• Discussed at November 2001 IASB Meeting
• Discussed at April 2002 IASB Meeting
• Added to IASB Agenda in April 2002
• Discussed at May 2002 IASB Meeting
• Discussed at June 2002 IASB Meeting
• Discussed at July 2002 IASB Meeting
• Discussed at September 2002 IASB Meeting
• Discussed at October 2002 IASB Meeting
• Discussed at November 2002 IASB Meeting
• Discussed at December 2002 IASB Meeting
• Discussed at January 2003 IASB Meeting
• Discussed at February 2003 IASB Meeting
• Discussed at March 2003 IASB Meeting
• Discussed at April 2003 IASB Meeting
• Discussed at May 2003 IASB Meeting
• Discussed at June 2003 IASB Meeting
• Discussed at September 2003 IASB Meeting
• Discussed at October 2003 IASB Meeting
• Discussed at November 2003 IASB Meeting
• Discussed at February 2004 IASB Meeting
• Discussed at April 2004 IASB Meeting
• Discussed at May 2004 IASB Meeting
• Discussed at June 2004 IASB Meeting
• Discussed at July 2004 IASB Meeting
  
• Discussed at September 2004 IASB Meeting
• Discussed at October 2004 IASB Meeting
• Discussed at December 2004 IASB Meeting
• Discussed at February 2005 IASB Meeting
• Discussed at March 2005 IASB Meeting
• Exposure Draft issued 30 June 2005 proposing amendments to IFRS 3 and related amendments to IAS 27 and IAS 37
  Click for IASB Press Release (PDF 56k).
• Discussed at October 2005 IASB Meeting
• Discussed at November 2005 IASB Meeting
• Discussed at January 2006 IASB Meeting
• Discussed at February 2006 IASB Meeting
• Discussed at March 2006 IASB Meeting
• Discussed at April 2006 IASB Meeting
• Discussed at April 2006 Joint IASB-FASB Meeting
• Discussed at May 2006 IASB Meeting
• Discussed at July 2006 IASB Meeting
  
• Discussed at September 2006 IASB Meeting
• Discussed at October 2006 IASB Meeting
• Discussed at December 2006 IASB Meeting
• Discussed at January 2007 IASB Meeting
• Discussed at February 2007 IASB Meeting
• Discussed at March 2007 IASB Meeting
• Discussed at April 2007 IASB Meeting
• Discussed at April 2007 Joint IASB-FASB Meeting
• Discussed at June 2007 IASB Meeting
• Discussed at November 2007 IASB Meeting
• Revised IFRS 3 and IAS 27 issued 8 January 2008. Click for:
  • Information about the Revisions
  • IASB Press Release (PDF 60k)

IAS Plus Newsletter

• September 2005 – Special Global Edition – Proposals Released on Accounting for Business Combinations (PDF 81k)

Phase I - Scope

• Definition of a business combination.
• Method(s) of accounting for a business combination.
• Accounting for goodwill (and negative goodwill) and intangible assets acquired in a business combination.
• Provisions (liabilities) for terminating or reducing the activities of an acquiree.
• Initial measurement of the identifiable net assets acquired in a business combination.
• Date on which equity instruments issued as consideration should be measured.
• Disclosures.
• Transitional provisions.

Click for Information About Phase I of the Business Combinations project.

Phase II - Scope

Application of the purchase method

This involves purchase accounting procedures, including the following:

1. Issues relating to minority interest:

• Whether a minority interest's share of goodwill should be recognised.
  
• Whether the purchase of a minority interest should be treated as the purchase of equity.
  
• Decreases in the parent's ownership interest after a business combination (both with and without loss of control).
• Display of minority interests in the consolidated income statement or statement of changes in equity.

2. Treatment of successive share purchases

3. Issues relating to the measurement of consideration for the acquisition:

• Measurement date for equity securities issued as consideration
  
• Date of acquisition
  
• Whether there should be an adjustment from a quoted market price when determining the value of a block of securities issued as consideration
  
• Treatment of direct costs of the acquisition
  
• Recognition and measurement of contingent consideration.
  
• Should businesses or other non-monetary assets exchanged for an interest in a subsidiary be accounted for at fair value at the date of the transaction or at previous carrying amounts?
• How should any gain or loss arising on the transaction be reported?

4. Issues relating to the measurement of the identifiable net assets acquired:

• Recognition of restructuring provisions. Specifically, whether the recognition criteria set out in IAS 37, Provisions, Contingent Liabilities and Contingent Assets, should be amended,
  
• Deferred revenue. This is a wider issue than recognition of items within a business combination, and this wider context will need to be borne in mind when the issue was considered,
  
• Income taxes. Although IASB and FASB guidance on income taxes will not be reconsidered as part of this project, the project will include the specific issue of the treatment of acquired deferred tax assets that are recognised after the business combination,
  
• Guidance on determining the fair value of liabilities,
  
• Assets expected to be disposed of,
  
• Contingencies of the acquired entity, and
  
• The period in which the allocation of the fair value of the acquisition to identifiable net assets can be revised.
  

Certain issues excluded from Phase I of the Business Combinations project

These include:

• Combinations of entities under common control
• Combinations in which separate entities are brought together to form a reporting entity by contract only without the obtaining of an ownership interest (for example, business combinations in which separate entities are brought together by contract to form a dual listed company).

Tentative Decisions to Date

IASB has indicated general agreement with the following 'working principle' as the basis for addressing application of the purchase method:

Contingent Assets and Contingent Liabilities

The Board has tentatively agreed that:

• Contingent assets and contingent liabilities of the acquiree should be recognised on acquisition at fair value
• Contingent consideration should be recognised at the acquisition date at fair value
• Subsequent adjustments to the measurement of the contingent consideration classified as liabilities should not be treated as adjustments to the cost of acquisition
• Contingent consideration that takes the form of financial instruments that are classified as equity should not be remeasured subsequent to its initial recognition
• The exception in paragraph 1(g) of IAS 39, which excludes contingent consideration from the scope of the standard, should be removed
• Contingent liabilities that are financial instruments should be remeasured in accordance with IAS 39
• Contingent liabilities that are financial instruments but that are outside the scope of IAS 39 should be subsequently remeasured at fair value
• Contingent liabilities that are not financial instruments should be subsequently remeasured at fair value
• Contingent assets that are financial instruments should be remeasured under IAS 39
• Contingent assets that are not financial instruments should be regarded as similar to intangible assets and should be remeasured in the same way as intangible assets under IAS 38, Intangible Assets

Definition of contingent liabilities

The Board discussed the treatment of contingent assets and contingent liabilities. The staff pointed out that the notion of contingency differed between the US standard FAS 5 and IAS 37. However, they concluded that the difference would not lead to a different accounting result in practice and therefore staff proposed not to change the definition in IAS 37. Some Board members did not accept the staff view. They perceived the IAS definition to be conceptually flawed and thought that, if the FASB definition was conceptually superior to the IAS 37 definition, IAS 37 should be amended, even as part of a project on business combinations. By a 12 to 1 majority, the Board decided to change the definition in IAS 37 and to make it consistent with the FASB definition.

Definition of contingent assets

As regards contingent assets the Board briefly touched on the issue but did not reach a decision on whether to copy the FASB definition. Several Board members proposed not to clean up all the persisting inefficiencies within the Business Combinations project but to deal with them as part other projects.

Recognition and Measurement Issues Related to Acquired Assets and Assumed Liabilities

How to determine fair value

The Board has previously agreed that acquired assets and liabilities should be measured at their fair values. The staff proposed to apply a three stage hierarchy as follows:

1. If there is an observable market transaction, the amount of cash exchanged for the same or similar item should be used.

2. If market values are not available, an enterprise should use an estimation technique (such as present value, option pricing models, or appraisals) using market-based assumptions with the objective of determining the item's fair value.

3. If neither market values nor market-based assumptions for estimating a value are available, management should use the same estimation techniques as above incorporating information that was not contrary to market-based assumptions.

The Board discussed the measurement hierarchy in length. Several Board members mentioned that the terms 'market' and 'fair value' were not precise enough and would need clarification:

• Which market should be considered when determining a market price (e.g. wholesale/retail; geography)?
• Does fair value include transaction costs?
• Is fair value meant to be an entry or an exit price?

The Board decided by a 10 to 3 majority to pursue the hierarchy principle further. The Board members dissenting were concerned about the practicability of the third stage of measurement. They perceived the principle to be neither precise enough in order to be workable nor leaving room for other measurement attributes such as current replacement costs. The Board directed the staff to explore possibilities of rephrasing the third principle to accommodate the concerns.

Fair value hierarchy

The Exposure Draft for phase II will include a fair value hierarchy (developed in co-ordination with the FASB) as follows:

• Level 1 – fair value should be determined by observable markets.
• Level 2 – fair value should be determined by adjusting observable transactions for similar items.
• Level 3 – fair value should be determined by use of a valuation technique.

The staff has proposed changes to this hierarchy as a result of the FASB deliberations on its fair value measurement project. There is concern that the hierarchy in IAS 39 could appear to be different from the proposed hierarchy in business combinations. However, the Board noted that each hierarchy is specific to the transactions it relates to (business combinations versus financial instruments). They should be consistent in theory.

The Board agreed to accept the changes to the hierarchy. However, it was noted that in Wednesday's discussion of IAS 39, the staff has proposed removal of Level 2. If removed in IAS 39, level 2 should also be removed from this proposed standard.

Measurement date for equity securities issued in a business combination

In September 2002, the IASB voted to support acquisition date (the date that control passes) in the interest of convergence with FASB.

Measurement - deferred taxes and pension obligations

The Board agreed that certain items will not be measured at fair value at the time of a business combination: deferred income tax assets and liabilities and benefit plan obligations.

The FASB and IASB have tentatively decided that this project will exclude issues related to the initial recognition and measurement of benefit plan obligations. However, within the scope of the project the Board will consider the measurement where the business combination itself affects the measurement of the post-employment benefit obligations. The Board considered three recommendations in this area, as follows:

• Recommendation 1: The assumptions of the acquirer in respect of future salaries, staff turnover etc should be used where the acquirer has a different assessment of future events to the acquiree. This was agreed by the Board.
• Recommendation 2: If the acquirer will change the plan of the acquiree to provide benefits to employees of the acquiree that are compatible with the benefits provided to its own employees or to curtail or terminate the plan, this should be treated as a post-acquisition event and not affect the measurement on acquisition. The Board supported this recommendation and noted that it differs from the current FASB position.
• Recommendation 3: If the acquirer is required to amend the plan as a condition of the business combination imposed by the owners of the acquiree, this should be included in the cost of acquisition. The Board deferred decision on this issue.

The Board discussed whether the occurrence of a business combination should affect the fair value measurement of acquired assets and liabilities. For example, should the acquirer's credit rating affect the measurement of the acquiree's liabilities assumed. The Board noted that under FASB Concepts Statement 7, the most relevant measure of a liability always reflects the credit standing of the entity obliged to pay. The Board concluded that this requires further study.

Provisions

The Board discussed IAS 37 and the treatment of contingent liabilities on acquisition, including contractual termination benefits (such as golden parachutes) that arise as a result of an acquisition and restructuring provisions. No decisions were reached.

Measurement of employee benefit obligations in connection with an acquisition.

IASB agreed to prepare a memorandum to FASB setting out the IASB's reasoning for not remeasuring such obligations.

Assets held for disposal

The Board noted a FASB decision that acquired assets should be measured at fair value less costs to sell if, at the date of acquisition, the assets meet the criteria in paragraph 32 of FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, for classification as assets held for sale. The IASB believed this arose out of the US "assets held for sale" concept, which does not exist in IAS literature. Consequently the IASB does not plan to follow the same route.

Constructive obligations

These are addressed in IAS 37 but not specifically in FASB Standards (though it is addressed in the FASB Concepts Standards). Members of the IASB Board generally agreed that recognition in an IASB Standard on Business Combinations should be consistent with IAS 37. They suggested that IASB encourage FASB to consider guidance that would be consistent with IAS 37.

