Financial Reporting Standard 3 Business Combinations (FRS 3) replaces FRS 122₂₀₀₄ Business Combinations. The IFRS also replaces the following Interpretations:

[Reason: MASB has not adopted SIC-9, SIC-22 and SIC-28]

IAS 22 permitted business combinations to be accounted for using one of two methods: the pooling of interests method or the purchase method. Although IAS 22 restricted the use of the pooling of interests method to business combinations classified as uniting of interests, analysts and other users of financial statements indicated that permitting two methods of accounting for substantially similar transactions impaired the comparability of financial statements. Others argued that requiring more than one method of accounting for such transactions created incentives for structuring those transactions to achieve a desired accounting result, particularly given that the two methods produce quite different results.

These factors, combined with the prohibition of the pooling of interests method in Australia, Canada and the United States, prompted the International Accounting Standards Board to examine whether, given that few combinations were understood to be accounted for in accordance with IAS 22 using the pooling of interests method, it would be advantageous for international standards to converge with those in Australia and North America by also prohibiting the method.

IAS 22 included a benchmark and an allowed alternative treatment for the initial measurement of the identifiable net assets acquired in a business combination, and therefore for the initial measurement of any minority interests. This IFRS requires the acquiree's identifiable assets, liabilities and contingent liabilities recognised as part of allocating the cost of the combination to be measured initially by the acquirer at their fair values at the acquisition date. Therefore, any minority interest in the acquiree is stated at the minority's proportion of the net fair values of those items. This is consistent with IAS 22's allowed alternative treatment.

There is no change from the previous requirement in FRS 122₂₀₀₄ with regard to the measurement of minority interest. FRS 122₂₀₀₄ prescribed that minority interest should be measured at its proportionate share of fair values of identifiable assets and liabilities of the acquiree that are included in the consolidation, which is the allowed alternative treatment in IAS 22.

Subsequent accounting for goodwill

This FRS requires goodwill acquired in a business combination to be measured after initial recognition at cost less any accumulated impairment losses. Therefore, the goodwill is not amortised and instead must be tested for impairment annually, or more frequently if events or changes in circumstances indicate that it might be impaired. IAS 22 required acquired goodwill to be systematically amortised over its useful life, and included a rebuttable presumption that its useful life could not exceed twenty years from initial recognition.

[Reason: FRS 122₂₀₀₄ excluded the section on accounting for goodwill.]

Excess of acquirer's interest in the net fair value of acquiree's identifiable assets, liabilities and contingent liabilities over cost

This FRS requires the acquirer to reassess the identification and measurement of the acquiree's identifiable assets, liabilities and contingent liabilities and the measurement of the cost of the combination if, at the acquisition date, the acquirer's interest in the net fair value of those items exceeds the cost of the combination. Any excess remaining after that reassessment must be recognised by the acquirer immediately in profit or loss. In accordance with IAS 22, any excess of the acquirer's interest in the net fair value of the identifiable assets and liabilities acquired over the cost of the acquisition was accounted for as negative goodwill as follows:

[Reason: FRS 122₂₀₀₄ excluded the section on accounting for goodwill.]

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