1.7 The following do not apply to entities preparing general purpose financial statements under Australian Accounting Standards – Reduced Disclosure Requirements:
(a) paragraphs 59-63, Aus63.6-Aus63.9, B64(d), B64(e), B64(h), B64(k), B64(l), B64(m), B64(n)(ii), B64(q), B65, B66, B67(a)-(c) and B67(e);
(b) in the heading before paragraph B64, the text “(application of paragraphs 59 and 61)”;
(c) in paragraph B64, the text “To meet the objective in paragraph 59,”;
(d) in paragraph B64(j), the sentence “If a contingent liability … liability cannot be measured reliably.”; and
(e) in paragraph B67, the text “To meet the objective in paragraph 61,”.
Entities applying Australian Accounting Standards – Reduced Disclosure Requirements may elect to comply with some or all of these excluded requirements.
Aus1.8 The requirements that do not apply to entities preparing general purpose financial statements under Australian Accounting Standards – Reduced Disclosure Requirements are identified in this Standard by shading of the relevant text, except for comparative disclosures subject to RDR paragraphs.
Aus1.9 RDR paragraphs in this Standard apply only to entities preparing general purpose financial statements under Australian Accounting Standards – Reduced Disclosure Requirements.
Scope
2 This Standard applies to a transaction or other event that meets the definition of a business combination. This Standard does not apply to:
(a) the accounting for the formation of a joint arrangement in the financial statements of the joint arrangement itself.
(b) the acquisition of an asset or a group of assets that does not constitute a business. In such cases the acquirer shall identify and recognise the individual identifiable assets acquired (including those assets that meet the definition of, and recognition criteria for, intangible assets in AASB 138 Intangible Assets) and liabilities assumed. The cost of the group shall be allocated to the individual identifiable assets and liabilities on the basis of their relative fair values at the date of purchase. Such a transaction or event does not give rise to goodwill.
(c) a combination of entities or businesses under common control (paragraphs B1-B4 provide related application guidance).
Aus 2.1 A restructure of administrative arrangements, as defined in Appendix A of AASB 1004 Contributions, is outside the scope of this Standard. AASB 1004 specifies requirements for restructures of administrative arrangements.[1]
2A The requirements of this Standard do not apply to the acquisition by an investment entity, as defined in AASB 10 Consolidated Financial Statements, of an investment in a subsidiary that is required to be measured at fair value through profit or loss.
Identifying a business combination
3 An entity shall determine whether a transaction or other event is a business combination by applying the definition in this Standard, which requires that the assets acquired and liabilities assumed constitute a business. If the assets acquired are not a business, the reporting entity shall account for the transaction or other event as an asset acquisition. Paragraphs B5-B12 provide guidance on identifying a business combination and the definition of a business.
The acquisition method
4 An entity shall account for each business combination by applying the acquisition method.
5 Applying the acquisition method requires:
(a) identifying the acquirer;
(b) determining the acquisition date;
(c) recognising and measuring the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree; and
(d) recognising and measuring goodwill or a gain from a bargain purchase.
Identifying the acquirer
6 For each business combination, one of the combining entities shall be identified as the acquirer.
7 The guidance in AASB 10 shall be used to identify the acquirer – the entity that obtains control of another entity, i.e. the acquiree. If a business combination has occurred but applying the guidance in AASB 10 does not clearly indicate which of the combining entities is the acquirer, the factors in paragraphs B14-B18 shall be considered in making that determination.
Determining the acquisition date
8 The acquirer shall identify the acquisition date, which is the date on which it obtains control of the acquiree.
9 The date on which the acquirer obtains control of the acquiree is generally the date on which the acquirer legally transfers the consideration, acquires the assets and assumes the liabilities of the acquiree – the closing date. However, the acquirer might obtain control on a date that is either earlier or later than the closing date. For example, the acquisition date precedes the closing date if a written agreement provides that the acquirer obtains control of the acquiree on a date before the closing date. An acquirer shall consider all pertinent facts and circumstances in identifying the acquisition date.
Recognising and measuring the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree
Recognition principle
10 As of the acquisition date, the acquirer shall recognise, separately from goodwill, the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree. Recognition of identifiable assets acquired and liabilities assumed is subject to the conditions specified in paragraphs 11 and 12.
Recognition conditions
11 To qualify for recognition as part of applying the acquisition method, the identifiable assets acquired and liabilities assumed must meet the definitions of assets and liabilities in the Framework for the Preparation and Presentation of Financial Statements (as identified in AASB 1048 Interpretation of Standards)[2] at the acquisition date. For example, costs the acquirer expects but is not obliged to incur in the future to effect its plan to exit an activity of an acquiree or to terminate the employment of or relocate an acquiree’s employees are not liabilities at the acquisition date. Therefore, the acquirer does not recognise those costs as part of applying the acquisition method. Instead, the acquirer recognises those costs in its post-combination financial statements in accordance with other Australian Accounting Standards.
