A business combination is a transaction that gives rise to the takeover of one or more businesses, regardless of the legal means by which such control is obtained.
In order to provide greater certainty to the investor, IFRS 3 regulates the way of preparing and presenting the information that companies generate in those acquisition processes in which a business combination occurs. This standard introduces the need to recognise assets, liabilities and contingent liabilities at fair value at the acquisition date, in addition to establishing the obligation to allocate the remaining consideration as goodwill.
The entry into force of International Accounting Standard (IFRS) led to the emergence of the Purchase Price Allocation (PPA) process, seeking to provide greater transparency and comparability to investors and users of financial information.
This standard sets out obligations related to information on the fair value of a transaction, beyond the recorded book value. It allows evaluating the financial consequences of a transaction with updated data by including the recognition of the company’s intangible assets, the acquirer’s expectations about future earnings, as well as the negotiation factors that have been considered by the parties involved.
What is the purpose of IFRS 3?
With IFRS 3, the buyer of a business recognises the assets and liabilities acquired at fair value, allocating the remaining consideration as goodwill. In this way, it provides the participants with tools for evaluating the financial consequences of the business combination.
In many cases, intangible assets not recognised in the balance sheets justify the difference in the acquisition price of a business. One of the most relevant unidentified assets linked to the value gap is the companies’ human capital. Given the difficulty to recognise it as an intangible asset, in many occasions it is implicitly included in goodwill.
The standard is intended to provide the market with information about the reality of a transaction, helping to define the considerations related to the business combination, both at the time it occurs and later.
Its main goals are as follows:
- Ensure that assets are recognised at fair value.
- Provide transparency to the transaction.
- Provide a transaction analysis tool.
- Justify the price paid for the investment.
- Understand the difference in the purchase price allocation processes of different companies.
Gesvalt offers financial advisory services for all types of companies in PPA processes. We participate throughout the project, covering all services: valuation of tangible assets, intangible assets and full articulation of the transaction.
Throughout the process, we work on identifying the conditions of the transaction; we determine which the cash generating units are; we give visibility to non-quantified intangibles and establish the period during which those assets contribute to cash-flow generation.
We have experience in international projects for all kinds of industries. Contact us, we will be pleased to contribute to the success of your transactions.