Business combinations (i): groups, IFRS 10 and IFRS 3

A company often grows by buying other companies. The buyer and the bought company stay separate in law, but in practice they work as one business. If the buyer only shows “investment in subsidiary” on its own statement of financial position, readers learn almost nothing. Group accounts fix this by adding the two sets of figures together as if they were one entity.

Two standards set the rules: International Financial Reporting Standard (IFRS) 10 says when a group exists and how to prepare consolidated statements, and IFRS 3 says how to account for the purchase itself.

This topic covers the nature of a group, the control test, when consolidation is required or exempt, investment entities, the acquisition method, the cost of the combination, the fair values of the net assets acquired, goodwill and bargain purchases. The next topic covers the consolidation technique and the testing of goodwill. Both November 2025 Question 1 and May 2026 Question 1 were group questions.

Key terms in plain English

Syllabus check

IFRS 10 and IFRS 3 are examinable under syllabus area C. This topic covers:

• the definitions of parent, subsidiary and control, and the exemptions;
• the acquisition method, the cost of a combination and the measurement of assets and liabilities acquired;
• goodwill, the choice of NCI measurement and bargain purchases.

CAMA 2020 and group accounts

The Companies and Allied Matters Act 2020 (CAMA 2020) requires statements that follow IFRS and give a true and fair view.

The nature of a group

The parent’s own statement of financial position shows “investment in subsidiary, at cost”. A parent whose main assets are shares in subsidiaries is often called a holding company. Users of its statements cannot judge the business from that one line. Consolidated statements present the assets, liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries as those of a single economic entity.

The group is one economic unit, even though each company is a separate legal entity.

IFRS 3 governs the initial accounting for an acquisition and the calculation of goodwill. IFRS 10 governs the ongoing consolidation: uniform accounting policies, line-by-line addition, elimination of unrealised profit on intra-group transactions, and cancellation of intra-group balances. It also covers changes in ownership and disposals.

Control

An investor controls an investee only if it has all three of these:

1. Power over the investee: existing rights that give it the current ability to direct the relevant activities (those that significantly affect the returns).
2. Exposure, or rights, to variable returns from its involvement.
3. The ability to use its power to affect the amount of those returns.

Power arises from rights. It does not have to be exercised. Only substantive rights count, meaning rights the holder has the practical ability to exercise. A right that needs 30 days’ notice can still be substantive if the holder can exercise it when decisions are needed.

Situations where control exists

• More than 50% of the voting rights, held directly or through other subsidiaries (a sub-subsidiary is also a subsidiary of the top parent). An 80% holding gives full control, and the other 20% is the non-controlling interest.
• Less than 50%, in some cases. Example: A holds 45% and the remaining shares are held by many investors, none above 1%. A can probably direct the company (de facto control). Another example: A holds 45% and a bank holding another 10% has agreed to vote as A directs.
• Rights from an option. A currently exercisable, deeply in-the-money option to acquire a majority can be a substantive right that gives power.

If two or more investors must act together to direct the relevant activities, none controls alone. Each accounts for its interest under IFRS 11, International Accounting Standard (IAS) 28 or IFRS 9 (see the topic on associates and joint ventures).

Who must consolidate, and the exemptions

A parent must present consolidated statements and must include all subsidiaries from the date control is gained to the date it is lost. The parent need not consolidate only if it meets all of these:

1. It is a wholly owned subsidiary of another entity, or a partly owned subsidiary whose other owners agree it need not.
2. Its debt or equity is not traded in a public market.
3. It does not file its statements with a securities commission to issue instruments in a public market.
4. Its own parent (or ultimate parent) publishes consolidated statements for public use that comply with IFRS.

None of these is a reason to leave out a subsidiary: its activities are different from the parent’s, obtaining the information is costly or slow, or it operates under severe long-term restrictions (if the restrictions are so severe that control is lost, it is no longer a subsidiary). A subsidiary acquired with a view to resale is treated as held for sale under IFRS 5.