12 In addition, to qualify for recognition as part of applying the acquisition method, the identifiable assets acquired and liabilities assumed must be part of what the acquirer and the acquiree (or its former owners) exchanged in the business combination transaction rather than the result of separate transactions. The acquirer shall apply the guidance in paragraphs 51-53 to determine which assets acquired or liabilities assumed are part of the exchange for the acquiree and which, if any, are the result of separate transactions to be accounted for in accordance with their nature and the applicable Australian Accounting Standards.
13 The acquirer’s application of the recognition principle and conditions may result in recognising some assets and liabilities that the acquiree had not previously recognised as assets and liabilities in its financial statements. For example, the acquirer recognises the acquired identifiable intangible assets, such as a brand name, a patent or a customer relationship, that the acquiree did not recognise as assets in its financial statements because it developed them internally and charged the related costs to expense.
14 Paragraphs B28-B40 provide guidance on recognising operating leases and intangible assets. Paragraphs 22-28 specify the types of identifiable assets and liabilities that include items for which this Standard provides limited exceptions to the recognition principle and conditions.
Classifying or designating identifiable assets acquired and liabilities assumed in a business combination
15 At the acquisition date, the acquirer shall classify or designate the identifiable assets acquired and liabilities assumed as necessary to apply other Australian Accounting Standards subsequently. The acquirer shall make those classifications or designations on the basis of the contractual terms, economic conditions, its operating or accounting policies and other pertinent conditions as they exist at the acquisition date.
16 In some situations, Australian Accounting Standards provide for different accounting depending on how an entity classifies or designates a particular asset or liability. Examples of classifications or designations that the acquirer shall make on the basis of the pertinent conditions as they exist at the acquisition date include but are not limited to:
(a) classification of particular financial assets and liabilities as measured at fair value through profit or loss or at amortised cost, or as a financial asset measured at fair value through other comprehensive income in accordance with AASB 9 Financial Instruments;
(b) designation of a derivative instrument as a hedging instrument in accordance with AASB 9; and
(c) assessment of whether an embedded derivative should be separated from a host contract in accordance with AASB 9 (which is a matter of ‘classification’ as this Standard uses that term).
17 This Standard provides two exceptions to the principle in paragraph 15:
(a) classification of a lease contract as either an operating lease or a finance lease in accordance with AASB 117 Leases; and
(b) classification of a contract as an insurance contract in accordance with AASB 4 Insurance Contracts.
The acquirer shall classify those contracts on the basis of the contractual terms and other factors at the inception of the contract (or, if the terms of the contract have been modified in a manner that would change its classification, at the date of that modification, which might be the acquisition date).
Measurement principle
18 The acquirer shall measure the identifiable assets acquired and the liabilities assumed at their acquisition-date fair values.
19 For each business combination, the acquirer shall measure at the acquisition date components of non-controlling interests in the acquiree that are present ownership interests and entitle their holders to a proportionate share of the entity’s net assets in the event of liquidation at either:
(a) fair value; or
(b) the present ownership instruments’ proportionate share in the recognised amounts of the acquiree’s identifiable net assets.
All other components of non-controlling interests shall be measured at their acquisition-date fair values, unless another measurement basis is required by Australian Accounting Standards.
20 Paragraphs 24-31 specify the types of identifiable assets and liabilities that include items for which this Standard provides limited exceptions to the measurement principle.
Exceptions to the recognition or measurement principles
21 This Standard provides limited exceptions to its recognition and measurement principles. Paragraphs 22-31 specify both the particular items for which exceptions are provided and the nature of those exceptions. The acquirer shall account for those items by applying the requirements in paragraphs 22-31, which will result in some items being:
(a) recognised either by applying recognition conditions in addition to those in paragraphs 11 and 12 or by applying the requirements of other Australian Accounting Standards, with results that differ from applying the recognition principle and conditions.
(b) measured at an amount other than their acquisition-date fair values.
Exception to the recognition principle
Contingent liabilities
22 AASB 137 Provisions, Contingent Liabilities and Contingent Assets defines a contingent liability as:
(a) a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity; or
(b) a present obligation that arises from past events but is not recognised because:
(i) it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or
(ii) the amount of the obligation cannot be measured with sufficient reliability.
