This step, often referred to as the ‘purchase price allocation’, can be a long, complex and expensive process because fair valuations need to be obtained.
At acquisition date, the acquirer recognises, separately from goodwill, all identifiable assets acquired, all liabilities assumed, as well as any non-controlling interests in the acquiree. This could result in the acquirer recognising assets and liabilities that the acquiree has not recognised in its own financial statements (e.g., brand names, patents, customer relationships and contingent liabilities).
Identifiable assets acquired and liabilities assumed are only recognised if they meet the definition of an asset or liability at acquisition date. Therefore, plans to restructure the acquired business, or terminate the acquiree’s employees, are not included as part of the liabilities assumed, but rather as post-combination expenses.
The acquirer must also pay attention to what was acquired or settled as part of the business combination, and what was a result of a separate transaction, for example:
- Settling a pre-existing relationship between the acquirer and the acquiree
- Remunerating employees or former owners of the acquiree for future services
- Reimbursing the acquiree or former owners for paying the acquirer’s acquisition-related costs.
Finally, acquirers need to ensure that all assets and liabilities recognised are properly classified or designated based on contractual terms at the acquisition date.
Identifiable assets acquired and liabilities assumed are generally recognised at their acquisition date fair values, however, there are a few exceptions, such as for measuring income taxes, employee benefits, leases, certain share-based payment transactions and assets held for sale, which are accounted for in accordance with the requirements of the specific standards identified in IFRS 3.
Non-controlling interests are measured at either:
- Fair value, or
- The acquiree’s proportionate share in the recognised amounts of the acquiree’s identifiable net assets.