To determine how IFRS 3 should be leveraged to acquire an asset(s), audit firms in Dubai must first determine if the asset(s) acquired represents a business combination. Suppose the conclusion is that the asset is a business combination. In that case, the auditors must ensure the business combination falls under IFRS 3 scope.
Determining a Business Combination
IFRS defines “business combination” instead of typical phrases like acquisition, takeover, or merger because the goal is to incorporate all the transactions which the acquirer has complete control over an acquire in all ways.
Therefore, a business combination is a transaction or an event where an investor entity (the acquirer) attains control of one or several businesses.
A company buying a controlling interest in another Dubai entity is a business combination. But, a business combination can be structured, and an organization can attain control of that structure in various ways.
Read also: Auditing Firms In Dubai Overview Of IFRS 9
The Investee: A Business?
Audit services in Dubai representing companies should, according to IFRS 3, find out whether assets acquired by the company and liabilities constitute a business. Suppose the assets and liabilities don’t qualify to be termed business. In that case, the auditors must account for the transaction as an asset acquisition.
IFRS 3 provided a detailed explanation of the meaning of a business. Note that the standard offers direction on a new definition of a business as of October 2018, which audit companies in Dubai & UAE should apply to business combinations. In this guidance, the acquisition date is on or after the start of the initial annual reporting period as of January 1st, 2020, and asset acquisitions that took place after the start of that period.
Also, business combination accounting does not relate directly to acquiring asset(s) that don’t constitute a business. The difference between an asset acquisition and a business combination is crucial since the accounting for an asset purchase varies from business combination accounting in various fundamental respects.
Determining If Control Has Been Attained
Again, a business combination is characterized by acquiring another company’s control. The company with the new control is called “the acquirer.” IFRS 3 and IFRS 10 Consolidated Financial Statements offer a detailed explanation on determining whether an entity in Dubai & UAE has attained control.
A majority of voting rights is usually necessary to obtain control of an investee. Consequently, control is generally achieved by possessing a majority of the shares that give voting rights (or, if some voting rights have already been acquired, acquiring more voting rights). Control typically arises through ownership of assets in deals where the acquired business is not a separate legal entity (a trade and asset deal).
Other means of controlling can also be used – and some of these require careful analysis and judgment. IASB and IFRIC guidance on control should be considered next. This guidance is applicable for assessing whether the control is acquired and for addressing questions relating to when and which entity obtains control.
Is The Business Combination in Line with IFRS 3
- There are three exceptions to IFRS 3’s application to business combinations deemed to be such:
- The financial statements of the joint arrangement itself show the formation of the joint arrangement
- Under common control are entities or businesses (a common control combination).
- Investment entities that acquire investments in subsidiaries must be measured at fair value through profit or loss (without exception) under IFRS 10.
There is more information in the document regarding these three areas.
The Future of IFRS 3 and What Audit Firms in Dubai Should Expect
A research project is being conducted by the International Accounting Standards Board (IASB) on business combinations under common control at the time of this writing. A discussion paper published by the IASB in November 2020 acknowledges that the lack of specific requirements has resulted in various practices.
As companies strive to achieve their growth objectives, mergers and acquisitions are becoming more common. There are challenging requirements for these transactions in IFRS 3’s Business Combinations.
Our goal with this article is to provide some insights into IFRS 3 that you may find helpful. Should you wish to discuss any of the points raised, please get in touch with your trusted partner, “Audit Firms In Dubai”, a leading audit service in Dubai and UAE.
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Theshani is a Senior auditor and has experience of 4+ years in providing audit assurance and advisory services to a wide range of industry clients. She continues to stay on top of ever-changing industry dynamics by continuously learning and developing expertise.