Purchase consideration | Business Combinations – IFRS 3

The purchase consideration includes the fair value of all interests that the acquirer may have held previously in the acquired business. 
This includes any interest in an associate or joint venture, or other equity interests of the acquired business. 

Any previous stake is seen as being ‘given up’ to acquire the entity, and a gain or loss is recorded on its disposal.

If the acquirer already held an interest in the acquired entity before acquisition, the standard requires the existing stake to be re-measured to fair value at the date of acquisition, taking into account any movement to the statement of profit or loss together with any gains previously recorded in equity that relate to the existing holding.

If the value of the stake has increased, there will be a gain recognized in the statement of comprehensive income of the acquirer at the date of the business combination.
A loss would only occur if the existing interest has a carrying amount in excess of the proportion of the fair value of the business obtained and no impairment had been recorded previously.
"This loss situation is not expected to occur frequently."

Contingent consideration is also recognized at fair value even if payment is not deemed to be probable at the date of the acquisition.


Josey acquires 100% of the equity of Burton on 31 December 2008. There are three elements to the purchase consideration: an immediate payment of $5m, and two further payments of $1m if the return on capital employed (ROCE) exceeds 10% in each of the subsequent financial years ending 31 December.
All indicators have suggested that this target will be met. Josey uses a discount rate of 7% in any present value calculations.


Determine the value of the investment.


The two payments that are conditional upon reaching the target ROCE are contingent consideration and the fair value of $(1m/1.07 + 1m/1.072) is $1.81m will be added to the immediate cash payment of $5m to give a total consideration of $6.81m.

All subsequent changes in debt-contingent consideration are recognized in the statement of profit or loss, rather than against goodwill, as they are deemed to be a liability recognized in accordance with IFRS 9, Financial Instruments.

An increase in the liability for good performance by the subsidiary results in an expense in the statement of profit or loss, and under-performance against targets will result in a reduction in the expected payment and will be recorded as a gain in the statement of profit or loss. 

These changes were previously recorded against goodwill.

The nature of the contingent consideration is important as it may meet the definition of a liability or equity. If it meets the definition of equity, then there will be no re-measurement. The new requirement is that contingent consideration is fair valued at acquisition and, unless it is equity, is subsequently re-measured through earnings rather than the historic practice of re-measuring through goodwill. 

This change is likely to increase the focus and attention on the opening fair value calculation and subsequent re-measurements.

The standard also requires any gain on a ‘bargain purchase’ (negative goodwill) to be recorded in the statement of profit or loss, as in the previous standard.

Transaction costs no longer form a part of the acquisition price; they are expensed as incurred. 

Transaction costs are not deemed to be part of what is paid to the seller of a business.

They are also not deemed to be assets of the purchased business that should be recognized on acquisition. The standard requires entities to disclose the amount of transaction costs that have been incurred.

The standard clarifies accounting for employee share-based payments by providing additional guidance on valuation, as well as on how to decide whether share awards are part of the consideration for the business combination or are compensation for future services.

IFRS 10, Consolidated financial statements.