Income taxes - net operating loss carryforward

Recognition of a NOL carryforward at the time of a business combination is different under IASB and FASB Standards. This difference can only be addressed as part of a project on accounting for income taxes.

Items whose fair value might be affected by a business combination

The Board discussed whether the fair value of a liability assumed in a business combination should reflect the acquirer's credit rating or the acquiree's credit rating. The Board concluded that, in general, the fair values of all assets and liabilities of the acquiree can be affected by the market's knowledge of a pending business combination. Therefore, in some circumstances depending on observed market adjustments of fair values, the acquirer's credit rating will be reflected in the fair value of an acquired liability.

Inventory

Items of inventory should be measured using a market-based assumption model that incorporates an observable disposition price and market-based calculations of the estimated costs to complete the inventory, including an estimated profit margin and costs to sell.

Allowance for uncollectible amounts

A discussion by the FASB whereby they agreed to provide the following guidance to clarify that recording a loss allowance for the estimated uncollectible amounts is not appropriate at the date of acquisition was noted: "Acquired receivables (including loans) would be measured at fair value at the date of acquisition; thus, a separate allowance for uncollectible amounts would not be established upon initial recognition of those receivables." The Board agreed that this direction would be followed in the IASB project.

Recognition and Measurement of deferred tax assets and valuation allowances

The Board considered whether the goodwill should continue to be reduced for the subsequent recognition of deferred tax benefits acquired in a business combination (as presently required under IAS 12).

The Board decided that the goodwill should not be adjusted for the subsequent recognition of deferred tax benefits. The acquirer recognises a deferred tax asset and the resulting deferred tax income is recognised in the income statement.

Scope - Identifiable Assets and liabilities that did not satisfy the criteria for recognition separately from the Goodwill

The Board's intentions are to adjust the goodwill and they are thinking of a 12 months window. The Staff has to work further on this issue.

Non-Monetary Consideration Exchanged in a Business Combination

In October 2002, the IASB agreed to further discuss the provisions of UITF 31. This interpretation deals with situations in which entity B issues shares to entity A, an unrelated third party, in exchange for A's business or other non-monetary assets and as a result of this transaction becomes A's subsidiary, joint venture or associate.

In January 2003, the Board discussed on the following issues:

• Should A's business or other non-monetary asset exchanged for an interest in a subsidiary, joint venture or associate be accounted for at fair value at the date of the transaction, at previous carrying amount or some combination of the two?
• How should A's gain or loss arising on the transaction be reported?

View 1. The business combination is accounted for at fair value, with the measurement based on either the fair value of the non-monetary consideration paid or fair value of the transaction. Similar to other identifiable acquired assets and assumed liabilities, the non-monetary asset transferred to the acquiree as consideration would be recognised on the date control is obtained, and measured at its fair value at that date. As a result, the full amount of any profit or loss arising on the transfer to the acquiree of the non-monetary asset would be recognised in the consolidated financial statements

View 2. As the first alternative, the business combination is accounted for at fair value with the measurement based on either the faire value of the non-monetary consideration paid or fair value of the business acquired. However, from the consolidated group's perspective the non-monetary asset exchanged is viewed as neither part of the consideration paid nor part of the business acquired. Therefore, the full amount of any profit or loss arising on the transfer to the acquiree of the non-monetary asset is eliminated in the consolidated statements

The Board decided on View 2, because A has the control of B and therefore should not be able to recognise a new basis for the asset with the corresponding gain or loss in the consolidated financial statements.

Earnings per Share

The staff asked the board to consider whether, as a consequence of the decision to report net profit before eliminating minority share of profit, there should be a change in the numerator in EPS. The Board did not support the proposal.

The Board agreed to consider whether adjustments to equity for changes in a parent's controlling interest should impact EPS calculations.

Acquisition of Control By Means Other than Shares

The Board agreed that the exposure draft for Phase 2 will explicitly state that control can pass to an entity by means other than the acquisition of shares and should be accounted for in the same manner as when control is acquired through the acquisition of shares.

The Board agreed similarly that the same result would arise if control was lost when no shares were sold.

Business combinations that are not exchanges of equal values

The Board concluded that if the fair value of the acquirer's interest in the acquiree is less than the consideration it paid for that interest (overpayment), that amount should be recorded as an expense. If the result is an underpayment, that amount is a gain. Several Board members expressed serious concern about this decision, as an amount historically attributed to goodwill could become an expense based on the ability of the entity to use internal synergies to improve the asset. For example, an entity may pay 100 more for an asset then anyone else because of its unique abilities to make more money from the asset than anyone else. However, since the market would not presume those synergies, the entity must write off the overpayment even if it thinks it could return 1,000 more.

Another effect of this decision is whether the distinction between measurement of equity securities issued in a business combination at the agreement date or acquisition date will be important. That is, based on the Board's decision, any change in the market price shares to be issued between the agreement date and the acquisition date would imply the valuation at the acquisition date is not longer valid. Therefore requiring measurement of the net assets acquired to determine the cost of acquisition. The Board also concluded that negative goodwill should never be in the financial statements.

Issues related to noncontrolling interests - disposition of a subsidiary

The Board also discussed issues related to noncontrolling interests and the possibilities for gaming on disposition of a subsidiary that result from a prior IASB decision. Due to time constraints, the Board did not discuss this issue at length. However, the Board noted general agreement with the Staff's proposal (which was not described in any sufficient detail to the observers). Please refer to the minutes of the IASB for further details on this issue.

Attributing a Partially Owned Subsidiary's Excess of Losses to the Controlling and Minority Interests

The Board agreed that a guarantee or other type of arrangement should not change the way losses are attributed between controlling and minority interests. The allocation should be based on the ownership interests.

Business Combination Disclosures

The Board asked its staff to review the wording of the disclosure requirements for contingent liabilities and assets. The issue is whether they should be measured at fair value (as in IAS 39) or at the best estimate of the expenditure required to settle the present obligation at the balance sheet date (as in IAS 37).

Comment Period, Effective Date, and Transition

The Board agreed to propose prospective application for business combinations that take place between the issue date and the effective date, consistent with the proposal in ED 3. The Board also agreed to propose an effective date of 1 January 2006.

Consequential Amendments

The Board agreed:

• Gains or losses on a subsidiary that have been recognised in equity should be included in calculating gain or loss on disposal of the subsidiary.
• Gains and losses on a subsidiary that have been recognised in equity should be 'recycled' (recognised in net profit or loss) when the parent increases or decreases its ownership whether or not the parent losses control.
• Measurement of a deferred tax asset should take into account the tax consequences applicable to the combined entity, with a corresponding adjustment of goodwill. To illustrate, if the estimated amount of a deferred tax asset on the acquired company's books is 80 at the date of acquisition and will be 100 after acquisition because of different assumptions, it should be recognised 100.

Minority interests issues

Full goodwill method

The Board agreed during its November 2002 meeting to use the full goodwill method to recognise goodwill in the acquisition of less than a 100% controlling interest in an acquired entity. If an entity acquires less than a 100% interest in another entity, both the acquirer's and the minority interest's share of goodwill should be recognised. Under IAS 22 currently, only the acquirer's share of goodwill is recognised. To illustrate, if P pays 900 for a 60% interest in S, and on that date the fair value of S's identifiable net assets is 1,200 and the full fair value of S is 1,500, goodwill of 300 will be recognised in consolidation (1,500 - 1,200). Minority interest of 600 will be recognised (40% x 1,500).

Subsequently, the Board redeliberated that decision and the staff proposed several alternatives for discussion.

Five Board members expressed serious concerns with the full goodwill method for various reasons, including reliability of measurement and relevance. One other Board member was still uncertain as to how this could be measured reliably but would not object to the issuance of the Exposure Draft. The Board agreed to retain the full goodwill method (9-4 and 1 abstention) in the current project and to proceed on this basis.

Full goodwill measurement issues

At its November 2002 meeting, the IASB agreed that the full goodwill method should be used to recognise goodwill in the acquisition of less than 100 per cent controlling interest in the acquiree. Under the full goodwill method, all of the goodwill of the acquiree, including goodwill attributable to minority interests, is recognised. The Board discussed several issues that stem from the application of this method when the cost of the acquisition is to be determined by reference to the net assets acquired.

The Board concluded that expected synergies and other benefits from combining the business of the acquiree and the acquirer should enter into the measurement of the fair value of the acquiree – but only up to the level of synergies that would be expected in the market. The synergies should be therefore measured at fair value.

The Board concluded that goodwill should be allocated on a reasonable basis to the controlling and non-controlling interests when the combination is an exchange of equal values. The Board concluded that issues related to the measurement of fair value are not unique to this project and, therefore, it would be inappropriate to provide detailed guidance here. The Board did not discuss where or whether such guidance should be provided.

Accounting and Display

The Board considered the accounting and display issues related to the minority interests and the conclusions were the following:

The Board agreed with the Staff's recommendations on the level of details that should be disclosed for the amounts attributable to the controlling and minority interests for individual line items in the consolidated income statement and statement of changes in equity.

The Board agreed that the losses of a subsidiary should be attributed to both the controlling and minority interests on the basis of their ownership interests. The board also agreed that losses in excess of the minority interests' investment will be attributed to the minority interests and that if losses attributable to the minority interests in excess of their investment are instead attributed to the controlling interests, the future income will be attributed first to the controlling interest to the extent of the excess losses previously attributed to the controlling interest.

Disclosures for Minority Interests

The Board discussed the effects of classifying minority interests on the disclosures to be required. The Board concluded that IAS 1.86 is clear that a reconciliation for minority interest would have to be provided in the statement of changes in equity. The most likely presentation would be an addition of one column in the statement of changes in equity, as illustrated in Appendix A of IAS 1.

Comment Period, Effective Date, and Transition - Minority Interest Decisions

The Board agreed that it will issue two exposure drafts in this project; one related to business combinations and one related to minority interests (amendment of IAS 27). Both EDs will be issued together and will have a 90-day comment period.

The proposed effective date will be 1 January 2006 for both standards. Earlier application will be optional. The requirements would have to be applied retrospectively, unless impracticable. However, all business combinations that occur after the earliest business combination that has been retrospectively restated must also be restated.

Discussion at the IASB's October 2003 meeting

The Board agreed to require disclosure of gains and losses on obtaining or losing control of subsidiaries.

The IASB had previously agreed that when a business combination is not an exchange of equal values, any excess of the consideration paid over the fair value of the acquirer's interest in the net assets acquired (that is, any overpayment) should be recognised in profit or loss at the date of acquisition. The disclosure of an overpayment would implicitly be required by the following disclosure objectives in ED 3, Business Combinations:

• "An acquirer shall disclose information that enables users of its financial statements to evaluate the nature and financial effect of business combinations" (paragraph 65).

• "If in any situation the information required to be disclosed by this [draft] IFRS does not completely satisfy the objectives set out in paragraphs 65, 71 and 73, the entity shall disclose such additional information as is necessary to meet those objectives" (paragraph 76).

The Board agreed to revise the disclosure in paragraph 66(i) of ED 3 to also include a requirement to disclose revenue of the acquiree since the acquisition date.

The staff proposed that:

• The term contingent asset and the existing guidance for such assets are withdrawn from IAS 37 Provisions, Contingent Liabilities and Contingent Assets.

• Phase II should require the recognition of non-monetary assets without physical substance separate from goodwill, if those assets have a separate fair value that can be measured reliably, irrespective of whether those assets satisfy the identifiability criterion in the proposed IAS 38.

The staff noted that this definition defines an asset and consequently the term contingent asset is misleading.

The Board agreed that this is not a definition of a contingent asset but that the contingent asset is the underlying on which the present right depends. The contingent asset would be excluded from assets recognised in a business combination. The present rights referred to above would, however, be intangible assets but may not meet the criteria for separate recognition. In these cases they would be subsumed in goodwill in the business combination. Certain Board members expressed concern that they would not be separately recognised. It was agreed that the staff would investigate this further.