23 The requirements in AASB 137 do not apply in determining which contingent liabilities to recognise as of the acquisition date. Instead, the acquirer shall recognise as of the acquisition date a contingent liability assumed in a business combination if it is a present obligation that arises from past events and its fair value can be measured reliably. Therefore, contrary to AASB 137, the acquirer recognises a contingent liability assumed in a business combination at the acquisition date even if it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation. Paragraph 56 provides guidance on the subsequent accounting for contingent liabilities.
Exceptions to both the recognition and measurement principles
Income taxes
24 The acquirer shall recognise and measure a deferred tax asset or liability arising from the assets acquired and liabilities assumed in a business combination in accordance with AASB 112 Income Taxes.
25 The acquirer shall account for the potential tax effects of temporary differences and carryforwards of an acquiree that exist at the acquisition date or arise as a result of the acquisition in accordance with AASB 112.
Employee benefits
26 The acquirer shall recognise and measure a liability (or asset, if any) related to the acquiree’s employee benefit arrangements in accordance with AASB 119 Employee Benefits.
Indemnification assets
27 The seller in a business combination may contractually indemnify the acquirer for the outcome of a contingency or uncertainty related to all or part of a specific asset or liability. For example, the seller may indemnify the acquirer against losses above a specified amount on a liability arising from a particular contingency; in other words, the seller will guarantee that the acquirer’s liability will not exceed a specified amount. As a result, the acquirer obtains an indemnification asset. The acquirer shall recognise an indemnification asset at the same time that it recognises the indemnified item measured on the same basis as the indemnified item, subject to the need for a valuation allowance for uncollectible amounts. Therefore, if the indemnification relates to an asset or a liability that is recognised at the acquisition date and measured at its acquisition-date fair value, the acquirer shall recognise the indemnification asset at the acquisition date measured at its acquisition-date fair value. For an indemnification asset measured at fair value, the effects of uncertainty about future cash flows because of collectibility considerations are included in the fair value measure and a separate valuation allowance is not necessary (paragraph B41 provides related application guidance).
28 In some circumstances, the indemnification may relate to an asset or a liability that is an exception to the recognition or measurement principles. For example, an indemnification may relate to a contingent liability that is not recognised at the acquisition date because its fair value is not reliably measurable at that date. Alternatively, an indemnification may relate to an asset or a liability, for example, one that results from an employee benefit, that is measured on a basis other than acquisition-date fair value. In those circumstances, the indemnification asset shall be recognised and measured using assumptions consistent with those used to measure the indemnified item, subject to management’s assessment of the collectibility of the indemnification asset and any contractual limitations on the indemnified amount. Paragraph 57 provides guidance on the subsequent accounting for an indemnification asset.
Exceptions to the measurement principle
Reacquired rights
29 The acquirer shall measure the value of a reacquired right recognised as an intangible asset on the basis of the remaining contractual term of the related contract regardless of whether market participants would consider potential contractual renewals when measuring its fair value. Paragraphs B35 and B36 provide related application guidance.
Share-based payment transactions
30 The acquirer shall measure a liability or an equity instrument related to share-based payment transactions of the acquiree or the replacement of an acquiree’s share-based payment transactions with share-based payment transactions of the acquirer in accordance with the method in AASB 2 Share-based Payment at the acquisition date. (This Standard refers to the result of that method as the ‘market-based measure’ of the share-based payment transaction.)
Assets held for sale
31 The acquirer shall measure an acquired non-current asset (or disposal group) that is classified as held for sale at the acquisition date in accordance with AASB 5 Non-current Assets Held for Sale and Discontinued Operations at fair value less costs to sell in accordance with paragraphs 15-18 of that Standard.
Recognising and measuring goodwill or a gain from a bargain purchase
32 The acquirer shall recognise goodwill as of the acquisition date measured as the excess of (a) over (b) below:
(a) the aggregate of:
(i) the consideration transferred measured in accordance with this Standard, which generally requires acquisition-date fair value (see paragraph 37);
(ii) the amount of any non-controlling interest in the acquiree measured in accordance with this Standard; and
(iii) in a business combination achieved in stages (see paragraphs 41 and 42), the acquisition-date fair value of the acquirer’s previously held equity interest in the acquiree.
(b) the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed measured in accordance with this Standard.
33 In a business combination in which the acquirer and the acquiree (or its former owners) exchange only equity interests, the acquisition-date fair value of the acquiree’s equity interests may be more reliably measurable than the acquisition-date fair value of the acquirer’s equity interests. If so, the acquirer shall determine the amount of goodwill by using the acquisition-date fair value of the acquiree’s equity interests instead of the acquisition-date fair value of the equity interests transferred. To determine the amount of goodwill in a business combination in which no consideration is transferred, the acquirer shall use the acquisition-date fair value of the acquirer’s interest in the acquiree in place of the acquisition-date fair value of the consideration transferred (paragraph 32(a)(i)). Paragraphs B46-B49 provide related application guidance.
