IFRS 3, Business combinations – A survival guide to the essentials of takeovers, Part IV

Athens, February 2018
Chris Ragkavas, BA, MA, FCCA, CGMA
IFRS technical expert, financial consultant.

Finalization of provisional values

Business combinations usually occur for strategic purposes, e.g. for the achievement of economies of scale, in order to diversify operations, customer portfolio, supplier base, to name but a few. However sometimes takeovers may occur simply to avoid a target entity being purchased by a competitor, without performing all steps that are considered usual in a regular takeover, as numerous due diligence engagements, detailed fair value assessments, etc. One might assume that in these particular cases, valuations on the date of the acquisition might not be fully correct. The investor may have decided to proceed with the takeover, ahead of a competitor, without getting full insight into the target entity, and have used provisional values for the net assets acquired, instead.

IFRS 3 allows acquirers a period of 12 months post acquisition (the measurement period) to finalize the values of assets acquired and liabilities assumed, i.e. of the NAV (Net Asset Value) acquired.  During these 12 months, the acquirer may adjust the provisional values of the NAV acquired and finalize goodwill. Naturally, the acquirer is only allowed and not obliged to wait until the end of the measurement period to do so. So if the values originally attached to the NAV acquired are deemed to be final much earlier than 12 months post acquisition, the measurement period ends then, and goodwill is also deemed to be finalized.

Upon finalization of goodwill, and no later than the end of the first annual period after finalization of goodwill, goodwill must be allocated to the cash generated units (CGUs) expected to benefit from the synergies of the business combination, and be tested for impairment.


  • A takes over 75% of B, on 16/04/2018. By the year-end on 31/12/2018, A still uses provisional values of the NAV acquired.

  • A, needs to finalize the provisional values and goodwill that arose on acquisition, until no later than 15/04/2019. They do so in Q1 of 2019, goodwill being $ 523,000. Five CGUs are expected to benefit from the takeover.

  • A, needs to allocate goodwill to these CGUs by no later than 31/12/2019, so it can be tested for impairment.

The detailed method for goodwill allocation to these CGUs and impairment testing, are beyond the scope of this Article. A general principle is that allocation monetizes the economic benefits expected to arise from the takeover synergies, and impairment testing confirms their continuing existence, or lack thereof. CGUs are not per se separate entities. A CGU is “the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets”.  Think of B having five CGUs with their own warehouses, retail outlets, customer portfolios, etc.

Goodwill is never amortized, but is tested at least annually for impairment, or earlier when there are indications of impairment.

In simple words, impairment testing is a test of recoverability of the carrying amount of a CGU, including the allocated goodwill.


Assume that one of the five CGUs,  ‘South’ is allocated in Q1 2019, $ 156,000 of goodwill. As per 31/12/2019, the carrying NAV of that CGU are as follows:


Goodwill 156,000
Property 230,000
Trade receivables 101,000
Banks 90,000
Loans (89,000)
Total 488,000

A simplified impairment testing exercise would compare $488,000 with the higher of the 2 values mentioned below.

  • How much money would A receive if A were to sell this CGU today? Say, this is $470,000. This means that A would recover the whole value of the CGU’s assets less its liabilities, however not the full amount of goodwill paid on acquisition. In other words, new investors do not perceive goodwill to be anymore, what A thought it was, on 16/04/2018.


  • How much money would A receive in present value terms, if A were to retain ownership of this CGU?
    What is the so-called, value in use, i.e. the present value of the cash flows expected to be earned in the future? Say, this $479,000.

Goodwill is therefore impaired, and losses of $(488,000-479,000) = $ 9,000 are recognized in the consolidated statement of profit or loss. These losses are never reversed, as reversal would be recognition of internally generated goodwill, which is strictly prohibited by IAS 38 Intangible Assets.

Queries, comments, are welcome at [email protected]

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