Convergence with FASB

The IASB is working on this project jointly with the US Financial Accounting Standards Board. While the two Boards have reached consistent decisions on the fundamental principles for applying the purchase method, their views have diverged on certain issues. The following issues were identified in November 2002 as areas of current divergence that potentially can be eliminated before the two Boards publish their exposure drafts:

• The treatment of blockage factors in the initial measurement of equity consideration.
• The treatment of amendments to post-employment benefit plans that are a condition of the business combination.
• The treatment of intended changes by the acquirer to employee benefit and other post-retirement benefit plans.
• The treatment of constructive obligations.
• The treatment of an intangible that becomes separable (and therefore eligible for separate recognition apart from goodwill) after the business combination.

At its April 2003 meeting, the Board noted a potential difference with US GAAP regarding whether assets and liabilities that arise as a result of acquisition (such as pension obligations and golden parachute obligations) should be recognised. The Board re-affirmed that all assets and liabilities should be recognised including those that arise at the date of acquisition but asked its staff to explore this further.

Issue related to the full goodwill method

At its September 2003 meeting, the Board considered an issue related to the allocation of the full amount of the goodwill between the controlling and the minority interests in an acquisition of a less than 100% controlling interest in a subsidiary. The Board had already agreed that the goodwill attributable to the controlling interest should be calculated as the difference between the consideration paid for that interest and the controlling interest's share of the fair value of the identifiable net assets acquired. The remainder of the goodwill should be allocated to the minority interests.

The Board tried to clarify how goodwill should be allocated to the controlling and minority interests if:

• no consideration is paid by the acquirer (at the date of the business combination), or
• the consideration paid does not represent the total controlling interest owned because control was obtained as part of a step acquisition.

The Board agreed with the methods the staff proposed but asked the staff to converge with the FASB wording to simplify the understanding and convergence of the two Standards. The staff should come back with redrafting paragraphs but the Board did not change its March meeting position.

The Board considered the allocation of the goodwill impairment losses between the controlling and the minority interests in a cash generating unit that includes a partially owned subsidiary or is a stand alone partially owned subsidiary. The staff proposed that the allocation should be based on the relative carrying amount. The Board agreed with this.

Acquired non-identifiable assets without physical substance

The Board considered whether a non-identifiable asset without physical substance, that does not meet the criteria for recognition separately from the goodwill at the acquisition date, should be subsequently reclassified from the goodwill and recognised separately as an intangible asset if it meets the criteria for separate recognition as a result of an event after the acquisition date in the following limited circumstances:

• The asset meets the criteria for separate recognition within 12 months of the acquisition date, and
• Its fair value at the acquisition date is reliably measurable.

The following examples might fit the above description:

(a) Technology-based items

• Technology developed by the acquiree and nearing the final stage of certification at the date of the acquisition.
• Pending patent for a new drug that has, at the acquisition date, cleared all preliminary clinical trials.

(b) Contract-based items

• Rights arising from a pending operating licence (when the application for the licence was made before the acquisition date) that is granted to the acquiree after the acquisition date.
• Rights arising from a pending broadcasting licence nearing the final stage of approval at the acquisition date.
• Rights arising from the franchise agreement, the terms of which are agreed in principle by the acquiree and the counter party before the acquisition date, but which is finalised and signed soon after the acquisition date.
• Rights arising from a construction, management, service or supply contract, the terms of which are agreed in principle by the acquiree and the counter-party before the acquisition date but which is finalised and signed soon after the acquisition date.

The staff proposed to not separate the intangible asset from the goodwill even if after subsequent events the intangible asset meets the criteria for separate recognition. Some Board members noted that assets would be not amortised, others that it would be caught by an eventual depreciation through the impairment test. Some Board members also noted that this might be affected by the recognition of contingent assets. The Board did not conclude on this subject and the topic will be brought back on the next agenda.

Transition

The Board agreed that in respect of transitional provisions for minority interests held by the entity that were previously controlled the standard should apply on a retrospective basis to:

• The classification and presentation of these minority interests.
• Accounting for decreases, before the effective date of the proposed standard, in a parent's controlling interest in a subsidiary without losing control in that subsidiary: any such losses previously recognised in profit or loss would be reclassified directly to equity.
• Accounting for losses, before the effective date of the proposed standard, that were attributable to minority interests but which exceeded the carrying amount of those interests: any such losses would be reclassified to the minority interests.

The Board agreed that the following should apply on a prospective basis:

• Accounting for a parent's retained ownership in a subsidiary that was disposed of before the effective date of the proposed standard.
• Accounting for acquisitions of minority interests before the effective date of the proposed standard.

The Board previously agreed that deferred tax assets that subsequently met the recognition criteria should be recognised as an adjustment to goodwill. The FASB concluded in these circumstances the adjustment should go to the income statement unless it occurred within one year after the acquisition date and does not relate to a discrete event or circumstance that occurred after the acquisition date and that could not have been foreseen at the acquisition date. The Board agreed to move to the FASB approach.

Discussion at the Joint IASB-FASB Meeting in October 2003

The Boards noted the following issues where each Board had reached tentative conclusions:

Measurement Period

Issue: Whether the measurement period applies to components of the consideration paid.

FASB Decision: The FASB agreed that the measurement period would include components of the consideration paid.

IASB Decision: In the IASB's proposed guidance in paragraph 61 of ED 3 (Phase I), the measurement period applies to the acquiree's identifiable assets, liabilities, and contingent liabilities as well as the cost of the combination.

Overpayments

Issue: Whether an excess of the consideration paid over the fair value of the acquirer's interest in the net assets acquired (i.e., an overpayment) should be recognised in profit or loss at the date of acquisition.

FASB Decision: The FASB decided that overpayments should not be expensed on the acquisition date. Therefore any excess of the consideration paid over the fair value of the acquirer's interest in the net assets acquired would be subsumed into goodwill and subsequently tested for impairment.

IASB Decision: At its March 2003 meeting the IASB agreed that when there is evidence to suggest that the business combination transaction is not an exchange of equal values, the excess of the consideration paid over the fair value of the acquirer's interest in the net assets acquired (i.e., any overpayment) should be recognised in profit or loss at the date of acquisition.

Transitional Provisions for Minority Interests Decisions

Issue: Whether the transitional provisions for the proposals on minority interests issues should state specifically which proposals should be applied retrospectively and which prospectively.

FASB Decision: The FASB agreed to state specifically which proposals should be applied retrospectively and which prospectively.

IASB Decision: The IASB agreed to an overall statement of principle that all of the proposals related to minority interests should be applied retrospectively, unless retrospective application would not be practicable.

However, both Boards agreed with the staff's assessment as to whether retrospective application is generally practicable for specific financial statement display requirements and minority interests transactions.

Subsequent Recognition of Deferred Tax Benefits

Issue: Whether goodwill should be adjusted for the subsequent recognition of deferred tax benefits acquired in a business combination that did not satisfy the criteria for separate recognition when the combination was initially recognised, but that are subsequently realised.

FASB Decision: The FASB affirmed its decision that deferred tax benefits recognised subsequent to the acquisition should be recognised as a reduction of income tax expense. The FASB also decided:

a. To include a rebuttable presumption that acquired deferred tax benefits recognised within one year following the acquisition date (that is, by reduction of any valuation allowance for acquired deferred tax assets) be reported as an adjustment to goodwill, rather than as a reduction of income tax expense. However, if the rebuttable presumption is overcome, the deferred tax benefit would be reported as a reduction of income tax expense for that period. The rebuttable presumption is overcome if the recognition of the acquired deferred tax benefit results from a discrete event or circumstance that occurred subsequent to the acquisition date, and, thus, was appropriately excluded from the acquirer's assessment in arriving at the valuation allowance at the date of acquisition.

b. To require disclosure of the events or change in circumstances that resulted in the subsequent recognition of deferred tax benefits.

IASB Decision: The IASB agreed that the acquirer should reduce the carrying amount of goodwill to the amount that would have been recognised under IAS 12, Income Taxes if the deferred tax asset had been recognised as an identifiable asset at the acquisition date.

Disclosure of an Additional Schedule If an Entity Is Partially Owned

Issue: Whether to require disclosure of an additional schedule that illustrates the effects of transactions with minority interests on the controlling interest's equity attributable to common shareholders and an additional per share metric that includes in the numerator the effects of equity transactions with minority interests.

FASB Decision: The FASB agreed:

• 1. To require that entities with one or more partially owned subsidiaries disclose an additional schedule in the notes to the consolidated financial statements that illustrates the effects of transactions with noncontrolling shareholders on the controlling interest's equity attributable to common shareholders

• 2. To require that entities that present earnings per share also disclose in that schedule an additional per share metric that includes in the numerator the effects of equity transactions with noncontrolling shareholders.

IASB Decision: The IASB previously considered whether premiums and discounts on purchases of equity instruments from, and sales of equity instruments to, minority interests by members of the consolidated group without a change in control should be displayed on the face of the consolidated income statement, and rejected such a presentation. The information about the effects of such transactions on the controlling interest's equity will, under IFRS, be provided in the statement of changes in equity or in the notes to the financial statements. The IASB also previously considered whether the numerator in the earnings per share calculation should be adjusted for premiums or discounts on purchases of equity instruments from, and sales of equity instruments to, minority interests by members of the consolidated group. The IASB agreed that the effects of such equity transactions should not be treated as adjustments to the numerator.

The Boards provided details as to the reasoning behind the decisions for the other Board to consider.

The Boards discussed the issue of determining which assets and liabilities should be included in the business combination accounting (versus post-combination)

The Boards have expressed different preferences on which assets and liabilities should be included as part of the business combination accounting. The IASB supports View A outlined below. The FASB has expressed a preference for View B.

View A: The objective of business combination accounting is to reflect the economic condition of the acquiree (including the effects of the acquiree's past actions) the moment before the business combination. Under this approach, the accounting for the business combination would include the assets, liabilities, and contingent liabilities of the acquiree immediately prior to the business combination.

View B: The objective of business combination accounting is to reflect the assets and liabilities that are acquired and assumed as part of the business combination. Under this approach, the accounting for the business combination would include the items acquired and assumed directly from the acquiree that met the conceptual definition of an asset or liability at the date of acquisition, as well as other assets acquired and liabilities assumed from the owners (seller) of the acquiree or third parties that are included as a condition of the combination and are essential to the business combination (for both the buyer and the seller).

No consensus could be reached and it was agreed that the staff should research the issue further including a view that all assets and liabilities of the acquired entity and that are legally imposed as a result of the combination should be recognised.

The Boards discussed whether certain business risks (contingencies) resulting from the acquiree's past actions constitute an obligation to stand ready when acquired. Two views were discussed in relation to the following example:

An entity contaminates a river adjacent to its land in a country where there is no legislation requiring it to clean up (and the entity has not created a constructive obligation to clean up). There is, however, a possibility that a new law will be enacted in due course that will require the entity to clean up its past contamination. The likelihood of the new law being passed is assessed to be approximately 75%.

View A: The entity had incurred a present obligation because it is left with little or no discretion to avoid the consequences of its past contamination. In other words, although there are no immediate consequences of the contamination, the entity is still obliged to address the consequences of its contamination, whenever they may occur.

View B: The entity does not have a present obligation until the law changes because there are two things required to create a present obligation: the entity must have contaminated and that contamination must be the subject of cleanup legislation (or a constructive obligation must exist).

The IASB has previously tentatively agreed with view B. FASB has still to conclude in this area. No decisions were made.

Discussion at the February 2004 IASB Meeting

The staff noted a previous Board decision to amend the definition of a contingent asset as follows:

"a conditional right that arises from past events that may result in a future cash inflow (or other economic benefits)based on the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity."

They further noted that the Board had considered two examples namely:

• a conditional right that arises from an in-process legal claim against a competitor through the courts, and
• a conditional right that arises from an application for an operating licence.

The Board had previously observed that for each of the above two examples, there exists two elements: an unconditional (or non-contingent) element and a conditional (or contingent) element. The Board agreed that the unconditional element gives rise to an asset while the conditional element gives rise to a contingent asset.

The staff requested the Board to consider whether any unconditional rights, if any, associated with a pending contract in the acquired entity at the time of a business combination would qualify for recognition separately from goodwill.

