Business Combinations and Related Disclosures

When performing a group audit, one can become so involved in verifying the detailed consolidation workings that one may omit to specifically consider the impact of business combinations. The relevant financial reporting framework establishes principles and requirements for the recognition, measurement and disclosure of business combinations by the acquirer during the financial reporting period. It is important that the auditor verifies whether business combinations are correctly dealt with in terms of the requirements.

Accounting for business combinations

IFRS for SMEs Section 19 para 19.6 refers to the application of the purchase method for accounting for business combinations. IFRS 3 para 4 refers to the application of the acquisition method. However, the main principles of these methods are similar:

  1. Identify the acquirer
  2. Determine the acquisition date
  3. Recognise and measure the assets acquired, liabilities assumed and any non-controlling interest
  4. Recognise and measure goodwill.

The auditor must verify each of these elements of all business combinations and obtain sufficient appropriate evidence to support conclusions made. This does not only entail obtaining the information from management and reperforming their calculations, but also verifying the pertinent facts of the business combination against relevant supporting documentation.

These procedures may have to be performed earlier than the annual audit, when reporting on reports relating to the business combination for purposes of stock exchange responsibilities.

The auditor must identify the entity that obtains control of another entity based on the requirements and guidance of IFRS for SMEs Section 9 or IFRS 10 to identify the acquirer, and verify whether management identified the acquirer correctly. The principles of business combinations require that two businesses combine, which is not always an obvious conclusion when shares of one entity are acquired by another. The acquired entity may not qualify as a business, in which case it will be identified as the acquirer for reporting purposes.

Similarly, the acquisition date, which is the date on which the acquirer obtains control over the other entity, must be verified based on the evidence obtained to ensure that management accounted for the acquisition using the correct acquisition date.

IFRS for SMEs Section 19 and IFRS 3 include specific requirements for the recognition and measurement of identifiable assets acquired, liabilities assumed and any non-controlling interests. The auditor must consider these recognition and measurement requirements and ensure that the audit documentation adequately reflects this, including explanations of the thought processes applied to verify compliance. Subsequently, the verification of the recognition and measurement of goodwill or a gain from a bargain purchase flows from this.

Also, don’t forget subsequent measurement and accounting, especially where there are changes in any of the elements involved.

Only through applying the appropriate level of professional scepticism and questioning management may the auditor identify reverse takeovers incorrectly accounted for, potential manipulation of acquisition dates, and unsupported values for assets, liabilities and goodwill. The engagement of an IFRS expert normally takes place under these circumstances and is advisable.


After the detailed verification of the business combinations is complete, the auditor must not forget the presentation assertion. This entails obtaining audit evidence about whether the disclosures made for business combinations in the financial statements are complete, valid and accurate.

IFRS for SMEs Section 19 para 25 specifies disclosures required for business combinations during the reporting period, and para 26 lists the required disclosures for all business combinations. Similarly, IFRS 3, paras 59–63, include the disclosure requirements for entities applying IFRS.

The audit documentation should clearly reflect how the relevant disclosures are verified. Simply indicating ‘yes’, ‘no’ or ‘not applicable’ in a disclosure checklist may not be enough for this purpose. The considerations and reasoning supporting these answers need to be provided.

Further audit considerations

One can see from the matters described that there are several elements to consider and include in the audit working papers when verifying business combinations.

It is advisable to develop adequately detailed working paper templates that incorporate and address the classification, recognition, measurement and disclosure requirements. For example, copy the text of the accounting framework requirements into the working paper, as well as the disclosures made in the financial statements, showing comparisons and audit procedures to ensure that classification, recognition, measurement and disclosure requirements have been complied with, and include comments to explain the resolution of differences.

In summary

Audit work must reflect how all relevant requirements from the relevant accounting framework were considered and verified for business combinations. It is easy to overlook some of the elements when working under pressure, due to tight deadlines.

LEAF can assist firms with performing thorough file reviews, providing practical advice, reviewing methodology design, designing audit working paper templates, and providing staff training on the relevant requirements and procedures.


  1. IFRS 3, Business combinations
  2. IFRS for SMEs, Section 19, Business combinations and goodwill.

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