Part 2: The Acquisition Method (IFRS 3)

IFRS 3 mandates the acquisition method for all business combinations. This part walks through each step — from identifying the acquirer to calculating goodwill. Get this right, and your consolidation journals will flow naturally.

1Identifying the Acquirer

The acquirer is the entity that obtains control of the acquiree. In most cases, this is straightforward — the entity paying cash or issuing shares is the acquirer. However, some situations require careful analysis:

Indicators of the Acquirer

The entity that transfers cash or other assets
The entity that incurs liabilities
The entity whose owners retain the largest voting interest
The entity that appoints the majority of the board
The larger entity (by assets, revenue, or profit)

Reverse Acquisitions

In rare cases, the legal acquirer is not the accounting acquirer. This happens when a smaller company "acquires" a larger one by issuing enough shares that the larger company's shareholders end up with majority control. The accounting acquirer is the entity whose shareholders control the combined entity.

2Determining the Acquisition Date

The acquisition date is the date on which the acquirer obtains control of the acquiree. This is typically the closing date when:

Legal transfer occurs

Shares are transferred, consideration is paid

Control is obtained

Power + variable returns + ability to affect returns

Why it matters: All fair values are measured at the acquisition date. Pre-acquisition profits belong to the acquiree's previous owners; post-acquisition profits are included in the group's results.

3Recognizing Identifiable Assets & Liabilities

At acquisition date, the acquirer recognizes the acquiree's identifiable assets and liabilities at their fair values. This includes items not previously recognized in the acquiree's books:

✓ Assets to Recognize at Fair Value

• Intangible assets (brands, customer lists, patents)
• Property, plant and equipment
• Investment property
• Financial instruments
• Inventories
• Contingent assets (not recognized — see note)

✓ Liabilities to Recognize at Fair Value

• Financial liabilities
• Provisions and contingent liabilities (if FV can be measured reliably)
• Deferred tax (arising from FV adjustments)
• Employee benefit obligations

Exceptions to Fair Value Measurement

Item	Measurement Basis
Deferred tax	IAS 12 (not discounted)
Employee benefits	IAS 19
Share-based payments	IFRS 2
Assets held for sale	IFRS 5 (FV less costs to sell)
Indemnification assets	Same basis as indemnified item

4Measuring Non-Controlling Interest (NCI)

IFRS 3 provides two choices for measuring NCI at acquisition — this choice affects your goodwill calculation:

Option 1: Fair Value (Full Goodwill)

NCI is measured at fair value, typically based on the market price per share × NCI shares.

Result: Goodwill includes both parent's and NCI's share

Option 2: Proportionate Share (Partial Goodwill)

NCI is measured at their proportionate share of the acquiree's identifiable net assets.

Result: Goodwill only includes parent's share

Exam Tip: Always check which method the question requires. If not specified, state your assumption clearly. The fair value method gives higher goodwill but is more intuitive for impairment testing.

5Calculating Goodwill

Goodwill Formula

Goodwill =

+ Consideration transferred (at fair value)

+ NCI (at FV or proportionate share)

+ Previously held interest (remeasured to FV)

− Fair value of identifiable net assets

Components of Consideration

Cash

Amount paid at acquisition date

Shares Issued

Fair value (market price) at acquisition date

Contingent Consideration

Fair value at acquisition date (probability-weighted)

Deferred Consideration

Present value if significant time element

Acquisition Costs

Transaction costs (legal fees, due diligence, advisory fees) are expensed as incurred — they are NOT part of consideration and do NOT affect goodwill. Only costs to issue shares are deducted from equity.

6Bargain Purchase (Negative Goodwill)

If the fair value of net assets exceeds the consideration paid + NCI, you have a bargain purchase. Before recognizing a gain:

1Review whether all assets and liabilities have been identified
2Review the fair value measurements for reasonableness
3If confirmed, recognize the excess as a gain in profit or loss

Common causes: Forced sales, distressed sellers, or errors in valuation. Bargain purchases are rare and examiners expect you to question them before recognizing a gain.

Key Takeaways

Identify the acquirer: The entity obtaining control (power, returns, ability to affect returns).
Acquisition date: When control is obtained — all FVs measured at this date.
Fair value everything: Assets and liabilities at FV, with specific exceptions.
NCI choice: Fair value (full goodwill) or proportionate share (partial goodwill).
Expense acquisition costs: Legal/advisory fees hit P&L, not goodwill.

Coming in Part 3...

We'll cover IFRS 10: Consolidation Mechanics — the procedures for combining parent and subsidiary, eliminating intra-group transactions, and presenting unified group financial statements.