Business combinations (ifrs 3) - Measurement period and adju...

Learning Outcomes

After reading this article, you will be able to explain the concept of the measurement period in IFRS 3, identify when provisional amounts and adjustments are applied in business combinations, and correctly account for retrospective changes affecting identifiable assets, liabilities, and goodwill. You will also distinguish between changes that qualify as measurement period adjustments and those that do not.

ACCA Strategic Business Reporting (SBR) Syllabus

For ACCA Strategic Business Reporting (SBR), you are required to understand how IFRS 3 addresses uncertainties at the acquisition date and the correct accounting treatment of subsequent changes.

• Explain the need for provisional (estimated) values at the acquisition date if information is incomplete
• Apply the rules on the measurement period and retroactive adjustments to provisional amounts
• Account for the impact of new information on the acquisition-date values of identifiable assets, liabilities, and goodwill
• Distinguish between changes affecting the measurement period and changes that are post–acquisition events
• Recognize disclosure requirements relating to the measurement period

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. What is the maximum length of the 'measurement period' under IFRS 3 after a business combination?

2. True or False? All changes to the fair value of acquired assets discovered within the measurement period must be amended retrospectively to acquisition date.

3. Which of the following is NOT a measurement period adjustment?
   1. Discovery of additional information about an asset's condition at the acquisition date
   2. Settlement of litigation related to pre-acquisition events after the measurement period ends
   3. Receipt of new evidence, within the measurement period, changing an estimate made at acquisition

4. Briefly explain how a measurement period adjustment affects goodwill.

Introduction

In a business combination, it is often not possible to determine final fair values for all identifiable assets and liabilities of the acquiree by the acquisition date. IFRS 3 allows provisional values to be used initially, while giving acquirers up to twelve months—the measurement period—to obtain further information. During this time, retrospective adjustments may be made to acquisition-date values, which can impact goodwill and the consolidated financial statements. A clear understanding of when and how to adjust these figures is important for accurate and compliant reporting.

Key Term: measurement period
The timeframe (not exceeding twelve months from the acquisition date) in which an acquirer may retrospectively adjust provisional amounts in the business combination accounting, based on new information about facts and circumstances that existed at the acquisition date.

Key Term: provisional amounts
Temporary values assigned at the acquisition date to identifiable assets, liabilities, or non-controlling interest where final fair values cannot be determined. These are subject to retrospective adjustment during the measurement period.

Key Term: measurement period adjustment
A retrospective revision to acquisition-date amounts, made if new information emerges during the measurement period about conditions that existed at that time. The adjustment amends previously reported figures as if the new information had been available from the start.

Measurement Period in Business Combinations

Provisional Amounts and the Need for Adjustment

When a business is acquired, IFRS 3 requires identifiable assets and liabilities to be recorded at fair value at acquisition. In practice, obtaining all required inputs and valuations by that date can be challenging, especially where assets are complex or litigation is unresolved. In these cases, provisional amounts are used, which must be finalized as soon as sufficient information becomes available.

Attributes of the Measurement Period

• The measurement period starts on the acquisition date and cannot exceed twelve months.
• It allows the acquirer to gather information about facts and circumstances that existed at the acquisition date.
• Only adjustments that relate to those acquisition-date conditions qualify.

Exam Warning Do not confuse adjustments for facts that existed at the acquisition date (measurement period adjustments) with changes that relate to post-acquisition events. Only the former are adjusted retrospectively.

Retrospective Adjustments

If, during the measurement period, the acquirer obtains new data about the acquisition-date fair values or other previously provisional measures, IFRS 3 requires retrospective restatement as if the new data had been available from the start. This can lead to changes in:

• The fair value of individual assets and liabilities
• The value of non-controlling interest
• The amount of goodwill or gain on bargain purchase

The opening balances of the statement of financial position—including goodwill—are remeasured from the acquisition date, and prior period figures are restated if affected.

Limitations

Adjustments are only allowed if they:

• Provide information about conditions existing at the acquisition date
• Occur within twelve months from the acquisition date

Any changes discovered after the measurement period, or relating to subsequent events, are not measurement period adjustments. They are treated under the relevant IFRS (e.g., as changes in estimates or corrections of errors).

Worked Example 1.1

AxeCo acquired 75% of BladeCo on 1 February 20X5. At acquisition, the fair value of a legal claim against BladeCo was uncertain, so a provisional liability of $1 million was recognized. In December 20X5, before the twelve-month period was over, new evidence confirmed the claim should have been recognized at $2 million. The final valuation is obtained in January 20X6.

Requirement: Explain how AxeCo should account for the adjustment.

Answer:
The $1 million increase relates to conditions at the acquisition date and was identified within the measurement period. AxeCo revises the acquisition-date liability to $2 million and adjusts opening balances and goodwill retrospectively. Comparative figures for 20X5 are restated as if the final value had been known at acquisition.

Worked Example 1.2

Dove Ltd acquired 100% of Finch Ltd on 1 July 20X6. Some intangible assets were provisionally valued at $10 million because independent valuation could not be obtained immediately. Nine months later, Dove receives a valuation indicating the actual fair value at acquisition date was $12 million.

Requirement: What is the accounting treatment?

Answer:
Since the more accurate fair value was determined using information that existed at the acquisition date and within twelve months, Dove Ltd increases the intangible asset and reduces goodwill by $2 million retrospectively as of 1 July 20X6. If affected, any prior period figures are restated.

Worked Example 1.3

On 1 January 20X8, Oak Plc acquires 60% of Elm Ltd. At acquisition, an item of inventory is valued provisionally at $500,000. After the measurement period ends, it becomes clear (due to newly arisen market data) that the value would have been $550,000 at acquisition.

Requirement: Should Oak Plc retrospectively adjust the acquisition-date value?

Answer:
No. The information became available after the measurement period. IFRS 3 prohibits retrospective changes after the measurement period ends. Oak Plc accounts for this as a change in estimate under IAS 8, affecting only the current and future periods.

Disclosures

IFRS 3 requires disclosure of:

• The reasons why provisional amounts were used
• The items affected
• The nature and amount of measurement period adjustments recognized in the current reporting period

Revision Tip Always verify the timing and source of new information before making a measurement period adjustment—only adjust if it relates to acquisition-date facts and is within twelve months.

Summary

Provisional amounts are used in initial business combination accounting when information is incomplete at the acquisition date. IFRS 3 allows adjustments to these figures retrospectively within the twelve-month measurement period if new details about acquisition-date conditions become available. All such adjustments require restatement of opening balances and affect goodwill or gain on bargain purchase, ensuring the consolidated financial statements faithfully reflect the combination as if all facts were known at the start.

Key Point Checklist

This article has covered the following key knowledge points:

• Explain why provisional amounts may be necessary in business combinations
• Define the measurement period and its twelve-month limit
• Identify when retrospective adjustments to acquisition-date figures are required
• Distinguish measurement period adjustments from post-acquisition changes
• Account for the impact of measurement period changes on goodwill
• State disclosure obligations for provisional amounts and their adjustments

Key Terms and Concepts

• measurement period
• provisional amounts
• measurement period adjustment