IFRS 3 establishes the following principles in relation to the recognition and measurement of items arising in a business combination:
Recognition principle. Identifiable assets acquired, liabilities assumed, and non-controlling interests in the acquiree, are recognised separately from goodwill [IFRS 3.10] Measurement principle. All assets acquired and liabilities assumed in a business combination are measured at acquisition-date fair value. [IFRS 3.18]
Exceptions to the recognition and measurement principles
The following exceptions to the above principles apply:
Contingent liabilities – the requirements of IAS 37 Provisions, Contingent Liabilities and Contingent Assets do not apply to the recognition of contingent liabilities arising in a business combination [IFRS 3.22-23] Income taxes – the recognition and measurement of income taxes is in accordance with IAS 12 Income Taxes [IFRS 3.24-25] Employee benefits – assets and liabilities arising from an acquiree's employee benefits arrangements are recognised and measured in accordance with IAS 19 Employee Benefits (2011) [IFRS 2.26] Indemnification assets - an acquirer recognises indemnification assets at the same time and on the same basis as the indemnified item [IFRS 3.27-28] Reacquired rights – the measurement of reacquired rights is by reference to the remaining contractual term without renewals [IFRS 3.29] Share-based payment transactions - these are measured by reference to the method in IFRS 2 Share-based Payment Assets held for sale – IFRS 5 Non-current Assets Held for Sale and Discontinued Operations is applied in measuring acquired non-current assets and disposal groups classified as held for sale at the acquisition date.
In applying the principles, an acquirer classifies and designates assets acquired and liabilities assumed on the basis of the contractual terms, economic conditions, operating and accounting policies and other pertinent conditions existing at the acquisition date. For example, this might include the identification of derivative financial instruments as hedging instruments, or the separation of embedded derivatives from host contracts.[IFRS 3.15] However, exceptions are made for lease classification (between operating and finance leases) and the classification of contracts as insurance contracts, which are classified on the basis of conditions in place at the inception of the contract. [IFRS 3.17]
Acquired intangible assets must be recognised and measured at fair value in accordance with the principles if it is separable or arises from other contractual rights, irrespective of whether the acquiree had recognised the asset prior to the business combination occurring. This is because there is always sufficient information to reliably measure the fair value of these assets. [IAS 38.33-37] There is no 'reliable measurement' exception for such assets, as was present under IFRS 3 (2004).
