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AASB 3 - Business Combinations
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Summary 
Developments, Key Differences & History 
Compared to IFRS 
Interpretations 
Rejection Notices 
Questions & Answers 
Articles 
AASB website 

 
Business Combinations and shelf companies 
as reported in ANT18/2008 
 
Q: My client has just acquired a shelf company. Does this constitute a business combination under AASB 3, and am I required to do all the AASB 3 disclosures in paragraph 66 onwards? 
 
A: I think that there may be some confusion here between AASB 3 Business Combinations, and AASB 127 Consolidated and Separate Financial Statements.  
 
AASB 3 applies to reporting entities that undertake material business combinations. In considering the application of AASB 3 to this transaction there are two main factors to consider: These are  
  • Does the transaction actually constitute a business combination? and
    •  
  • Is the entity material?
Normally, a shelf company is unlikely to be material and therefore paragraph Aus1.4 of AASB 3 would indicate that the standard does not apply. If it is material, the question then arises as to whether it meets AASB 3’s definition of a business, that is: 
 
"an integrated set of activities and assets conducted and managed for the purpose of providing: 
 
(a) a return to investors; or 
(b) lower costs or other economic benefits directly and proportionately to policyholders or participants. 
 
"A business generally consists of inputs, processes applied to those inputs and resulting outputs that are, or will be, used to generate revenues. If goodwill is present in a transferred set of activities and assets, the transferred set shall be presumed to be a business." 
 
Again, a shelf company is unlikely to satisfy this definition due to its lack of activity. 
 
While the initial acquisition of the shelf company is therefore unlikely to trigger the application of AASB 3, once acquired it does represent a subsidiary to which AASB 127, Consolidated and Separate Financial Statements must be applied. This is the standard that applies to the presentation of financial statements of a group under the control of a parent entity. On initial acquisition, materiality may be a relevant factor to consider and so consolidation of the shelf company may be able to be avoided until the shelf company's operations become material to the group.  
 
 
Business Combinations: Valuation of assets 
as reported in ANT09/2007 
 
Q: Subsequent to the acquisition of company B by company A, A has incurred costs from external organizations in having valuations of B performed to determine the fair value of the assets (particularly intangible assets) acquired. 
 
A's management argue that the costs would not have been incurred if the business combination had not occurred and that they are therefore directly attributable to the combination. Can A capitalize these valuation costs as part of the cost of acquisition? 
 
A: AASB 3 includes within the cost of the business combinations any costs that are 'directly attributable to the combination such as professional fees paid to accountants, legal advisers, valuers and other consultants to effect the combinations' (para 29). 
 
Valuation costs incurred prior to the acquisition date may qualify to be capitalised as part of the cost of the combination. However, costs incurred post-acquisition to determine the fair value of the assets acquired have not been incurred to effect the combination and must be expensed. This would also apply to other types of valuation costs (eg, for tangible fixed assets and pension liabilities).  
 
(Thanks to the UK's Accountancy magazine for this one) 
 
 
Fair Value Adjustments under Business Combinations 
As reported in ANT31/2005: 
 
Q: Under AASB 3 "Business Combinations", am I able to "push-down" fair value adjustments made in relation to acquisition accounting of a newly acquired subsidiary, or do the balances have o remain as a consolidation adjustment? 
 
A: While AASB 3 does not specifically discuss "pushing down" fair value adjustments arising from acquisition and consolidation accounting to subsidiaries, there is nothing specific in AASB 3 to preclude it. If the subsidiary were not a reporting entity, there would be no specific accounting or reporting restrictions over "pushing down" any fair value adjustments made in relation to acquisition accounting a subsidiary. However, if the subsidiary is a reporting entity, there may be some limitations. 
 
For example, if the subsidiary recognised an intangible asset arising from development that was measured by the subsidiary in accordance with AASB 138 "Intangible Assets" and the parent entity's interest in the fair value of the identifiable assets, liabilities and contingent liabilities exceeded the cost of the business combination, then the parent entity may not be able to "push down" any such re-measurement of the subsidiary's intangible asset if that caused the intangible asset to be valued in the subsidiary's accounts at an amount inconsistent with the requirements of the Standard. 
 
 
Goodwill Amortisation 
As reported in ANT46/2005: 
 
Q: I understand that under the new 2005 standards goodwill is no longer amortised. Does this mean the balance can be carried unreviewed, indefinitely? 
 
A: No. Paragraph 54 of the new AASB 3 “Business Combinations” requires that once goodwill has been initially recognised, it must be carried at cost less any accumulated impairment losses. Paragraph 55 then says it shall not be amortised but must be subject to a yearly (or if necessary more frequent) review for impairment in accordance with the requirements of AASB 136 "Impairment of Assets". 
 
AASB 136 sets out specific rules in paragraphs 80 and following for how this impairment assessment is to be carried out, requiring allocation of the goodwill to the appropriate cash-generating unit. 
 
 
Transitional Provisions for Goodwill 
As reported in ANT21/2005: 
 
Q: In adopting AIFRS, do I have to apply AASB 3 "Business Combinations” retrospectively and recalculate the goodwill for acquisitions made before the transition date? 
 
A: No. Recall that the transition date is the beginning of the period for the comparatives, i.e. 1 July 2004 for an entity doing 30 June 2006 financials using AIFRS. AASB 1 includes at paragraph 13 a specific exemption in relation to the Business Combination standard AASB 3 which allows entities to choose between retrospectively applying AASB 3 or using the provisions of AASB 1 “First-time Adoption of International Financial Reporting Standards” Appendix B to apply to these types of business combinations. Paragraph B2 of Appendix 1 goes into detail about the consequences of choosing to use this exemption, and specifically refers to the appropriate adjustments necessary for goodwill in paragraph B2 (g).