IFRS 3, Business combinations – A survival guide to the essentials of takeovers, Part V (final)

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

Closing remarks

IFRS 3 is applicable only when the acquirer indeed acquires a business as defined by the standard.  In all other cases, the acquisition is treated as one of an asset, tangible or intangible.

Whereas in many cases the distinction between purchasing an asset and purchasing a business is rather straightforward, in other cases that may not hold true.  In order for an investee to qualify as a business, it must comprise the following three elements:

  • Input: Any economic resource that creates, or has the ability to create, outputs when one or more processes are applied to it. Examples include non-current assets (including intangible assets or rights to use non-current assets), intellectual property, the ability to obtain access to necessary materials, or rights and employees.

  • Process: Any system, standard, protocol, convention or rule that when applied to an input or inputs, creates or has the ability to create outputs. Examples include strategic management processes, operational processes and resource management processes. These processes typically are documented, but an organized workforce having the necessary skills and experience following rules and conventions may provide the necessary processes that are capable of being applied to inputs to create outputs.  Accounting, billing, payroll and other administrative systems typically are not processes used to create outputs.

  • Output: The result of inputs and processes applied to those inputs that provide or have the ability to provide a return in the form of dividends, lower costs or other economic benefits directly to investors or other owners, members or participants.

To be capable of being conducted and managed for the purposes defined, an integrated set of activities and assets requires two essential elements: inputs and processes applied to those inputs, which together are or will be used to create outputs.

However, a business need not include all of the inputs or processes that the seller used in operating that business if market participants are capable of acquiring the business and continuing to produce outputs, for example, by integrating the business with their own inputs and processes.


Assuming A acquires majority shareholding of a pharmaceutical entity, which comprises:

  1. Three patents, two trademarks, a small plant and 4 machineries.

  2. Scientists and skilled labor that manufactures and distributes its produce to its customer portfolio.

  3. Generates commensurate net cash inflows distributed as dividends to its current shareholders or reinvested in research and development.

This entity is a business.

Assume A acquires majority shareholding of a pharmaceutical entity, that does not own any plant, machineries, employs only limited administrative staff and owns one patent. This entity does not constitute a business, and its purchase is treated as one of an intangible non-current asset. No goodwill arises from such a transaction.

Queries, comments, are welcome at [email protected]

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