Investment entities

An investment entity obtains funds from investors to provide them with investment management services, commits that its purpose is returns from capital growth, investment income or both, and measures substantially all its investments on a fair value basis. Typical features are more than one investment, more than one investor, unrelated investors, and equity interests. It does not consolidate the investees it controls.

It measures them at fair value through profit or loss under IFRS 9. A subsidiary that provides services related to its investment activities is still consolidated. If the investment entity is itself a subsidiary, its parent consolidates it in the normal way.

The acquisition method

1. Identify the acquirer. Usually the larger entity, the entity that transfers cash or incurs liabilities, or the entity that issues equity. In a reverse acquisition the issuer is the acquiree. Other indicators: whose owners hold most of the voting rights, who can appoint the governing body, whose management dominates, and who pays a premium.
2. Fix the acquisition date, the date the acquirer obtains control. It is usually the closing date, but may be earlier or later.
3. Recognise and measure the identifiable assets acquired, the liabilities assumed and any non-controlling interest.
4. Recognise and measure goodwill or a gain from a bargain purchase.

IFRS 3 does not apply to combinations of entities under common control, such as group reconstructions. Those follow an accounting policy developed under IAS 8.

The cost of the combination

Consideration transferred is the sum of the acquisition-date fair values of the assets transferred, the liabilities incurred to the former owners, and the equity instruments issued.

• Shares issued: valued at the market price on the acquisition date, not the later issue date.
• Assets given: remeasured to fair value, with any gain or loss in profit or loss.
• Transaction costs (advisers, lawyers): expensed when incurred and disclosed. The cost of arranging borrowing to finance the deal is deducted from the debt and spread by the effective interest rate (IFRS 9).
• Deferred consideration: discounted to present value at the acquisition date. The discount is unwound as a finance cost.
• Contingent consideration: recognised at fair value at the acquisition date even if payment is not probable. If it is a liability (cash or debt), it is remeasured to fair value at each reporting date with the change in profit or loss. If it is equity, it is not remeasured and later settlement is an equity transaction. Under the old rules, increases were added to goodwill. They are not now.
• Share options given to the previous owners to stay on are not part of the consideration. They are post-acquisition employment costs under IFRS 2.

Recognising and measuring what is acquired

The acquirer recognises, separately from goodwill, the identifiable assets, the liabilities and the NCI, if they meet the definitions of assets and liabilities in the Conceptual Framework at the acquisition date. This can include assets that the acquiree never recognised, such as a brand it built itself. For the buyer, the brand is a purchased asset. Everything is measured at fair value at the acquisition date.

Particular points

• Contingent liabilities of the acquiree are recognised at fair value if they are a present obligation, even if payment is not probable. Contingent assets are not recognised.
• Restructuring after the acquisition is not a liability at the acquisition date, so no provision is made. This stops an acquirer from creating a provision and releasing it later to smooth profits.
• Exceptions to the measurement rule: deferred tax (IAS 12), employee benefits (IAS 19), indemnification assets (mirror the related liability), reacquired rights (measured over the remaining contract term), share-based payments (IFRS 2) and assets held for sale (IFRS 5). Lease classification (IFRS 16) and insurance contract classification (IFRS 17) are set at contract inception.
• Measurement period: goodwill may be provisional. It is finalised when the acquirer has the information it needs, within one year of the acquisition date. Adjustments for facts that existed at the acquisition date change goodwill.

Goodwill and bargain purchases

Goodwill = consideration transferred + NCI + fair value of any previously held interest − net identifiable assets at the acquisition date.

The NCI is measured at acquisition, by choice for each combination, either at its proportionate share of the net identifiable assets (partial goodwill) or at fair value (full goodwill). Under the second choice the goodwill includes the NCI’s share.

If the result is negative, it is a bargain purchase. The acquirer must first check that it has found and measured all assets and liabilities, the NCI and the consideration. Any amount left is a gain in profit or loss on the acquisition date, attributed to the acquirer.