Bargain purchases
34 Occasionally, an acquirer will make a bargain purchase, which is a business combination in which the amount in paragraph 32(b) exceeds the aggregate of the amounts specified in paragraph 32(a). If that excess remains after applying the requirements in paragraph 36, the acquirer shall recognise the resulting gain in profit or loss on the acquisition date. The gain shall be attributed to the acquirer.
35 A bargain purchase might happen, for example, in a business combination that is a forced sale in which the seller is acting under compulsion. However, the recognition or measurement exceptions for particular items discussed in paragraphs 22-31 may also result in recognising a gain (or change the amount of a recognised gain) on a bargain purchase.
36 Before recognising a gain on a bargain purchase, the acquirer shall reassess whether it has correctly identified all of the assets acquired and all of the liabilities assumed and shall recognise any additional assets or liabilities that are identified in that review. The acquirer shall then review the procedures used to measure the amounts this Standard requires to be recognised at the acquisition date for all of the following:
(a) the identifiable assets acquired and liabilities assumed;
(b) the non-controlling interest in the acquiree, if any;
(c) for a business combination achieved in stages, the acquirer’s previously held equity interest in the acquiree; and
(d) the consideration transferred.
The objective of the review is to ensure that the measurements appropriately reflect consideration of all available information as of the acquisition date.
Consideration transferred
37 The consideration transferred in a business combination shall be measured at fair value, which shall be calculated as the sum of the acquisition-date fair values of the assets transferred by the acquirer, the liabilities incurred by the acquirer to former owners of the acquiree and the equity interests issued by the acquirer. (However, any portion of the acquirer’s share-based payment awards exchanged for awards held by the acquiree’s employees that is included in consideration transferred in the business combination shall be measured in accordance with paragraph 30 rather than at fair value.) Examples of potential forms of consideration include cash, other assets, a business or a subsidiary of the acquirer, contingent consideration, ordinary or preference equity instruments, options, warrants and member interests of mutual entities.
38 The consideration transferred may include assets or liabilities of the acquirer that have carrying amounts that differ from their fair values at the acquisition date (for example, non-monetary assets or a business of the acquirer). If so, the acquirer shall remeasure the transferred assets or liabilities to their fair values as of the acquisition date and recognise the resulting gains or losses, if any, in profit or loss. However, sometimes the transferred assets or liabilities remain within the combined entity after the business combination (for example, because the assets or liabilities were transferred to the acquiree rather than to its former owners), and the acquirer therefore retains control of them. In that situation, the acquirer shall measure those assets and liabilities at their carrying amounts immediately before the acquisition date and shall not recognise a gain or loss in profit or loss on assets or liabilities it controls both before and after the business combination.
Contingent consideration
39 The consideration the acquirer transfers in exchange for the acquiree includes any asset or liability resulting from a contingent consideration arrangement (see paragraph 37). The acquirer shall recognise the acquisition-date fair value of contingent consideration as part of the consideration transferred in exchange for the acquiree.
40 The acquirer shall classify an obligation to pay contingent consideration that meets the definition of a financial instrument as a financial liability or as equity on the basis of the definitions of an equity instrument and a financial liability in paragraph 11 of AASB 132 Financial Instruments: Presentation. The acquirer shall classify as an asset a right to the return of previously transferred consideration if specified conditions are met. Paragraph 58 provides guidance on the subsequent accounting for contingent consideration.
Additional guidance for applying the acquisition method to particular types of business combinations
A business combination achieved in stages
41 An acquirer sometimes obtains control of an acquiree in which it held an equity interest immediately before the acquisition date. For example, on 31 December 20X1, Entity A holds a 35 per cent non-controlling equity interest in Entity B. On that date, Entity A purchases an additional 40 per cent interest in Entity B, which gives it control of Entity B. This Standard refers to such a transaction as a business combination achieved in stages, sometimes also referred to as a step acquisition.
42 In a business combination achieved in stages, the acquirer shall remeasure its previously held equity interest in the acquiree at its acquisition-date fair value and recognise the resulting gain or loss, if any, in profit or loss or other comprehensive income, as appropriate. In prior reporting periods, the acquirer may have recognised changes in the value of its equity interest in the acquiree in other comprehensive income. If so, the amount that was recognised in other comprehensive income shall be recognised on the same basis as would be required if the acquirer had disposed directly of the previously held equity interest.