The staff had proposed that these rights would not be separately recognised from goodwill but noted that some Board members have expressed concern that if this is the case and the contract is signed after the acquisition date, the value of the pending contract would continue to be subsumed in goodwill indefinitely, which seems inappropriate if the contract has a finite life.

The staff consequently requested the Board to consider whether, as an exception to the principle of not adjusting goodwill for events after the acquisition date, the fair value at the acquisition date of the pending contract should be subsequently credited to goodwill, with the corresponding recognition of an intangible asset (ie the contract) if:

• the pending contract transforms, within twelve months of the acquisition date, into a contract that would have qualified for recognition separately from goodwill, and
• the pending contract's fair value at the acquisition date is reliably measurable.

The staff proposed that the above not be adopted and that goodwill not be adjusted for events that occur after the acquisition date.

In addition the staff proposed that there should be an acknowledgement that events that occur shortly after the acquisition date, such as a contract signing, should be carefully considered to determine whether they provide substantive evidence of the existence of an intangible asset at the acquisition date that, in fact, meets the criteria for recognition separate from goodwill.

Some Board members noted that the wording needed to be clear in distinguishing between conditional and unconditional rights and that those conditional rights are not unrecognised but are subsumed within goodwill.

It was noted that the transfer of probability from recognition to measurement gave rise to the need for a recognition screening mechanism.

The Board requested that the staff prepare a paper setting out the differences between conditional and unconditional rights.

Discussion at the April 2004 IASB Meeting

The Board first discussed the recognition of contingent liabilities in a business combination. The Board concluded that only liabilities that meet the IASB Framework's definition of liabilities should be recognised as part of the combination. Therefore, stand-alone contingent liabilities would not be recognised.

The Board further discussed the principle by which assets and liabilities should be considered part of the business combination. The Board concluded that only identifiable assets and liabilities that exist at the date of combination should be recognised. The Board will further develop this principle and discuss its application.

The Board decided to amend IAS 28 and IAS 31 to require that an investment that moves from the equity method of accounting to IAS 39 accounting be measured at fair value, not at the carrying amount of the equity method investment, when significant influence is lost. Further, the Board decided to require an investment be fair valued when control is lost and significant influence was or was not retained.

The Board decided that when the investment is fair valued, all amounts in equity (for instance, translation adjustments, net investment hedges) should be recycled to income. This accounting would be required regardless of how the change occurred (such as sale of shares or dilution of shares). If an entity has significant influence somehow, only that portion of the investment lost would be recycled from equity.

Discussion at the May 2004 IASB Meeting

The IASB discussed various sweep issues related to the proposed exposure draft on the application of the purchase method. These issues were:

• Whether the IASB should reconsider the definition of a business included in IFRS 3 and also whether the IASB should include application guidance on identifying a business similar to the guidance that the FASB plans to provide.
• Whether the purchase method should be renamed the acquisition method.
• Whether IAS 12 should be amended to explicitly address deferred tax assets arising from excess tax goodwill.
• The recognition and measurement of operating leases acquired in a business combination.

Definition of a Business

The staff noted that the definitions of a business as set out in the IASB's and FASB's proposals were broadly consistent. The differences related to:

• Whether development stage entities were businesses.
• The inclusion of the word "generally" in the IASB's definition.
• The IASB presumption that where goodwill is present a business exists.

The staff recommended that the definitions not be changed.

Some Board members noted that the recognition of the purchase of a basket of assets under the business combination criteria would give rise to different results than if individual asset recognition standards such as those in IAS 16 were applied, and that difference was what caused problems. The Board agreed to discuss with FASB examining initial recognition of assets outside a business combination. In the meantime the Board agreed to eliminate the word "generally", to provide further guidance in this area, and to provide further guidance for using the goodwill presumption.

Change of Name of the Project

The Board agreed to change the name of the project and the wording of IFRS 3 to refer to the Acquisition Method and not the Purchase Method.

Deferred Tax Assets Arising from Excess Tax Goodwill

The Board considered whether a deferred tax asset should be recognised if the amount of goodwill deductible for tax purposes is more than the amount recognised for financial reporting purposes. The Board agreed it should be recognised.

Recognition and Measurement of an Operating Lease Acquired in a Business Combination

Under IFRS 3 favourable and unfavourable operating lease contracts are recognised net.

The Board considered whether the reference to all assets and liabilities acquired in a business combination included the rights and obligations under an operating lease that is neither favourable nor unfavourable. The Board agreed that these were recognised but net at nil. It was noted that this was not to disturb the initial classification and could be affected by future decisions.

Discussion at the June 2004 IASB Meeting

Fair value hierarchy. The Board discussed the fair value hierarchy. The FASB intends to issue an exposure draft soon outlining their fair value hierarchy, and the Board considered what its approach to this should be, given that a comprehensive and consistent fair value hierarchy is critical to the success of the Business Combinations Phase II project. The Board agreed that it should publish a proposed fair value hierarchy for public comment separately from the business combinations project. That is more likely to catch the attention of constituents that may have a limited interest in the Business Combinations project, for example investment banks, as the outcomes of the hierarchy debate will have wide ranging implications across all IFRS that require the use of fair value, including the requirements relating to financial instruments. The Board agreed that the proposed fair value hierarchy should highlight any differences with the hierarchy proposed by the FASB. The initial view of some Board members was that there did not appear to be any substantive differences, and the staff indicated their intention to work with the FASB staff to determine whether mutually acceptable drafting could be agreed upon.

Replacement grants of stock options. The Board considered the replacement of acquiree share-based payment awards by acquirers, and whether some or all of such replacements should be treated as part of the cost of the business combination. The Board agreed that where the acquirer has an obligation (legal or constructive) to replace the share-based payments at the date of acquisition the replacement must be considered as part of the cost of the business combination. The Board agreed that the requirements of IFRS 2 must be applied in determining the fair value of the replacement award. Where a replacement grant partly relates to future employee service it should be allocated between purchase price and post-combination expenses. Where this occurs future 'truing-up' of the expense should be relate only to the period between the date of the acquisition and the date of truing-up.

Where the fair value of the replacement grant exceeds the fair value of the original grant, the incremental fair value is to be treated a post-combination expense. The Board agreed that the measurement of post-combination expenses should be based on the acquisition date fair value of the instrument.

The Board agreed the following principles with respect to replacement of employee benefit awards:

• Where vested awards are replaced with vested awards, the full acquisition date fair value should be included in the cost of the business combination.
• Where a vested award is replaced with a non-vested award the fraction of the acquisition date fair value relating to prior requisite service must be included in the cost of the business combination, and the remainder is treated as a post combination expense. The staff noted that this represents non-convergence with FASB, as the FASB have agreed to allocated based on the total period outstanding (for example, ten years between grant date and new vesting date) while the IASB have agreed to allocate based only on the requisite service periods (for example, an employee may have needed to do four years service for it to vest initially, and another three under the new conditions - IASB would allocate the amount between seven years, while the FASB would allocated between the total number of years elapsing between grant date and final vesting which may be significantly greater than seven years).
• Where a non-vested award is replaced with a non-vested award the entity must recognise the effect of any acceleration of the vesting conditions as a post-combination expense immediately. Where no acceleration occurs the acquisition date fair value of the replacement award is allocated between cost of acquisition and post combination expense based on the fraction of the requisite service period still outstanding.
• Where a non-vested award is replaced with a vested award the acquisition date fair value is allocated between cost of acquisition and post-combination compensation expense based on the fraction of the requisite service period of the original award still outstanding. The effect of the immediate vesting is then recognised immediately as a post combination expense.

Post-acquisition date events. The Board agreed that where post-acquisition-date events alter the measurement of share-based payment awards the purchase price of the acquisition should not be amended for the effect of those events.

Mutual entities. The Board considered the inclusion of business combinations between one or more mutual entities within the scope of the FASB's Phase II project on Business Combinations. The Board agreed that they should discuss at the September meeting the issues the FASB considered in reaching this conclusion and determine whether or not those issues have been adequately addressed by the Phase II project. If the Board believe the issues have been addressed then such transactions will be within the scope of the Phase II Business Combinations project.

Transition - contingent consideration. The Board considered the transitional provisions in relation to contingent consideration as the current version of IFRS 3 requires that the accounting for a business combination be adjusted based on the outcome of contingent consideration agreements, while the future project will require that contingent consideration to be fair valued and included at acquisition date without subsequent amendment. The current version of IFRS 3 also requires that the initial accounting for a business combination be adjusted for deferred tax assets not recognised at the date of acquisition that subsequently prove to be recoverable. The Board considered the alternatives, and determined that they would converge with the FASB in requiring that business combinations occurring before the date of application of the Phase II standard should be adjusted for changes to the contingent consideration but not changes to the recoverability of tax balances.

Transition - contingent liabilities. The Board agreed that when the Phase II Business Combinations standard comes into effect any existing contingent liabilities recognised as part of a business combination in accordance with the current version of IFRS 3 that do not satisfy the revised recognition criteria should be derecognised immediately via an adjustment to goodwill. Where this would result in the creation of or increase of negative goodwill, the adjustment should be recognised directly in retained earnings.

Valuation techniques. The Board agreed that the Phase II Business Combinations document should include guidance on using valuation techniques (such as a market-based approach and an income approach) to measure the fair value of businesses acquired.

Bargain purchase. The Board agreed that where a business combination appears to contain a bargain purchase, any excess of the fair value of the acquirer's interest in the business acquired over the fair value of the consideration given for that interest should be recognised as a reduction in the total amount of goodwill until the goodwill is reduced to zero, and any excess remaining after the total amount of goodwill has been reduced to zero should be recognised immediately in profit or loss.

Discussion at the July 2004 IASB Meeting

The Board discussed issues where the IASB and FASB have reached different conclusions.

The first is the treatment of an excess of the consideration paid over the fair value of the acquirer's interest in the business acquired (the overpayment). The IASB requires this to be taken to profit or loss and the FASB requires it to be subsumed within goodwill. The Board continued to believe they have the better principle and would prefer to expose on this basis and ask a specific question as to reliability of measurement and other problems. If FASB did not agree to this the IASB will expose the FASB requirement.

The second relates to the IASB conclusion that there is a rebuttable presumption that the consideration paid provides the best evidence of the fair value of the business acquired. The FASB believes that this would normally be the case and should be used when 100% of a subsidiary is acquired but should not be a rebuttable presumption when a partial interest is acquired. The IASB agreed to move to the FASB requirement.

The third relates to differences in the IASB's and FASB's application guidance on the definition of a business. The IASB agreed to move to the FASB guidance together with an explanation in the Basis for Conclusions on the implication of the differences.

The Board noted various inherited differences, some of which will be dealt with in the short-term convergence project and some of which will need to be dealt with in later projects.

The Board noted a summary of decisions taken to date.

In response to a query regarding field testing of the full goodwill method, the staff noted they would be observing the FASB's field visits with preparers. The FASB staff noted that their user consultative group were in favour of the full goodwill method as they believed it provided more useful information.

The Board continued the Phase II discussion on Business Combinations by going through the principal decisions made to date and clarifying the wording in the summary document presented by the staff.

The staff tentatively indicated that a draft exposure draft could only be expected at the end of the fourth quarter. This was tentative, as staff were still to meet with the FASB staff to set out the work plan.

An indication was requested of Board members intending to dissent on the exposure draft. Five Board members indicated that they would dissent, principally for the following reasons:

• The full goodwill approach taken by the Board contradicts the Framework as that portion attributable to the minority interest does not meet the definition of an asset. In addition, the recognition criteria for an asset require the measurability of an asset to be reliable. The dissenting Board members indicated that this was not the case for goodwill, which is in principle a residual amount. Furthermore, any impairment write offs of such goodwill would be taken through the income statement of the entity and thereby affecting the minority's interest in the results of the entity. Cost/benefit concerns of the full goodwill approach were also raised.
• The accounting for transactions with minority interests has not been fully explored, and the disclosure requirements in this area are insufficient.
• The step acquisition provisions agreed to by the Board.

Discussion at the September 2004 IASB Meeting

Mutual Entities

An important objective of the IASB-FASB joint project is to achieve convergence on the accounting for business combinations. A remaining area of divergence is the accounting for combinations between two or more mutual entities. The FASB decided to include business combinations involving two or more mutual entities within the scope of its Business Combinations Exposure Draft arising from the Application of the Purchase Method project.

