What is IFRS 3 and how does it govern M&A accounting?

Full Explanation

IFRS 3 requires acquirers to recognise and measure all identifiable assets acquired and liabilities assumed at fair value, with residual goodwill — it drives the purchase price allocation process. Under IFRS 3, when one company acquires another (a business combination), the acquisition is recorded at the acquisition date using the acquisition method. All identifiable tangible and intangible assets acquired and liabilities assumed are measured at fair value. The purchase price — the consideration paid (cash, equity, or contingent payments) plus any non-controlling interest and previously held equity stakes — is allocated across these assets and liabilities. Any amount remaining is recorded as goodwill. IFRS 3 requires the acquirer to identify and separately measure all intangible assets meeting the definition, even if not previously recognised by the target. This includes customer relationships, brand names, technology, and in-process R&D. The PPA must be completed within 12 months (measurement period), during which the acquirer can adjust provisional amounts if new information emerges. IFRS 3 applies to all business combinations, whether public or private. For the acquired company's owners, the PPA determines how much value is attributed to identifiable intangibles (affecting amortisation charges) vs. goodwill (affecting impairment risk and longer-term value representation). For the acquirer, getting PPA right is essential for accurate financial reporting and tax planning.

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