A business combination achieved without the transfer of consideration
43 An acquirer sometimes obtains control of an acquiree without transferring consideration. The acquisition method of accounting for a business combination applies to those combinations. Such circumstances include:
(a) The acquiree repurchases a sufficient number of its own shares for an existing investor (the acquirer) to obtain control.
(b) Minority veto rights lapse that previously kept the acquirer from controlling an acquiree in which the acquirer held the majority voting rights.
(c) The acquirer and acquiree agree to combine their businesses by contract alone. The acquirer transfers no consideration in exchange for control of an acquiree and holds no equity interests in the acquiree, either on the acquisition date or previously. Examples of business combinations achieved by contract alone include bringing two businesses together in a stapling arrangement or forming a dual listed corporation.
44 In a business combination achieved by contract alone, the acquirer shall attribute to the owners of the acquiree the amount of the acquiree’s net assets recognised in accordance with this Standard. In other words, the equity interests in the acquiree held by parties other than the acquirer are a non-controlling interest in the acquirer’s post-combination financial statements even if the result is that all of the equity interests in the acquiree are attributed to the non-controlling interest.
Measurement period
45 If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the acquirer shall report in its financial statements provisional amounts for the items for which the accounting is incomplete. During the measurement period, the acquirer shall retrospectively adjust the provisional amounts recognised at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date and, if known, would have affected the measurement of the amounts recognised as of that date. During the measurement period, the acquirer shall also recognise additional assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date and, if known, would have resulted in the recognition of those assets and liabilities as of that date. The measurement period ends as soon as the acquirer receives the information it was seeking about facts and circumstances that existed as of the acquisition date or learns that more information is not obtainable. However, the measurement period shall not exceed one year from the acquisition date.
46 The measurement period is the period after the acquisition date during which the acquirer may adjust the provisional amounts recognised for a business combination. The measurement period provides the acquirer with a reasonable time to obtain the information necessary to identify and measure the following as of the acquisition date in accordance with the requirements of this Standard:
(a) the identifiable assets acquired, liabilities assumed and any non-controlling interest in the acquiree;
(b) the consideration transferred for the acquiree (or the other amount used in measuring goodwill);
(c) in a business combination achieved in stages, the equity interest in the acquiree previously held by the acquirer; and
(d) the resulting goodwill or gain on a bargain purchase.
47 The acquirer shall consider all pertinent factors in determining whether information obtained after the acquisition date should result in an adjustment to the provisional amounts recognised or whether that information results from events that occurred after the acquisition date. Pertinent factors include the date when additional information is obtained and whether the acquirer can identify a reason for a change to provisional amounts. Information that is obtained shortly after the acquisition date is more likely to reflect circumstances that existed at the acquisition date than is information obtained several months later. For example, unless an intervening event that changed its fair value can be identified, the sale of an asset to a third party shortly after the acquisition date for an amount that differs significantly from its provisional fair value measured at that date is likely to indicate an error in the provisional amount.
48 The acquirer recognises an increase (decrease) in the provisional amount recognised for an identifiable asset (liability) by means of a decrease (increase) in goodwill. However, new information obtained during the measurement period may sometimes result in an adjustment to the provisional amount of more than one asset or liability. For example, the acquirer might have assumed a liability to pay damages related to an accident in one of the acquiree’s facilities, part or all of which are covered by the acquiree’s liability insurance policy. If the acquirer obtains new information during the measurement period about the acquisition-date fair value of that liability, the adjustment to goodwill resulting from a change to the provisional amount recognised for the liability would be offset (in whole or in part) by a corresponding adjustment to goodwill resulting from a change to the provisional amount recognised for the claim receivable from the insurer.
49 During the measurement period, the acquirer shall recognise adjustments to the provisional amounts as if the accounting for the business combination had been completed at the acquisition date. Thus, the acquirer shall revise comparative information for prior periods presented in financial statements as needed, including making any change in depreciation, amortisation or other income effects recognised in completing the initial accounting.
50 After the measurement period ends, the acquirer shall revise the accounting for a business combination only to correct an error in accordance with AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors.
Determining what is part of the business combination transaction
51 The acquirer and the acquiree may have a pre-existing relationship or other arrangement before negotiations for the business combination began, or they may enter into an arrangement during the negotiations that is separate from the business combination. In either situation, the acquirer shall identify any amounts that are not part of what the acquirer and the acquiree (or its former owners) exchanged in the business combination, i.e. amounts that are not part of the exchange for the acquiree. The acquirer shall recognise as part of applying the acquisition method only the consideration transferred for the acquiree and the assets acquired and liabilities assumed in the exchange for the acquiree. Separate transactions shall be accounted for in accordance with the relevant Australian Accounting Standards.
