IFRS 3 business combinations: acquisition accounting explained
When a company obtains control of a business, IFRS 3 may require a detailed analysis of the price and acquired assets. Follow the acquisition method, explore an example in Swiss francs and prepare the evidence needed for the first group closing.
By Sarah Prieur · Swiss certified accountant
IFRS 3: the essentials
IFRS 3 governs business combinations within its scope. It requires the acquisition method: identify the acquirer, establish the acquisition date, recognise the identifiable assets and liabilities, then calculate goodwill or a bargain purchase gain.
- Not every purchase of shares or assets falls within IFRS 3.
- The relevant date is when the acquirer obtains control.
- The purchase price does not become goodwill in full.
- Valuation and disclosure work requires more evidence than the sale agreement alone.
These requirements apply to reporting under IFRS Accounting Standards. They do not automatically govern every acquisition by a Swiss SME. First establish which financial statements and accounting framework the transaction affects.
Buying a company or buying assets: does IFRS 3 apply?
The legal structure alone does not answer the question. Buying a company may mean acquiring a business, or merely a set of assets that does not meet the definition of a business.
For example, buying the shares of a company that holds only one property requires a closer assessment. A share purchase is not, by itself, proof of a business combination under IFRS 3.
Conversely, acquiring assets together with substantive processes can constitute the acquisition of a business. The analysis considers the resources and processes acquired. Where the standard's conditions are met, an optional concentration test may simplify that assessment.
Business combinations under common control are excluded from IFRS 3. A restructuring within the same group should therefore not automatically be accounted for in the same way as an external acquisition. Likewise, an asset acquisition outside the definition of a business does not generate goodwill under IFRS 3.
The four steps of the acquisition method
- Identify the acquirer. This is the entity that obtains control. In some transactions, the accounting acquirer differs from the entity that appears to be the buyer based on the legal structure.
- Determine the acquisition date. This may be the closing date, but examine the rights actually transferred and any outstanding conditions. Signing a sale agreement does not necessarily transfer control.
- Identify and measure the acquired assets and assumed liabilities. IFRS 3 generally uses acquisition-date fair values, subject to specific exceptions. Deferred tax, employee benefit obligations and relevant contingent liabilities need particular attention.
- Calculate the residual amount. Goodwill is determined after this allocation, commonly called the purchase price allocation, or PPA. It is not an amount chosen simply to balance an incomplete acquisition file.
The PPA connects the transaction documents with the opening consolidated figures. It can reveal identifiable assets that were absent from the target's historical accounts.
Worked example: acquiring 100% of a business
A Swiss company acquires an entire business for CHF 2,000,000. It holds no previous interest, and there are no non-controlling interests. The following illustrative amounts are measured at the acquisition date.
| Item | Amount |
|---|---|
| Identifiable assets recognised | CHF 1,800,000 |
| Liabilities recognised, including deferred tax | CHF −500,000 |
| Identifiable net assets | CHF 1,300,000 |
| Consideration transferred | CHF 2,000,000 |
| Goodwill | CHF 700,000 |
The identifiable assets may include technology or customer relationships recognised separately. Their absence from the target's historical balance sheet is not a reason to leave them within goodwill without further analysis.
A partial or step acquisition requires a broader calculation that also considers non-controlling interests and any previously held interest. Our article on goodwill calculation and impairment explains the residual amount and its subsequent treatment.
Separate variable consideration, fees and remuneration
A contract may combine a fixed price, a performance-related payment and amounts conditional on the seller remaining with the business. Calling a payment an “earn-out” does not determine its accounting treatment.
Contingent consideration must be assessed at the acquisition date. If classified as a liability, subsequent remeasurement may affect profit or loss under the applicable requirements. Payments linked to continued employment may instead represent remuneration.
Acquisition-related costs, including certain advisory fees, are generally expensed. Debt and equity issuance costs follow separate rules. Code invoices as they arrive so that all transaction expenditure is not mistakenly included in the acquisition price.
Practical control: prepare a schedule separating immediate payments, deferred instalments, variable consideration and remuneration. Reconcile the accounting treatment with the actual cash funding requirement.
What if the valuation is unfinished at year-end?
IFRS 3 allows provisional amounts when the initial accounting remains incomplete. The measurement period cannot exceed one year from the acquisition date.
That period is for obtaining information about facts and circumstances that existed at acquisition. It does not allow the original allocation to be retrospectively rewritten to absorb a commercial downturn occurring months after the purchase.
If the calculation produces a bargain purchase gain, reassess the underlying items first. A gain confirmed after that review is recognised immediately in profit or loss; it cannot simply be spread across future years.
The allocation also affects subsequent results. Depreciable or amortisable identifiable assets create future expenses, while IFRS goodwill is subject to impairment testing. A post-acquisition income statement forecast therefore needs more than the target's historical profit.
Prepare the acquisition file and first group closing
Collect the agreement and its schedules, evidence of control, the acquisition-date trial balance, asset valuations, commitments, tax assumptions and terms for any variable consideration.
Assign responsibility for valuations and agree approval dates. Finance, legal and operational teams need a common understanding of the control timeline, what was acquired, expected synergies and outstanding obligations.
The disclosures must explain the transaction and its effects, beyond naming the target and stating the price. Include the monitoring of goodwill, acquired assets and adjustments in your year-end closing process. Prepare the acquisition disclosures alongside the notes to the financial statements, using the requirements of your reporting framework.
Frequently asked questions
Does IFRS 3 use merger accounting?
No. IFRS 3 requires the acquisition method for transactions within its scope. Identify the accounting acquirer and apply the corresponding recognition and measurement requirements.
Does buying a minority shareholding fall within IFRS 3?
Not automatically. IFRS 3 addresses obtaining control of a business. An investment without control, or a change in ownership percentage after control has already been obtained, may fall under other requirements.
Can all advisory fees be included in goodwill?
No. Acquisition-related costs are generally expensed, while debt and equity issuance costs follow specific rules. Review each invoice according to the service it covers.
Are acquired customer relationships always goodwill?
No. They may meet the criteria for an identifiable intangible asset and require separate recognition. Assess the contractual rights and economic characteristics involved.
Must the auditor prepare the purchase price allocation?
Preparation and accounting decisions are the company's responsibility, supported by specialists where needed. If the accounts are audited, agree the respective roles and address auditor independence from the outset.
