Introduction

Accounting for acquisitions and mergers has long been a controversial area of accounting. In particular, there have been disputes about whether the technique of merger accounting should be permitted, and about the nature and accounting treatment of goodwill.

Changes in US accounting rules in this area shortly before the IASB was formed led to changes in IFRS; IFRS 3 ‘Business combinations’ was published in March 2004 and is the extant standard on this topic (with a revised version shortly to supersede it – see below). In a nutshell, merger accounting is no longer permitted in IFRS, although the scope of IFRS 3 does not extend to group reconstructions where the use of merger accounting has been, and continues to be, prevalent in the UK. Goodwill is no longer amortised; IFRS 3 requires goodwill to be carried at cost less any accumulated impairment losses.

IFRS 3 was the output of Phase I of the IASB project on business combinations. Phase II, which was a joint project with the FASB (the US standard setter), sought to improve and align further the accounting for business combinations. Phase II was recently completed and a revised version of IFRS 3 was published in January 2008. It is effective for business combinations for which the acquisition date is on or after the start of the accounting period beginning on or after 1 July 2009. For a company with a calendar reporting period, it is effective for business combinations made on or after 1 January 2010. Some of the changes to IFRS 3 are controversial and reflect a desire for the standard to move away from the parent entity perspective to the economic entity concept.