In June 2004, the Board considered whether the IASB's Exposure Draft arising from this project should propose that business combinations involving two or more mutual entities or by contract alone without the obtaining of an ownership interest should be accounted for in accordance with the Board's tentative decisions in this project, rather than in accordance with the interim approach set out in the Exposure Draft of Proposed Amendments to IFRS 3 Combinations by Contract Alone or Involving Mutual Entities (Mutual Entities Exposure Draft).

The Board tentatively decided that the Exposure Draft should propose that such business combinations be accounted for in accordance with the proposals in the Application of the Purchase Method project. However, the Board agreed that before proceeding with this tentative decision, it should consider the issues that the FASB considered in respect of mutual entities to the extent that those issues have not already been dealt with by the IASB.

With this objective in mind, FASB staff gave an overview of the issues that had been considered by the FASB and noting that although differences do exist in the manner that business combinations affect mutual entities when compared to other entities, such differences did not warrant different accounting. Furthermore, the particular difficulty of identifying an acquirer would not be unique to such entities only.

FASB staff also indicated that it did not appear that the FASB had intentions to explore 'fresh start accounting' for 'true mergers' which were agreed to be rare / seldom occurred, as this would create another form of accounting (in addition to purchase method accounting). A Board member suggested that the IASB should still explore fresh start accounting as this was an area that had not been explored before and therefore could not be ruled out as not providing appropriate accounting in such cases.

After some deliberation, the Board re-affirmed some of its previous decisions and made consequential decisions as follows:

• re-affirmed the Phase I 'in-principle' decision to require the purchase method of accounting for combinations of two or more mutual entities.
• that difficulties in identifying the acquirer are not a sufficient reason to justify a different accounting treatment and that no further guidance is necessary for identifying the acquirer for combinations of two or more mutual entities.
• reject the phase I Mutual Entities Exposure Draft's proposed 'modified' purchase method of accounting and propose in the forthcoming Exposure Draft that the accounting for goodwill should be the same for combinations of mutual entities as for combinations of other entities.
• require the acquiring mutual entity to measure and recognise the business combination as the fair value of the acquired mutual entity.
• add additional guidance for measuring the fair value of an acquired mutual entity.
• require that in an acquisition in which the acquirer exchanges member interests for the member interests of the acquired mutual entity, the fair value of the acquired mutual entity be recognised as a direct addition to a properly labelled capital or equity account, which would be consistent with the accounting for combinations in which any other entity issues equity instruments in exchange for equity instruments of the acquired entity.
• provide detailed guidance for the valuation of acquired loans, deposits, or intangible assets in the forthcoming Exposure Draft.
• Not modify the tentative decisions in this project for possible regulatory impacts but consider using the invitation to comment to ask constituents to identify any regulatory concerns that might exist in their jurisdictions.
• Include an additional disclosure requirement for mutual entities to disclose the accounting for the member interests transferred.

Implications of introducing fair value hierarchy into IFRSs

The FASB and IASB have in the past, tentatively decided in this project to use fair value as the measurement objective for the business acquired in a business combination. The Boards also tentatively decided to adopt additional guidance for measuring fair value in the form of a hierarchy (the fair value hierarchy) to ensure consistent application of the fair value measurement requirement.

However, the FASB subsequently amended the fair value hierarchy to reflect decisions made by the FASB as part of its Fair Value Measurements project. Therefore, the FASB plans to include in its forthcoming Business Combinations Exposure Draft the fair value hierarchy agreed in its Fair Value Measurements project. The IASB has not considered all of the issues that the FASB has considered as part of its Fair Value Measurements project and that resulted in the FASB amendments.

The Board deliberated on how best to proceed considering the overall objective of this project was convergence, the desire not to delay the Phase II project, but also considering that the IASB had not deliberated on the specific issues that led to the FASB making amendments to the hierarchy. Some of the options discussed:

• append the FASB document with a 'wrap-around' from the IASB stating that these issues are still to be debated by the IASB with a view to producing a single pronouncement in the future with all necessary fair value guidance that would be applicable under IFRS.
• to debate the issues in the FASB document as part of Phase II, on the understanding that a 'high hurdle' (a 'dissentable' issue) would be used during these deliberations in making wording suggestions.

The latter option was selected and the Board proceeded to list the issues that it would like to include in the Phase II fair value document that would be applicable to fair value measurement in the context of business combinations only. These issues will be discussed at the next meeting:

• definition of an active market;
• guidance on market inputs;
• guidance on valuation techniques

Discussion at the October 2004 Board Meeting

The Board considered a paper addressing a number of issues relating to fair value measurement, and some sundry issues to be dealt with in respect of the Phase II Business Combinations project.

The IASB reaffirmed its decision from the September meeting that the Business Combinations exposure draft should incorporate the definition of fair value currently being considered by the FASB in its Fair Value project (for which the comment period on an exposure draft has recently closed). The IASB's exposure draft will note in the basis for conclusions that the revised definition of fair value is only, at this time, being considered for incorporation into IFRS 3, and not into all pronouncements that require the use of a fair value measurement. The basis for conclusions will outline the future process for including the new fair value definition in other pronouncements.

The Board discussed whether it is important to assess whether a counter party is 'knowledgeable' in determining fair value. It was agreed that for the purposes of exposure the references to 'knowledgeable parties' and 'the absence of compulsion' contained in the FASB Fair Value Exposure Draft should be retained.

It was agreed that the exposure draft should retain the requirement in the FASB Fair Value Exposure Draft to utilise multiple valuation techniques in determining the fair value of an asset for which a market price is not readily available, and that the guidance included in the FASB exposure draft should also be included in the IASB's Business Combinations Phase II exposure draft. The Board agreed that consistent with the FASB proposal, the use of multiple valuation techniques should be required unless it causes 'undue cost or effort' and noted that this exemption is less stringent than the normal wording used by the IASB that exempts entities from certain requirements where they are 'impracticable'.

The Board discussed the guidance contained in the FASB Fair Value Exposure Draft on identifying an active market. The IASB agreed to incorporate this guidance in its Business Combinations Phase II exposure draft, but that the examples should be changed to reflect a wider variety of possible active markets, as all of the examples in the FASB Fair Value Exposure Draft were US-specific.

The Board agreed that the guidance on using market inputs in obtaining fair values that was included in the FASB Fair Value Exposure Draft should be included in the Business Combinations Phase II Exposure Draft.

The Board discussed whether to use the term 'immediate access' rather than 'reasonable access' in identifying markets by which fair value can be measured with reference to. The Board discussed the true meaning of 'immediate access', including discussions related to the inaccessibility of certain markets by entities in other time zones. It was agreed that the term 'immediate access' was appropriate, but that it should be clarified that simply because a market is closed for trading on balance sheet date this does not mean an entity cannot be considered to have 'immediate access' to this market.

The Board agreed to adopt the FASB guidance stating that a fair value is determined by reference to the most advantageous market to which an entity has access. However, it was agreed that the ED should clarify that these are markets to which an entity has access at this time, rather than markets an entity can foresee having access to in a number of years.

The Board agreed that no unintended consequences arise from applying the requirement to use bid prices for assets and ask prices for liabilities to non-financial assets and non-financial liabilities. It was noted that the scenario in which this is likely to be most relevant is in relation to commodities, the markets for which behave in a similar manner to those for financial assets and financial liabilities. Therefore the Board agreed to include this requirement in the Business Combinations Phase II ED.

The Board agreed that, consistent with the FASB, they would require that for offsetting positions, the mid-market prices should be used for the matched portion.

The Board considered the issues of accounting for transactions where entities are brought together by contract alone without the obtaining of an ownership interest. The Board agreed that these transactions should be within the scope of the Phase II business combinations project. Because it seemed likely that an acquirer would be able to be identified for all such transactions with the aid of the existing IFRS 3 guidance, no further guidance would be added on this issue. The Board noted that it is not possible to consider 'fresh start' accounting as part of this project because such a wide conceptual change would surely have consequences to other transactions rather than just those described above.

The Board confirmed its view that in transactions where entities are brought together by contract alone, the total amount to be recognised by the acquirer should be the fair value of the business acquired. The Board also agreed that the Exposure Draft should explicitly state that such an accounting entry should be affected by putting the credit side of the entry to equity, and noted that much confusion had been expressed about this matter.

The Board will deliberate Business Combinations Phase II again at a future meeting with the intention of issuing an exposure draft in the near future.

Discussion at the December 2004 IASB Meeting

The decisions reached by the FASB at its 24 November meeting relating to the drafting issues in the joint IASB-FASB business combinations Exposure Draft were discussed by the Board.

EITF 95-8 Accounting for Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in Purchase Business Combinations

The staff proposed that the guidance on this issue in EITF 95-8 (Additional Factors to Consider in Determining Whether Certain Contingent Arrangements Should be Accounted for as Part of the Exchange for the Acquiree) be included as part of the implementation guidance in the joint exposure draft.

The Board agreed with the principles of the guidance but suggested that the wording is too long to be included in the implementation guidance as it stands. The Board asked the FASB staff to re-draft the wording to retain the principles but to make the guidance shorter.

EITF 04-1 Accounting for Preexisting Relationships between the Parties to a Business Combination

There were several issues considered in relation to EITF 04-1. It should be noted that, where the Board agreed with the conclusions reached by the EITF, it was requested that the wording be reduced for inclusion in the implementation guidance for business combinations.

The issues discussed were as follows:

(i) Whether a business combination between two parties that have a pre-existing relationship should be evaluated to determine if a settlement of a preexisting relationship exists, the requiring accounting separate from the business combination

• 'Pre-existing relationship' refers to circumstances in which the acquirer and the acquiree have a contractual (e.g. licensor/licensee) or other relationship before the business combination.
• 'Settlement of a pre-existing relationship' refers to the fact that some of the pre-existing contractual relationships are effectively 'settled' as a result of the business combination.

The EITF conclusion was that the two elements (i.e. the settlement of the pre-existing relationship and the business combination) should be accounted for separately.

The Board discussed the issue and considered the situation where, if the EITF conclusion was not concurred with, there would be potential for entities to avoid accounting for items such as onerous contracts with third parties by buying the entity with whom the contract existed.

Thus, the Board agreed with the consensus in the EITF that the two items must be accounted for separately.

(ii) How the effective settlement of an executory contract in a business combination should be measured

The EITF had reached a consensus that the effective settlement of an executory contract in a business combination as a result of a preexisting relationship should be measured at the lesser of:

• (a) the amount by which the contract is favourable or unfavourable from the perspective of the acquirer when compared to pricing for current market transactions for the same or similar items; or
• (b) any stated settlement provisions in the contract available to the counterparty to which the contract is unfavourable.

The Board agreed with the consensus on the basis that the contract would effectively no longer be favourable/unfavourable upon consolidation, but requested that the wording in the guidance be reduced.

(iii) Whether the acquisition of a right that the acquirer had previously granted to the acquired entity to use the acquirer's recognised or unrecognised intangible assets should be included in the measurement of the settlement amount or included as part of the business combination

The Board agreed with the EITF consensus that the acquisition of a right that the acquirer had previously granted to the acquired entity to use the acquirer's recognised or unrecognised intangible assets should be included as part of the business combination.

(iv) Whether the acquirer should recognise, apart from goodwill, an acquired entity's intangible asset(s) that, before the business combination, arose solely from the acquired entity's contractual right to use the acquirer's recognised or unrecognised intangible asset(s).

The EITF had reached the consensus that the reacquired right should be recognised as an intangible asset apart from goodwill.

There was much debate amongst the Board members over whether the reacquired right should be recognised as a separate intangible asset or be subsumed within goodwill.

There were several views put forward:

• The reacquired right should not be recognised as a separate asset, as effectively the reacquired right is a contract between the entity and itself and therefore it is nonsensical to recognise a separate asset - it should be included within goodwill;
• The reacquired right meets the definition of an intangible asset in accordance with IAS 38, and is separately identifiable since it has previously been sold, and therefore should be treated as a separate asset apart from goodwill;
• The reacquired right may be treated as a separate asset if the 'day 2' accounting problem of how to account for the asset in terms of amortisation can be resolved.

