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The key valuation and accounting issues arising in IFRS reporting on a business combination
Accounting for business combinations under IFRS throws up a number of complex issues. As the volume of European merger and acquisition activity increases, these issues are becoming pertinent to many companies. This article runs through some of the issues that arise and how to resolve them whilst avoiding the pitfalls that are easy to fall into.
1. Introduction
There are several key steps involved in accounting for a business combination under IFRS 3 including
measuring the consideration,
identifying the intangible assets to be recognised separately from goodwill,
measuring these intangible assets at fair value,
preparing an acquisition date fair value balance sheet,
reviewing the overall results for reasonableness.
The appropriate accounting requires applying several different IFRSs including IFRS 3 Business Combinations, IFRS 13 Fair Value Measurement, and IAS 38 Intangible Assets.
2. Measuring the consideration
In straightforward cases, the consideration comprises cash payable on completion. In more complex cases, consideration may include shares, share options and/or deferred or contingent payments.
2.1. Shares as a component of consideration
If the consideration comprises shares and these ...