52 A transaction entered into by or on behalf of the acquirer or primarily for the benefit of the acquirer or the combined entity, rather than primarily for the benefit of the acquiree (or its former owners) before the combination, is likely to be a separate transaction. The following are examples of separate transactions that are not to be included in applying the acquisition method:
(a) a transaction that in effect settles pre-existing relationships between the acquirer and acquiree;
(b) a transaction that remunerates employees or former owners of the acquiree for future services; and
(c) a transaction that reimburses the acquiree or its former owners for paying the acquirer’s acquisition-related costs.
Paragraphs B50-B62 provide related application guidance.
Acquisition-related costs
53 Acquisition-related costs are costs the acquirer incurs to effect a business combination. Those costs include finder’s fees; advisory, legal, accounting, valuation and other professional or consulting fees; general administrative costs, including the costs of maintaining an internal acquisitions department; and costs of registering and issuing debt and equity securities. The acquirer shall account for acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received, with one exception. The costs to issue debt or equity securities shall be recognised in accordance with AASB 132 and AASB 9.
Subsequent measurement and accounting
54 In general, an acquirer shall subsequently measure and account for assets acquired, liabilities assumed or incurred and equity instruments issued in a business combination in accordance with other applicable Australian Accounting Standards for those items, depending on their nature. However, this Standard provides guidance on subsequently measuring and accounting for the following assets acquired, liabilities assumed or incurred and equity instruments issued in a business combination:
(a) reacquired rights;
(b) contingent liabilities recognised as of the acquisition date;
(c) indemnification assets; and
(d) contingent consideration.
Paragraph B63 provides related application guidance.
Reacquired rights
55 A reacquired right recognised as an intangible asset shall be amortised over the remaining contractual period of the contract in which the right was granted. An acquirer that subsequently sells a reacquired right to a third party shall include the carrying amount of the intangible asset in determining the gain or loss on the sale.
Contingent liabilities
56 After initial recognition and until the liability is settled, cancelled or expires, the acquirer shall measure a contingent liability recognised in a business combination at the higher of:
(a) the amount that would be recognised in accordance with AASB 137; and
(b) the amount initially recognised less, if appropriate, the cumulative amount of income recognised in accordance with the principles of AASB 15 Revenue from Contracts with Customers.
This requirement does not apply to contracts accounted for in accordance with AASB 9.
Indemnification assets
57 At the end of each subsequent reporting period, the acquirer shall measure an indemnification asset that was recognised at the acquisition date on the same basis as the indemnified liability or asset, subject to any contractual limitations on its amount and, for an indemnification asset that is not subsequently measured at its fair value, management’s assessment of the collectibility of the indemnification asset. The acquirer shall derecognise the indemnification asset only when it collects the asset, sells it or otherwise loses the right to it.
Contingent consideration
58 Some changes in the fair value of contingent consideration that the acquirer recognises after the acquisition date may be the result of additional information that the acquirer obtained after that date about facts and circumstances that existed at the acquisition date. Such changes are measurement period adjustments in accordance with paragraphs 45-49. However, changes resulting from events after the acquisition date, such as meeting an earnings target, reaching a specified share price or reaching a milestone on a research and development project, are not measurement period adjustments. The acquirer shall account for changes in the fair value of contingent consideration that are not measurement period adjustments as follows:
(a) Contingent consideration classified as equity shall not be remeasured and its subsequent settlement shall be accounted for within equity.
(b) Other contingent consideration that:
(i) is within the scope of AASB 9 shall be measured at fair value at each reporting date and changes in fair value shall be recognised in profit or loss in accordance with AASB 9.
(ii) is not within the scope of AASB 9 shall be measured at fair value at each reporting date and changes in fair value shall be recognised in profit or loss.
Disclosures
59 The acquirer shall disclose information that enables users of its financial statements to evaluate the nature and financial effect of a business combination that occurs either:
(a) during the current reporting period; or
(b) after the end of the reporting period but before the financial statements are authorised for issue.
60 To meet the objective in paragraph 59, the acquirer shall disclose the information specified in paragraphs B64-B66.
61 The acquirer shall disclose information that enables users of its financial statements to evaluate the financial effects of adjustments recognised in the current reporting period that relate to business combinations that occurred in the period or previous reporting periods.
62 To meet the objective in paragraph 61, the acquirer shall disclose the information specified in paragraph B67.
63 If the specific disclosures required by this and other Australian Accounting Standards do not meet the objectives set out in paragraphs 59 and 61, the acquirer shall disclose whatever additional information is necessary to meet those objectives.
