Applying IFRS 3 in Accounting for Business Acquisitions

Abstract: Background and Problem Discussion: This essay has been commissioned by a Swedish group considering to voluntary adopt the regulations of IAS/IFRS in its accounting. This group has further given us a case; to investigate how the accounting for a specific business acquisition would have been affected by the regulation of IAS/IFRS, or more specifically by IFRS 3 – Business Combinations. When developing IFRS 3, the IASB wanted to create a standard that would provide users of financial statements with the most relevant and reliable information. However, with this ambition IFRS 3 became extensive and implies a number of important changes. The question is how the application of this standard really affects the groups applying it? Is it possible that the IASB, with their ambitions, has made IFRS 3 too demanding or too difficult to apply? Purpose: The purpose of this essay is to investigate the application of IFRS 3, in order to provide parts of a basis for the decision-making of our assigner in its considerations to voluntary adopt the IAS/IFRSs in its accounting. In order to do this, we aim to identify what issues or practical problems come with the application of IFRS 3. We also aim to examine how IFRS 3 affects consolidated financial statements. Delimitations: This essay examines the accounting for one specific acquisition in accordance with IFRS 3, and therefore the empirical material is delimited to this acquisition. The accounting for the acquisition was originally established in accordance with Swedish GAAP, which therefore serves as a starting point for our discussions. Further, this essay treats the accounting issues and not the valuation issues that come with the application of IFRS 3. Method: This essay is a case study limited to the examination of one single acquisition, which limits our ability to come to conclusions applicable to all acquisitions. However, we believe that the results from our case study can be useful and serve as a basis for comparison for other groups facing a first-time adoption of IFRS 3. In carrying through our work with the case, we have examined the accounting regulations of IFRS 3 and Swedish GAAP concerning business acquisitions. We have also carried through interviews with an auditor, and with persons involved in the acquisition. Results and Conclusions: From the application of IFRS 3 on this acquisition we were able to identify eleven new intangible assets, five of which were considered to meet the criteria for recognition. The value of the recognisable intangible assets would importantly have diminished the value of goodwill recognised in the original accounting for the acquisition. Further, IFRS 3 would have demanded an explanation of this goodwill value as well as much more extensive disclosures. The main effect on the income statements is that goodwill under IFRS 3 would not be amortised, but instead annually tested for impairment. Our conclusion is that IFRS 3 probably demands too much from groups applying it, in relation to the extent it benefits users of financial statements by giving useful information.