Business combinations vs asset acquisition

In recent years the IASB amended how the business definition is applied with said amendments becoming effective for business combinations on or after 1 January 2020. The inclusion of a concentration test as a practical expedient assists in simplifying the distinction between a business and an asset acquisition, yet there is often confusion as to what this means practically when accounting for the acquisition of an entity that may or may not constitute a business.

Appendix A to IFRS 3 Business Combinations define a business as “an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing goods or services to customers, generating investment income (such as dividends or interest) or generating other income from ordinary activities”.

A business consists of inputs and processes that have the ability to create outputs (IFRS 3.B7) and clarifies the definitions of inputs, processes and outputs. The question then arises as to what should be done when an entity is acquired that does not meet the definition of a business? This is particularly common in development stage entities, including those within the extractive industries sector.

A number of key differences need to be considered when it is determined that the acquisition of an entity is not a business. The table below summarises these considerations:

Business combination:Asset acquisition:
The purchase consideration is measured and the assets and liabilities are recognised at fair value and the resulting difference is goodwill or a bargain purchase gain, depending on whether the difference is a debit or a credit.The purchase consideration is measured at cost, which is fair value in most situations. The assets and liabilities are allocated to the purchase consideration on a relative fair value basis with no goodwill recognised.
When the purchase consideration includes contingent or variable consideration, the specific criteria in IFRS 3 dealing with contingent consideration needs to be adhered to. Subsequent adjustments are treated based on the classification as a debt or equity instrument.Although variable consideration is generally estimated using the principles of IFRS 15, there is no guidance on the treatment of such differences. The adjustment can be recognised to profit or loss or to the value of the assets and/or liabilities, in certain circumstances.
Transaction costs must be expensed as incurred.Transaction costs are capitalised to the asset or the liability raised to purchase it.
The initial recognition exception on deferred tax does not apply in the case of a business combination; it must be recognised.For asset acquisitions the initial recognition exception for deferred tax results in no deferred tax being recognised.
Business combinations require detailed disclosures in the year of the acquisition.The disclosure requirements for an asset acquisition are less onerous than those explained in IFRS 3.

Careful consideration is needed when doing this analysis. The judgement applied in making the distinction between a business combination and an asset acquisition may also warrant disclosure as the accounting differences between the two methods are quite extensive.


Sonica Schoeman, IFRS Director

18 April 2023