Restructures of local governments
Aus63.1 Where assets and liabilities are transferred to a local government from another local government at no cost, or for nominal consideration, pursuant to legislation, ministerial directive or other externally imposed requirement, the transferee local government shall recognise assets and liabilities and any gain or loss.
Aus63.2 Assets transferred to a local government from another local government at no cost, or for nominal consideration, by virtue of legislation, ministerial directive or other externally imposed requirement shall be recognised initially either at the amounts at which the assets were recognised by the transferor local government as at the date of the transfer, or at their fair values.
Aus63.3 A restructure of local governments involves the transfer of assets and liabilities of a local government to another local government, at no cost or for nominal consideration, by virtue of legislation, ministerial directive or other externally imposed requirement. This gives rise to assets and liabilities and a gain or loss of the transferee local government. A restructure of local governments may take the form of a new local government being constituted and other local governments being abolished as a result of a State government’s policy to effectively amalgamate a number of local governments.
Aus63.4 A restructure of local governments involves a change in the resources controlled by the local governments involved in the restructure. The transferor local government will decrease its assets by the carrying amount of the assets transferred. The transferred assets will usually be recognised by the transferee at their carrying amounts in the books of the transferor at the time of the transfer. Such amounts provide a practical basis for recognising the transfer of assets, particularly when many assets are involved, as is usually the case in a restructure of local governments. However, the recognition of transferred assets at fair value is permitted by this Standard.
Aus63.5 The restructures of local governments referred to in paragraphs Aus63.3 and Aus63.4 do not involve transfers between the local government and its ownership group but give rise to a gain or loss that is recognised in the statement of comprehensive income.
Aus63.6 Assets and liabilities transferred during the reporting period and recognised in accordance with paragraph Aus63.1 shall be disclosed separately, by class, by way of note or otherwise, and the transferor local government shall be identified.
Aus63.7 Any gain or loss recognised in accordance with paragraph Aus63.1 shall be separately disclosed in the statement of comprehensive income.
Aus63.8 The disclosures required by paragraph Aus63.6 will assist users to identify the assets and liabilities recognised as a result of a restructure separately from other assets and liabilities and to identify the transferor local government. In addition, the disclosures required by paragraph Aus63.7 will assist users to identify separately the gain or loss which results from a restructure of local governments.
Aus63.9 Local governments are not required to apply paragraphs 59 to 63 and the related Appendix B Application Guidance paragraphs of this Standard when disclosing information about restructures of local governments.
Effective date and transition
Effective date
64 [Deleted by the AASB]
64A [Deleted by the IASB]
64B AASB 2010-3 Amendments to Australian Accounting Standards arising from the Annual Improvements Project issued in June 2010 amended paragraphs 19, 30 and B56 and added paragraphs B62A and B62B. An entity shall apply those amendments for annual reporting periods beginning on or after 1 July 2010. Earlier application is permitted. If an entity applies the amendments for an earlier period it shall disclose that fact. Application shall be prospective from the date when the entity first applied this Standard.
64C Paragraphs 65A-65E were added by AASB 2010-3 issued in June 2010. An entity shall apply those amendments for annual reporting periods beginning on or after 1 July 2010. Earlier application is permitted. If an entity applies the amendments for an earlier period it shall disclose that fact. The amendments shall be applied to contingent consideration balances arising from business combinations with an acquisition date prior to the application of this Standard, as issued in 2008.
64D [Deleted by the IASB]
64E AASB 2011-7 Amendments to Australian Accounting Standards arising from the Consolidation and Joint Arrangements Standards, issued in August 2011, amended paragraphs 7, B13, B63(e) and Appendix A. An entity shall apply those amendments when it applies AASB 10.
64F AASB 2011-8 Amendments to Australian Accounting Standards arising from AASB 13, issued in September 2011, amended paragraphs 20, 29, 33, 47, amended the definition of fair value in Appendix A and amended paragraphs B22, B40, B43-B46, B49 and B64. An entity shall apply those amendments when it applies AASB 13 Fair Value Measurement.
64G AASB 2013-5, issued in August 2013, amended paragraph 7 and added paragraph 2A. An entity shall apply those amendments for annual reporting periods beginning on or after 1 January 2014. Earlier application of AASB 2013-5 is permitted. If an entity applies these amendments earlier it shall also apply all amendments included in AASB 2013-5 at the same time.
64H [Deleted by the IASB]
64I AASB 2014-1 Amendments to Australian Accounting Standards, issued in June 2014, amended paragraphs 40 and 58 and added paragraph 67A and its related heading. An entity shall apply that amendment prospectively to business combinations for which the acquisition date is on or after 1 July 2014. Earlier application is permitted. An entity may apply the amendment earlier provided that AASB 9 and AASB 137 (both as amended by Part A of AASB 2014-1) have also been applied. If an entity applies that amendment earlier it shall disclose that fact.