The Board could not reach an agreement on this issue, and requested the FASB staff to consider the 'day 2' accounting problem and to present a solution to the Board for consideration.

(v) Whether it is appropriate for an acquirer to recognise a settlement gain in conjunction with the effective settlement of a lawsuit or an executory contract in a business combination

The Board agreed with the EITF consensus that a settlement gain or loss should be recognised in conjunction with the effective settlement of a lawsuit or executory contract in a business combination, unless otherwise specified in existing authoritative literature.

Other Business Combination II issues:

(a) Definition of a Business Combination

At its 17 November meeting, the Board expressed its preference for developing a new definition of a business combination if it could be done quickly and not delay issuance of the joint Exposure Draft. As a second choice, the Board stated that it would adopt the FASB definition that was developed in phase II. That definition is "a transaction or other event in which an acquirer obtains control over one or more businesses."

Prior to the FASB's meeting, the staff distributed a memo to the FASB that provided two new alternatives for defining a business combination. Those alternatives were:

• Alternative One - A business combination is a transaction or event that brings one or more businesses into a reporting entity by means of obtaining control or otherwise.
• Alternative Two - A business combination is any transaction or event that results in the initial inclusion of one or more businesses in the financial statements of an acquirer.

Neither the staff nor the FASB could come to agreement on any one definition. Each had their pros and cons. Because the FASB believed that a new definition could not be developed quickly and because a majority still preferred the FASB's definition, the FASB decided to retain its definition.

The majority of the Board agreed.

(b) Identifying the Acquirer

Consistent with the Board's 17 November decision, the FASB agreed to explore developing converged guidance for identifying the acquirer. Prior to the FASB's meeting, the staff distributed a memo to the FASB that illustrated the approach that the staff suggested for converging the guidance. That approach is the same as the approach discussed by the IASB at its November 17 meeting, which is:

• a. The first step would be to identify the party who obtained control-Neither Board would provide any control guidance in the joint Exposure Draft. The IASB's Exposure Draft would refer to IAS 27 and the FASB's Exposure Draft would refer to ARB No. 51, Consolidated Financial Statements (as revised), and FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities, for guidance on control.
• b. If it is not obvious which party obtained control, the second step would be to consider other factors-Those factors would then be similar to the factors provided in both IFRS 3 and Statement 141.

The FASB agreed with that approach and agreed to provide suggested wording for guidance in the joint Exposure Draft. The guidance was discussed briefly by the Board and the majority voted in favour (only 1 against).

(c) Definition of goodwill

The FASB had agreed that it prefers the Board's approach for defining goodwill by its nature rather than by its measurement. However, the FASB suggested a modification to the IASB's definition of goodwill that it would like the Board to consider.

The FASB proposed modifying the definition as follows (part in square brackets marked for deletion):

Future economic benefits arising from assets that are not [capable of being] individually identified and separately recognized.

The Board agreed that capable is not the right word to describe whether an intangible asset should be recognized separately from goodwill. For example, in many instances intangible assets that are subsumed in goodwill are capable of being individually identified, however they are not recognized separately from goodwill because they do not meet the recognition criteria.

(d) Report Issues

• Reliable Measurement of Intangible Assets. The Board discussed whether the criteria for recognising intangible assets separately from goodwill needed to include the requirement that the fair value of an intangible asset must be reliably measurable to be recognised separately from goodwill. The Board had discussed this at its 17 November meeting and concluded that this requirement for 'reliably measurable' should be retained. However, the FASB had decided not to include this in its criteria. The Board held with its original view on the basis that intangible assets could not be reliably separated from goodwill if they are not reliably measurable. The Board asked the FASB staff to encourage the FASB to reconsider its reasons.

• Adjustments Made to the Provisional Amounts Recorded in a Business Combination. It was reported to the Board that the FASB had agreed to adopt the Board's approach in IFRS 3 and require that any adjustments made to the provisional amounts recorded in a business combination be accounted for retroactively (that is, adjust previously reported amounts) rather than prospectively. Thus, this issue is resolved.

Discussion at the February 2005 IASB Meeting

The FASB staff was present by video link.

Recognition of an acquirer's deferred tax benefits as a result of a business combination

The Board agreed that a previously unrecognised deferred tax liability (or one for which a full valuation allowance had been provided under FAS 109 Accounting for Income Taxes) may be recognised at the acquisition date and not before. This would be made explicit through a consequential amendment to IAS 12 Income Taxes.

Including deductible temporary differences or loss carryforwards of the acquirer in the combination

The Board agreed that the recognition of a deferred tax asset by the acquirer as the result of its pre-existing deductible tax differences or loss carryforwards that meet the recognition criteria in IAS 12 as a result of a business combination is a separate transaction and should be accounted for separately from the business combination.

The FASB staff noted that, in an education session, the FASB had expressed a preference (by a 5-2 vote) for including these items as part of the business combination. IASB members noted this, but expressed concerns about the application of the FASB's preferred approach in jurisdictions that do not have consolidated tax returns. The Board agreed to include a discussion of this point, and any difference with the FASB, in the Basis for Conclusions on the exposure draft. Disclosure: intangible assets that were not recognised separately from goodwill The Board agreed to remove the reliability of measurement recognition criteria for intangible assets. This converges with a FASB decision.

Disclosure: format of the disclosure of the assets acquired and liabilities assumed

The Board agreed to require disclosure of a condensed balance sheet and to provide a non-mandatory illustration of this requirement. (This approach was adopted because of concerns that there might be confusion between the disclosure required in the business combinations standard and that required by IAS 34 Interim Financial Reporting.)

Disclosure: carrying amount of assets acquired and liabilities assumed

The Board agreed to eliminate the requirement to disclose the carrying amounts immediately prior to the combination of each of the classes of assets acquired and liabilities assumed (determined in accordance with IFRSs). Some Board members saw this requirement as both onerous and as raising almost insurmountable audit issues.

Disclosure: maximum potential amount of future payments

The Board agreed to add a requirement in the business combinations exposure draft to disclose (a) the maximum potential amount of future payments (undiscounted) the acquirer could be required to make under the terms of the acquisition agreement; and (b) if there is no limitation on the maximum amount, disclosure of that fact.

Disclosure: operations to be disposed of

The Board agreed to eliminate the requirement in IFRS 3 Business Combinations to disclose the details of any operations the acquirer has decided to dispose of as a result of the business combination. This requirement has been superseded by IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.

Disclosure: scope of application for certain disclosures

The Board agreed (by an 8-5 majority) to require all entities to disclose revenue of the acquiree since the acquisition date and selected information as if the business combination had occurred as of the beginning of the annual reporting period. This will result in a difference between IFRSs and US GAAP, although entities applying IFRSs will satisfy US GAAP. The Board agreed that the derogation proposed by the FASB would be considered as part of its project on non-publicly accountable entities.

Disclosure: pro-forma disclosure for prior period

The Board expressed a preference not to add a requirement to disclose the comparable prior fiscal year if comparative financial statements are presented (for selected information as if the business combination had occurred as of the beginning of the annual reporting period). It was noted that, in the US this pro-forma disclosure was supplementary to the audited financial statements, an option that was unavailable to the IASB. The Board agreed to discuss this issue in its Basis for Conclusions on the exposure draft and to ask a question about it in the Invitation to Comment.

Disclosure: assets and liabilities for which the measurement period is still open

The Board agreed to add a requirement to disclose the assets acquired and liabilities assumed for which the measurement period is still open.

Disclosure: 'Day 2' gains or losses of significance

The Board agreed to clarify that disclosure is required of the amount and an explanation for any gain or loss recognised in relation to a business combination occurring in the current or immediately prior period that relates to the identifiable assets acquired or liabilities assumed and is of such size, nature, or incidence that disclosure is relevant to understanding the combined entity's financial statements.

Disclosure: goodwill

The Board agreed that it would expose its proposals on goodwill as part of the business combinations exposure draft. To include them as a proposed amendment of IAS 38 Intangible Assets would be a 'non-trivial exercise'. (The FASB will include its proposals as an amendment of FAS 142 Goodwill and Other Intangible Assets.) The Board did not accept a proposal to reduce the line items that are required in the reconciliation of the opening and closing balance of goodwill.

Reliability of measurement recognition criteria for intangible assets acquired in a business combination

The Board agreed to remove the reliability of measurement criteria for intangible assets. In addition, the Board agreed to include guidance similar to that in FAS 141 paragraph 39.

Incorporation of EITF guidance

The Board discussed whether the business combinations exposure draft should incorporate guidance contained in EITF 04-1 Accounting for Pre-existing Relationships between the Parties to a Business Combination. The issue was the appropriate accounting by a franchisor for the acquisition from a franchisee of a franchise right. This might occur, for example, when a franchisor repurchases a [successful] franchise either to run the location as a corporate location or, if the location is not successful, to turn it around with a view to re-franchising it later on.

The Board agreed to incorporate this guidance and to specify that the asset acquired was an intangible asset and not goodwill. The intangible asset would be amortised over the remaining franchise term.

Guidance on reverse acquisition accounting

The Board agreed to include detailed guidance on reverse acquisition accounting and related example, as revised, in its implementation guidance.

IAS 27 sweep issues

The Board agreed that IAS 27 Consolidated and Separate Financial Statements should be revised so that the gain or loss on disposal of a subsidiary includes cumulative gains and losses reflected in equity that relate to the subsidiary and that are being 'recycled' on loss of control of that subsidiary.

The Board agreed not to prescribe a specific presentation of the gain or loss on disposal of a subsidiary in the income statement.

The Board agreed that no gain or loss should be recognised with respect to noncontrolling interests on loss of control.

Update on FASB Activities

The staff provided feedback on the activities of the FASB as regards this project. The staff provided the Board with a summary of issues where the FASB had agreed to incorporate the disclosure requirements into the ED together with those areas where there was disagreement (e.g. pro-forma disclosures, which were rejected on cost benefit grounds). The Board asked the Staff to raise questions for constituents to comment specifically where proposed disclosures presented points of divergence with US GAAP.

A requirement that entities present goodwill by segment was discussed in the context of the IAS 36 requirements which are focussed on cash generating units (rather than segments). The Board requested that the Staff ask the FASB to reconsider this requirement given that even if segments were to be used for impairment testing (as per US GAAP but not IFRS), that the presentation under IAS 14 could require a different allocation.

Discussion at the March 2005 IASB Meeting

FASB staff presented, by video link, the issue of the comment period and effective date for both the business combinations and non controlling interests Exposure Drafts.

Normally, comment periods for IASB exposure drafts have been 90 days, with 20 days given to non English speaking countries in order to give them time to translate the drafts. However, the complexity of the ED and the time of year it is issued (to take into account holidays) may lead to a shorter or longer period. After some discussion, the Board tentatively agreed the comment period for Business Combinations should be 120 days, which would include the 20 days for countries to translate the standard. The FASB tentatively agreed that this would work, and could do the same for the non-controlling interests document.

With regards to the effective date, this was the subject of some discussion. The proposed deadline for a finalised standard is June 2006, and the effective date of 1/1/07 was considered. However, one board member felt 6 months was too long a lead time, and another thought this would not be a good message to be sending out. Another proposal was that the effective date should follow fiscal years, however, one board member pointed out that it is impossible to predict when the deliberations would conclude, and when a standard would be finalised, and therefore suggested that it would be better to include in the draft an effective date of X months after the issuance of the standard.

The Board tentatively agreed to include an effective date of 3 - 6 months after the issuance of the standard.

June 2005: Amendments proposed to IFRS 3, IAS 27, IAS 37

On 30 June 2005, the IASB and the US Financial Accounting Standards Board (FASB) each published for public comment exposure drafts containing joint proposals to improve and align the accounting for business combinations. The proposals include a draft standard that the boards have developed in their first major joint project. The proposed standard would replace the existing requirements of the IASB's IFRS 3 Business Combinations and the FASB's Statement 141 Business Combinations. The proposals retain the fundamental requirement of IFRS 3 and SFAS 141 to account for all business combinations using the purchase method of accounting, by which one party is always identified as acquiring the other.

