How To Identify A Business Combination? Obtaining control over the net assets of another entity could be achieved by one entity acquiring the shares of another entity on the open market and, because of the quantity of shares acquired, being able to control the financial and operating policies of the other entity. Accounting for this form of business combination requires the application of the associated principles but the application further involves the preparation of consolidated financial statements.
A business combination could also occur without any exchange of assets or equity between the entities involved in the exchange. For example, a business combination could occur where two entities merged under a contract. The shareholders of the two entities could agree to adjust the rights of each of their shareholdings so that they receive a specified share of the profits of both the combined entities. As a result of the contract, both entities would be under the control of a single management group.
Business combinations are also not restricted to transactions involving companies. Mutual entities such as credit unions and mutual insurance companies which combine together, for example to increase their market share and to lower their risk, may also have to account for the combination under IFRS 3.
There are many other forms of business combinations that can occur, such as Raeesa Ltd acquiring the assets only of Senjuti Ltd, and Senjuti Ltd paying off the liabilities and then liquidating. Alternatively, Raeesa Ltd may acquire all the assets and only some of the liabilities of Senjuti Ltd, and Senjuti Ltd pays the remaining liabilities before liquidating.
IFRS 3 applies to all business combinations except those listed in paragraph 2 of the standard, namely:
Where the business combination results in the formation of a joint venture. Such a business combination is accounted for under IFRS 11 Joint Arrangements.
Where the business combination involves entities or businesses under common control. Such a business combination occurs where all of the combining entities or businesses ultimately are controlled by the same party or parties both before and after the combination, and where control is not transitory.
This situation could arise where Pentagon Ltd owns 100% of the shares of Santa Ltd. The directors of Pentagon Ltd form a new entity, Xerox Ltd, wholly owned by Pentagon Ltd, which acquires all the issued shares of Santa Ltd in an internal reconstruction. All the combining entities are controlled by Pentagon Ltd both before and after the reconstruction.