The rules in more depth

Why all subsidiaries are consolidated

Leaving out a subsidiary because it is different hides assets and debts. Users need the whole group to judge it.

Why transaction costs are expensed

They are payments for services, not part of the price paid to the owners of the business. They do not create an asset that the group holds.

Why contingent consideration is at fair value from day one

An obligation to pay more if profits are high is part of the price. Ignoring it makes the acquisition look cheaper.

Why no restructuring provision

The acquirer has not yet committed to restructure on the acquisition date. A plan is not a past event.

Effect on analysis

Goodwill and acquired intangibles can be a large part of group assets. Analysts compare them with equity and look at later impairments.

Worked examples

1. Cost = ₦300,000 + 10,000 × ₦40 = ₦700,000.
   The price on the issue date is ignored.
2. NCI = 20% × ₦800,000 = ₦160,000.
3. Goodwill = ₦700,000 + ₦160,000 − ₦800,000 = ₦60,000.
   (The same goodwill comes from ₦700,000 − 80% × ₦800,000 − ₦640,000.)
4. The ₦80,000 costs are expensed in profit or loss.
5. If the NCI had a fair value of ₦170,000, goodwill would be ₦700,000 + ₦170,000 − ₦800,000 = ₦70,000.

1. Present value.
   ₦1,000,000 ÷ 1.10² = ₦826,446.
   This is the cost on the acquisition date.
2. Year 1 unwinding = ₦826,446 × 10% = ₦82,645, charged as a finance cost.
   The liability becomes ₦909,091.

1. Cost = ₦300,000 + ₦60,000 = ₦360,000, even if payment is not probable.
2. Year 4: Dr profit or loss ₦20,000; Cr contingent consideration liability ₦20,000. Goodwill is not changed (unless it is a measurement-period adjustment for facts at the acquisition date).
3. If the contingent consideration were payable in X’s shares (equity), it would not be remeasured.

1. (a) A has 55% of the votes it can use, so A controls B. B is a subsidiary.
2. (b) A probably controls B (de facto), because it is unlikely that enough small holders will vote together against A.
3. (c) No one controls D alone. D is a joint arrangement and each investor accounts under IFRS 11, IAS 28 or IFRS 9.

How to score full marks

• Apply the control test in three parts, and say which part fails if control does not exist.
• For the cost of acquisition, list each item and its measurement: shares at the acquisition-date price, deferred consideration discounted, contingent consideration at fair value.
• Expense transaction costs and say why.
• For fair values, list adjustments one by one and give the double entry or working.
• Use the full goodwill formula and state the NCI measurement choice.
• For a bargain purchase, state the reassessment step before the gain.

Common mistakes in the exam

• Adding transaction costs to the cost of investment.
• Valuing shares issued at the issue-date price.
• Ignoring contingent consideration because payment is unlikely.
• Adding increases in contingent consideration to goodwill.
• Creating a restructuring provision at acquisition.
• Using book values instead of fair values.
• Leaving out unrecognised intangibles such as a brand.
• Excluding a subsidiary because its business is different.

Quick revision

• Control: power, variable returns, link between them. Substantive rights only.
• Exempt only if all four conditions are met. Investment entities use fair value.
• Cost: assets transferred, liabilities incurred and shares issued, all at acquisition-date fair value.
• Expense transaction costs. Discount deferred consideration. Contingent consideration at fair value and remeasured in profit or loss.
• Goodwill = consideration + NCI + previously held interest − net assets at fair value.
• Bargain purchase: reassess, then a gain to the acquirer.
• CAMA 2020: ss. 377(1), 378, 379 to 381, 374(1), 385, 404(7).

Practice questions

These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.

Recall check: multiple choice

The real ICAN paper has no multiple-choice section. These questions are for quick recall. The written questions that follow are closer to the exam.

Written questions

Model answers

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