Comment deadline on all of the exposure drafts is 28 October 2005. Click to Download the IASB Press Release (PDF 56k).

For additional information about the exposure drafts, Deloitte has published a Special Global Edition – Business Combinations Proposals of our IAS Plus newsletter (PDF 81k).

Special Edition of IAS Plus Newsletter on Business Combinations

Click to download a special edition of our IAS Plus newsletter detailing the Business Combinations Phase 2 Proposals (PDF 81k).

Discussion at the October 2005 IASB Meeting

No decisions were taken during this session. This was essentially a preparatory session prior to the forthcoming public round-tables on the proposed changes to IFRS 3 and the equivalent FASB standards to be held on 27 October in Norwalk and 9 November in London.

The staff also presented the preliminary plan for redeliberating and finalising the standards. The Board generally agreed that the timetable set out in the agenda paper (and given in summary in the Observer Notes), which suggests that final standards could be issued in the fourth quarter of 2006, was unreasonable given the likely opposition to some of the Boards' proposals and that coordinating two Boards will inevitably add time to the project. This date would potentially also be affected by any delay on the finalisation of the proposed changes to IAS 37. One Board member stated the importance of communicating that the timetable is unreasonable to constituents.

The Board decided to take this debate further on to the joint meeting with the FASB.

Discussion at the November 2005 IASB Meeting

Business Combinations Roundtables Debriefing

Whilst the Board was provided with a paper giving a preliminary summary of both the IASB and FASB roundtable discussions, this paper was not made available to observers. Further, the Board was not asked to make any decisions.

The first part of the session was dedicated to administrative details. This was primarily on comparing the two roundtable sessions and seeing which one worked best and why.

The remainder of the session was spent reviewing what was said at both the Norwalk and London roundtable meetings. Generally, there was a lack of support for many of the proposals. The main exception to this was financial analysts who, for example, agreed with expensing transaction costs.

It was also noted that it was unlikely that the Board could issue standards before 2007, and therefore that the earliest application date was likely to be in 2008.

Discussion at the January 2006 IASB Meeting

The IASB began redeliberating the exposure drafts that it published as part of the Business Combinations Phase II project in conjunction with the US Financial Accounting Standards Board (FASB).

Together, the IASB and the FASB received 282 comment letters in total on the Business Combination ED and held roundtable discussions with approximately 50 of those respondents. 95 comment letters were received on the IAS 27 ED.

The staff stated that the purpose of the day's discussions was to seek the Board's consent on the direction that the staff intends to take regarding the various issues raised. The purpose was not to discuss the detailed technical points with a view to making decisions. Detailed analysis of each issue will be brought before the Board at subsequent meetings for consideration by the Board.

The Board was asked to review the primary objective of the business combinations project, which was defined as:

To develop a single high-quality standard for accounting for business combinations that can be used for both domestic and cross-border financial reporting.

To accomplish that objective, the staff plan to develop FASB and IASB standards on business combinations and non-controlling interests that:

• 1. Are converged on a common set of principles that provide decision-useful information.
• 2. Contain converged guidance that minimizes exceptions to those principles.
• 3. Are written in plain English, and use the same language to the extent possible to minimise differences in the application in the US and internationally.
• 4. Provide authoritative implementation/application guidance to the extent necessary for consistent application by different entities.

The Board confirmed that the objective and the staff's approach to achieve that objective are still appropriate.

The Board went on to review the issues as analysed by the staff together with the proposals of how to approach each major issue. The Board concurred that the staff analysis was complete. There was some discussion of particular topic areas as the Board and the staff clarified the intended course of action.

The Board considered a detailed timetable setting out the topics to be addressed at future meetings. The staff explained that redeliberations were expected to take approximately one year. After discussing the order that issues will be brought to the Board, the staff of both the IASB and FASB agreed to examine the timetable to take into account the suggestions put forward.

Discussion at the February 2006 IASB Meeting

The IASB staff outlined a slightly modified schedule from that proposed in January 2006. This was accepted.

Joint Ventures

The Board agreed that the formation of a joint venture is, by definition, not a business combination. None of the parties to a joint venture have the ability to control the joint venture. The ED of Amendments to IFRS 3 defined a business combination in terns of 'a transaction or event in which an acquirer obtains control of one or more businesses.'

The Board supported a staff recommendation that they should not seek to develop a common definition of a joint venture as part of the Business Combination project; nor should the scope of this project be extended to accounting for joint ventures.

Definition of a business combination

The Board discussed alternatives put to them by the staff related to the definition of a business combination. Board Members debated the merits and faults of the alternatives proposed by the staff. The Board agreed to explore, as its preferred option, whether it would be possible to develop a robust definition of a business combination that is principles-based and would capture those transactions the Board intended it to. (The Board acknowledged this would be a fairly long-term project.) As a fall-back position, the Board agreed that the final Standard should retain the Business Combinations II ED definition of a business combination and provide supplemental guidance that clarifies that particular transactions for which some argue do not result in one entity obtaining control of another are still business combinations.

Board members stressed the need for clarity between acquiring control and a change in control, noting that a change in control need not be an economic event.

Discussion at the March 2006 IASB Meeting

The Board continued its deliberations on business combinations. FASB staff participated in this session. Staff presented the following five papers:

• Business combination principles
• Accounting for partial and step acquisitions, changes in controlling ownership interests, and loss of control with a retained ownership interest
• Accounting for bargain purchases and overpayments
• The nature and classification of noncontrolling interests in the consolidated balance sheet*
• Presentation and disclosure of information about changes in controlling ownership interests*

Discussion of the fourth and fifth of these papers on continued on Thursday 30 March.

Business combination principles

The purpose of this paper was to outline to the Board the basic presumptions, assertions and principles that form the foundations of the BC ED proposals. The paper also summarised the scope of the project and the main implications of the presumptions, assertions and principles. This was in response to concerns expressed by some respondents that the project had gone beyond its original scope and resulted in proposals that are fundamentally different from current practice.

The Board affirmed and endorsed the following definitions, assertions, presumptions and principles as an appropriate basis for the standard (vote 11/3):

Basic assertions and definitions

• A business combination is a transaction or other event in which an acquirer obtains control of one or more businesses.
• An acquirer can be identified in every business combination.
• The business combination acquisition date is the date the acquirer obtains control of the acquiree.
• A business combination is accounted for by applying the acquisition method.
• By obtaining control of an acquiree, an acquirer becomes responsible and accountable for all of the acquiree's assets, liabilities and activities, regardless of the percentage of its ownership in the acquiree.

Principles and presumptions for applying the acquisition method

• Recognition

  In a business combination, the acquirer recognises all of the assets acquired and all of the liabilities assumed.

• Measurement

  In a business combination, the acquirer measures each recognised asset acquired and each liability assumed at its acquisition-date fair value.

  The acquisition-date fair value of the consideration transferred by the acquirer is presumed to be the best evidence of the fair value of the interest acquired.

Disclosure

• Users of the acquirer's financial statements should be able to evaluate the nature and financial effect of business combinations recognised by the acquirer.

Board members generally agreed to the principles proposed by the staff.

The issue that raised most discussion was the principles and presumption in relation to recognition of goodwill. The proposal would result in the acquirer recognising all of the goodwill at the acquisition date, including goodwill related to the non-controlling interests (the 'full-goodwill method'), which will be a change from the requirements in the existing IFRS 3. Some Board members indicated that they would prefer the current approach where the acquirer recognises the full fair value of all assets and liabilities except from goodwill, and only its own purchased share of the acquiree's goodwill.

Accounting for partial and step acquisitions, changes in controlling ownership interests, and loss of control with a retained ownership interest

1. Partial and step acquisitions

The following issues were discussed and decided on:

• Measurement of the identifiable net assets in a partial or step acquisition;

  The Board affirmed the proposal in the BC ED that in a partial or step acquisition the acquirer would measure the acquiree's identifiable assets and liabilities at 100 percent of their fair values on the acquisition date (vote 13/1).

• Measurement of goodwill in a partial or step acquisition;

  The Board voted 8/6 that the full goodwill method be applied(recognising goodwill for both the purchaser and the non controlling interests share). They believed that the only compelling argument in support of the purchased goodwill method is reliability of measurement. However, they did not believe that the concerns expressed about reliability of measurement outweigh the benefits of improved relevance and transparency of financial statements and reduced complexity. The full goodwill method would also be consistent with the principle that the acquirer should recognise all assets and liabilities in a business combination.

  Again some Board members raised remarks that they had concern about this, as they had a preference for applying the purchase method for goodwill.

• Accounting for the acquirer's previously held equity interests in the acquiree in a step acquisition;

  The Board voted 7/5 (2 abstained) in favour to proceed on the basis that obtaining control or losing control of an entity is a remeasurement event. Remeasurement adjustments would therefore be recognised in net income/profit or loss. In addition to the reasons cited above, the staff preferred not to recognise such remeasurement adjustments in other comprehensive income/directly in equity because those adjustments would be 'trapped' indefinitely until the acquirer sells the business or even permanently if the acquirer never sells the business. The staff also proposed that the acquirer disclose the amount of any gain or loss recognised and the line item in the income statement in which that gain or loss is presented. The staff believed that disclosure will mitigate the concerns expressed by respondents.

  All Board members agreed that this would be a remeasurement event, but Board members seemed to be somewhat split between recognising this in profit and loss or in other comprehensive income.

2. The accounting for loss of control of subsidiaries

The staff proposed the following alternative for measuring and recognising any retained noncontrolling equity investment on the date control is lost: Any retained noncontrolling equity investment should be remeasured to fair value on the date control is lost, and the remeasurement gain or loss should be recognised in net income/profit or loss.

The Board agreed with the staff's proposal.

Accounting for bargain purchases and overpayments

Bargain purchases

The staff recommended that the Board:

• Affirm that bargain purchases can occur and that an economic gain is inherent in a bargain purchase transaction. Therefore, conceptually, the acquirer should recognise a gain on the acquisition date.
• Affirm the proposed accounting for bargain purchases in the Business Combinations II exposure draft.
• Acknowledge that the accounting for a bargain purchase is an exception to the principle that the acquirer should recognise all of the assets acquired and all of the liabilities assumed since any positive goodwill would be reduced to zero before recognising a gain. (Goodwill is already an exception to the fair value measurement principle.)
• Acknowledge that the accounting for a bargain purchase is consistent with the overpayment decision in that it is based on the notion that measuring the consideration paid by the acquirer on the acquisition date is generally more reliable than measuring the fair value of the interest acquired using other valuation techniques.

The Board agreed with the proposal by the staff as a working decision, but indicated that the issue had to be brought back at a later meeting for more extensive discussion.

Overpayments

The staff recommended the following accounting:

• Affirm the proposed accounting for overpayments in the Business Combinations II exposure draft.
• Acknowledge that the accounting for overpayments is an exception to the principle that the acquirer should recognize all of the assets acquired and all of the liabilities assumed since any the overpayment, which is not an asset, would be subsumed in goodwill. (Goodwill is already an exception to the fair value measurement principle).
• Acknowledge that the accounting for overpayments is consistent with the bargain purchase decision in that it is based on the presumption that measurement of the consideration paid by the acquirer on the acquisition date is more reliable than measuring the fair value of the interest acquired using other valuation techniques.

The Board agreed with the staff proposal

Disclosure

The Board agreed with the staff's proposed disclosure requirements.

The nature and classification of non-controlling interests in the consolidated balance sheet

Staff noted that respondents did not raise any compelling arguments to classify non-controlling interests in subsidiaries as something other than equity. The Board reaffirmed its previous decision that non-controlling interests in subsidiaries are equity and should be presented in the consolidated balance sheet within equity, separately from the parent shareholders' equity.