64J AASB 2014-1, issued in June 2014, amended paragraph 2(a). An entity shall apply that amendment prospectively for annual reporting periods beginning on or after 1 July 2014. Earlier application is permitted. If an entity applies that amendment for an earlier period it shall disclose that fact.
64K AASB 2014-5 Amendments to Australian Accounting Standards arising from AASB 15, issued in December 2014, amended paragraph 56. An entity shall apply that amendment when it applies AASB 15.
64L AASB 2010-7 Amendments to Australian Accounting Standards arising from AASB 9 (December 2010) (as amended), AASB 2014-1 Amendments to Australian Accounting Standards and AASB 2014-7 Amendments to Australian Accounting Standards arising from AASB 9 (December 2014) amended paragraphs 16, 42, 53, 56, 58 and B41 and deleted paragraph 64A. Paragraph 64D, added by AASB 2010-7, was deleted by AASB 2014-1. Paragraph 64H, added by AASB 2014-1, was deleted by AASB 2014-7. An entity shall apply those amendments when it applies AASB 9 (December 2014).
Transition
65 Assets and liabilities that arose from business combinations whose acquisition dates preceded the application of this Standard shall not be adjusted upon application of this Standard.
65A Contingent consideration balances arising from business combinations whose acquisition dates preceded the date when an entity first applied this Standard as issued in 2008 shall not be adjusted upon first application of this Standard. Paragraphs 65B-65E shall be applied in the subsequent accounting for those balances. Paragraphs 65B-65E shall not apply to the accounting for contingent consideration balances arising from business combinations with acquisition dates on or after the date when the entity first applied this Standard as issued in 2008. In paragraphs 65B-65E business combination refers exclusively to business combinations whose acquisition date preceded the application of this Standard as issued in 2008.
65B If a business combination agreement provides for an adjustment to the cost of the combination contingent on future events, the acquirer shall include the amount of that adjustment in the cost of the combination at the acquisition date if the adjustment is probable and can be measured reliably.
65C A business combination agreement may allow for adjustments to the cost of the combination that are contingent on one or more future events. The adjustment might, for example, be contingent on a specified level of profit being maintained or achieved in future periods, or on the market price of the instruments issued being maintained. It is usually possible to estimate the amount of any such adjustment at the time of initially accounting for the combination without impairing the reliability of the information, even though some uncertainty exists. If the future events do not occur or the estimate needs to be revised, the cost of the business combination shall be adjusted accordingly.
65D However, when a business combination agreement provides for such an adjustment, that adjustment is not included in the cost of the combination at the time of initially accounting for the combination if it either is not probable or cannot be measured reliably. If that adjustment subsequently becomes probable and can be measured reliably, the additional consideration shall be treated as an adjustment to the cost of the combination.
65E In some circumstances, the acquirer may be required to make a subsequent payment to the seller as compensation for a reduction in the value of the assets given, equity instruments issued or liabilities incurred or assumed by the acquirer in exchange for control of the acquiree. This is the case, for example, when the acquirer guarantees the market price of equity or debt instruments issued as part of the cost of the business combination and is required to issue additional equity or debt instruments to restore the originally determined cost. In such cases, no increase in the cost of the business combination is recognised. In the case of equity instruments, the fair value of the additional payment is offset by an equal reduction in the value attributed to the instruments initially issued. In the case of debt instruments, the additional payment is regarded as a reduction in the premium or an increase in the discount on the initial issue.
66 An entity, such as a mutual entity, that has not yet applied AASB 3 and had one or more business combinations that were accounted for using the purchase method shall apply the transition provisions in paragraphs B68 and B69.
Income taxes
67 For business combinations in which the acquisition date was before this Standard is applied, the acquirer shall apply the requirements of paragraph 68 of AASB 112, as amended by AASB 2008-3 Amendments to Australian Accounting Standards arising from AASB 3 and AASB 127, prospectively. That is to say, the acquirer shall not adjust the accounting for prior business combinations for previously recognised changes in recognised deferred tax assets. However, from the date when this Standard is applied, the acquirer shall recognise, as an adjustment to profit or loss (or, if AASB 112 requires, outside profit or loss), changes in recognised deferred tax assets.
Reference to AASB 9
67A If an entity applies this Standard but does not yet apply AASB 9, any reference to AASB 9 should be read as a reference to AASB 139.
Withdrawal of IFRS 3 (2004)
68 [Deleted by the AASB]