Understanding of ‘’Business combinations of entities under common control’’ under IFRS 3 ‘’Business combination’’
Understanding of ‘’Business combinations of
entities under common control’’ under IFRS 3 ‘’Business combination’’
(Note- Para B1 – B4 of bear standard IFRS 3)
How to identify a ‘’Business Combination’’
under IFRS 3?
This IFRS defines a business combination as a transaction
or other event in which an acquirer gains control of one or more companies. An
acquirer can gain control of an acquiree in several ways, for example:
(a) through the transfer of cash, cash equivalents or other
assets (including net assets that constitute a business);
(b) incurring liabilities;
(c) by issuing capital shares;
(d) providing more than one type of consideration; or
(e) without transferring the consideration, even by
contract alone.
A business combination can be structured in various ways
for legal, tax or other reasons, including, but not limited to:
(a) one or more companies become subsidiaries of an
acquirer or the net assets of one or more companies are legally merged into the
acquirer;
(b) a combining entity transfers its net assets, or its
owners transfer its equity interests, to another combining entity or its
owners;
(c) all combined entities transfer their net assets, or the
owners of those entities transfer their equity interests, to a newly formed
entity (sometimes called a cumulative or grouped transaction); or
(d) a group of former owners of one of the combined
entities gains control of the combined entity.
IFRS 3 Business combination outlined the
following guidance of business combination of entities under common control to
clarify that following cases are out of its scope. Thus IFRS 3 shall NOT apply in any of below case:
· This
IFRS does not apply to a business combination of entities or businesses under
common control. A business combination involving entities or businesses under
common control is a business combination in which all the combining entities or
businesses are controlled by the same party or parties before and after the
business combination, and that control is not transient.
· A
group of individuals will be considered to control an entity when, as a result
of contractual agreements, they collectively have the power to govern its
financial and operating policies to obtain benefits from its activities.
Therefore, a business combination is outside the scope of this IFRS when the
same group of individuals has, as a result of contractual agreements, the final
collective power to govern the financial and operating policies of each of the
combined entities to obtain benefits. of their activities, and that final
collective power is not transitory.
· An
entity may be controlled by an individual or by a group of individuals acting
together under a contractual agreement, and that individual or group of
individuals may not be subject to the financial reporting requirements of IFRS.
Therefore, combined entities do not need to be included as part of the same
consolidated financial statements for a business combination to be considered
as one involving entities under common control.
· The
scope of non-controlling interests in each of the combined entities before and
after the business combination is not relevant to determine whether the
combination involves entities under common control. Similarly, the fact that
one of the combined entities is a subsidiary that has been excluded from the
consolidated financial statements is not relevant to determine whether a
combination involves entities under common control.
You may also refer below related articles:-
IAS 1 Presentation of Financial Statements
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