Presentation and disclosure of information about changes in controlling ownership interests

The staff informed the Board that most respondents disagreed with the proposals in the NCI exposure draft. Many respondents disagreed that changes in controlling ownership interests should be accounted for as equity transactions. That is because they believe that parent entity shareholders view purchases and sales of non-controlling interests as transactions with third parties that produce significant economic effects that should be recognised in net income/profit or loss. To address respondents' concerns that the proposals in the NCI exposure draft do not adequately address the information needs of parent entity shareholders, the staff proposed the following presentation/disclosure formats for changes in controlling ownership interests:

• Alternative A - Presentation only in the consolidated statement of changes in equity, if presented, otherwise separate note disclosure

• Alternative B - In addition to presentation in the statement of changes in equity, disclosure of a supplementary schedule in the notes to the consolidated financial statements

• Alternative C - Introduce a new statement to the set of consolidated financial statements or disclose at the bottom of the consolidated income statement.

The Board agreed that additional disclosure should be provided and asked the staff to consider other more complex instruments such as puts on minority interests to ensure the proposals capture such instruments adequately.

Discussion at the April 2006 IASB Meeting

The staff provided the Board with an overview of how the staff intends to approach the joint meeting with the FASB. In addition, the staff informed the Board that the more difficult topics arising from the Business Combinations project will be brought back to the Board's for consideration as soon as the staff have completed the comment letter analysis as well as working through all those comments – a process that is time consuming as it does not constitute mere re-affirmation of the principles exposed.

The Board agreed with the staff's proposals and expressed support for the excellent work the staff has been doing on this project. The Board also noted that constituents who do not understand the IASB's due process should refer to the Due Process Handbook which sets out the process that the IASB must follow in finalising a Standard.

On whether re-exposure was likely for the Business Combinations exposure draft, the staff indicated that it was not yet clear whether this would be necessary.

Discussion at the April 2006 Joint IASB-FASB Meeting

Costs incurred in connection with a business combination

The Boards discussed the appropriate accounting for costs incurred in connection with a business combination in the context of the general recognition and measurement principles agreed by each Board in March 2006. Those principles are:

• In a business combination, the acquirer recognises all of the assets acquired and all of the liabilities assumed.
• In a business combination, the acquirer measures each recognised asset acquired and each liability assumed at its acquisition-date fair value.

The staff noted that application of those principles means that acquisition-related costs associated with a business combination would not be accounted for as part of the business combination accounting (and, generally, would be expensed in the period they are incurred). In the staff's view, acquisition-related costs do not meet the recognition criteria of an asset acquired in a business combination and are not part of the fair value measurement of recognised assets acquired and liabilities assumed in a business combination.

The staff summarised the comments received from constituents, many of which criticised the ED either because the constituents favoured asset treatment for such expenditures or because they perceived an inconsistency between business combination accounting and single asset purchases. (See Observer Note [IASB] 2B/ [FASB] 15.)

Most of those who spoke during the debate supported the staff view. It was noted that the 'assets' acquired by the acquirer from service providers (lawyers, accountants, investment bankers, etc) were consumed during the transaction and had no future benefit. However, the ED's Basis for Conclusions had not refuted the arguments for recognition of such costs as an asset (essentially a component subsumed in goodwill). In addition, there was a perceived inconsistency between the treatment of such costs for asset purchases and for share issue costs. Again, the Basis for Conclusions needed to address these areas better than it had done at the ED stage.

The Boards affirmed that the acquirer shall not include acquisition-related costs in the measure of the fair value of the acquiree or the assets acquired or liabilities assumed as part of the business combination. Instead, the acquirer accounts for acquisition-related costs separate from the business combination in accordance with other IFRSs or US GAAP. (FASB: none opposed; IASB: 11 in favour; 2 opposed; 1 abstained, pending review of the Basis.)

Presentation and disclosure of non-controlling interests

The Boards were encouraged to achieve convergence of their positions on several issues related to the presentation and disclosure of non-controlling interests.

Disclosing a reconciliation of the controlling and non-controlling interest

The issue was that the IASB would require a reconciliation of movements in the carrying amount of equity attributable to equity holders of the parent entity and non-controlling interest, while the FASB's current position is that the reconciliation would be required for non-controlling interests only.

After a short discussion, the FASB did not object to adopting the IASB position.

Disclosure of changes in controlling ownership interests

The IASB agreed that entities should be required to disclose the effects of any transactions with the non-controlling interest on the equity attributable to the controlling interest in a separate schedule in the notes to the financial statements.

Several IASB members welcomed this more prominent display, but stressed that this disclosure would be either within the statement of changes in shareholders' equity or the notes to that statement (i.e., not as items of profit or loss).

Disclosure in the event of a loss of control of a subsidiary

In March 2006, the Boards affirmed that if a parent loses control of a subsidiary but retains a non-controlling equity investment in the former subsidiary, the retained non-controlling equity investment should be remeasured to fair value and any gain or loss on such remeasurement should be recognised in net income/profit or loss. At that time, the FASB also affirmed that the amount of any remeasurement gain or loss and the line item in the income statement where the gain or loss is recognised should be disclosed.

The IASB agreed that the amount of any remeasurement gain or loss and the line item in the statement of profit or loss where the gain or loss is recognised should be disclosed. Board members observed that such gains and losses would not be operating items.

Disclosing amounts attributable to the controlling interest

The Boards affirmed that only the amounts attributable to the controlling interest should be required to be disclosed either on the face of the consolidated financial statements or in the notes. There was some controversy and confusion during this discussion-one IASB member in particular was concerned that useful information would be lost through high levels of aggregation. Although a reconciliation of components would be required, the member was not convinced that users would be able to identify all critical information easily and accurately. The IASB member agreed to work with the staff out of session to articulate his concern.

Consideration transferred and fair value in a business combination

The Boards explored whether the revised definition of fair value and the recent FASB redeliberations in their Fair Value Measurements project affect the presumption in the Business Combinations Exposure Draft that the consideration transferred in an arm's-length exchange for an acquired interest (the transaction price) is the best evidence of fair value of that interest.

The staff explained that the definition of fair value used in the ED had evolved as a result of the FASB's redeliberation of their Fair Value Measurement draft Statement:

The staff suggested that, consistent with the Fair Value Measurements project, in many cases:

• (a) In an 100 percent acquisition, the consideration transferred is presumptively the acquisition-date fair value of the acquiree, as a whole.
• (b) In a less than 100 percent acquisition, the consideration transferred is presumptively the acquisition-date fair value of the interest acquired and that the fair value of the interest acquired likely will be used as one piece of information in measuring the fair value of the acquiree as a whole.

However, the FASB's Fair Value Measurements Statement will include four examples in which the entry price might differ from the exit price. The staff suggested that a business combination might occur under any one of those examples. For example:

• (a) The market in which a business combination occurs might be different from the market in which the acquirer would sell or otherwise dispose of the aggregate acquired interest.
• (b) The unit of account represented by the consideration transferred might be different from the unit of account of the acquired interest in the aggregate.
• (c) A business combination might occur under duress or a seller might be forced to accept a price because of urgency.
• (d) A business combination might occur between related parties.

During the discussion that followed, a FASB member attempted to simplify this analysis by suggesting (as a practical expediency) that presumptively the transaction price would represent fair value except in the case of a related party transaction or a combination under duress. In those situations it would be necessary to gather more information about the transaction before concluding that the transaction price did or did not represent fair value. Another FASB member noted that what the Boards were trying to distinguish were transactions in which the transaction price was pre-determined from those that were subject to true negotiation.

No decisions were made. The staff will use the discussion to help them as they continue to re-examine the fair value measurement requirement and any possible exceptions to that principle.

Discussion at the May 2006 IASB Meeting

Exceptions to the fair value measurement principle - Assets held for sale

The Business Combinations Exposure Draft (BC ED) proposes an exception to the fair value measurement principle for acquired non-current (long-lived) assets that are classified as held for sale as of the acquisition date.

At the January 2006 meeting, The Board asked the staff to bring the proposed accounting for assets held for sale back to the Board because:

• the staff was concerned about the justification for the proposal as an exception to the fair value measurement principle; and
• it was not clear to the staff whether the Boards intended the measurement exception to relate to assets that the acquiree classified as assets held for sale before the acquisition date or whether the Board intended the measurement exception to relate to any assets acquired in the business combination that the acquirer intends to hold for sale.

The Board agreed that the final standard make it clear that the designation by an acquiree of an asset as being held for sale is not relevant when recognising and measuring assets acquired in a business combination. In addition, the Board agreed with the staff view that an acquirer should be allowed to recognise an asset as being held for sale at the date of acquisition if it can meet the criteria in IFRS 5. However, it is unlikely that the acquirer would be able to meet those criteria as of the acquisition date.

The Board agreed to go a step further and amend IFRS 5 to replace 'fair value less cost to sell' with 'fair value'. It was reported that the FASB had indicated its intention to take the same extra step. However, some Board members noted that this extra step should be taken as a separate project as it will involve a fundamental review of impairment accounting.

Accounting for employee benefits in a business combination

The Board affirmed the fair value measurement exception for employee benefit obligations in the scope of IAS 19. Therefore, an acquirer will measure the assets or liabilities of the acquiree that are related to its employee benefit schemes in accordance with IAS 19 rather than at fair value.

Operating leases

The staff believes that without additional guidance, different interpretations of the application of the recognition principle to an acquiree's operating leases might result. For example, constituents might interpret the recognition principle as requiring recognition of an intangible asset (liability) for the acquiree's interest in a net beneficial (onerous) contract and:

• separate recognition of the assets and liabilities related to an acquiree's operating leases. For example, if the acquiree is the lessee of an operating lease, the acquirer would recognise a separate asset for the acquiree's rights to use assets according to the lease agreement, including related renewal options and other rights, and a separate liability for its obligations to make required lease payments.
• no recognition of assets and liabilities related to an acquiree's operating leases because IAS 17 Leases and FASB Statement No. 13 Accounting for Leases do not require separate recognition of assets and liabilities related to operating leases.

Operating leases in which the acquiree is the lessee

The Board affirmed the proposal in the business combinations ED that acquirers only should be required to recognise an intangible asset (liability) for the acquiree's interest in a net beneficial (onerous) contract, rather than being required to recognise separately an asset and related liability.

Operating leases in which the acquiree is the lessor

The staff proposed that the final business combinations standard should clarify that the fair value of the asset subject to the operating lease is not affected by the terms of the operating lease contract associated with the asset. The fair value of the asset subject to the operating lease will reflect the effects of leasing the asset at market terms at the measurement date. The effects of the terms of the existing operating lease contract should be considered separately from the fair value measurement of the asset subject to the operating lease. If the lease is not at market terms, the lessor would recognise separately an intangible asset (beneficial contract) or liability (onerous contract). The concern is that without this clarification some constituents might believe that the fair value of an asset subject to an onerous operating lease contract is lower than the fair value of the same asset leased at market terms.

Some Board members disagreed with the staff proposal on the basis that a building that is subject to lease agreements is different to one that is not subject to lease agreements. Furthermore, IAS 40 and IAS 41 are inconsistent on this issue. The Board decided to wait for the outcome of the FASB's deliberations before deciding on how to proceed.

Can an operating lease at market terms have a greater net value than zero?

The business combinations ED guidance on operating leases describes only two types of assets and liabilities that might be recognised in relation to operating lease contracts:

• an intangible asset or liability if the terms of the operating lease are favourable or unfavourable relative to market terms; and
• the asset subject to an operating lease in which an acquiree is the lessor.
• The Board agreed with the staff recommendation that the final business combinations standard should clarify, that operating lease contracts at market terms might have value for reasons other than terms that are favourable relative to market prices. For example, an operating lease contract might have value because an entity is willing to pay more than the market rate to gain entry into a market with limited access or to obtain access to existing customer relationships. In such circumstances the intangible asset to which that value is attributable should be recognised separately. That is to say, even if an acquiree's operating lease contract is at market terms, the acquirer still must recognise any intangible assets which create value in the at-market contract.

It was not clear whether the Board decided to characterise the above clarification as an exception to the recognition principle or as additional application / implementation guidance.

Discussion at the July 2006 IASB Meeting

Identifying the components of a business combination (BC)

A business combination might be comprised of several substantively separate, but related, transactions and events. It is important to identify each of the components of a business combination so that each component is accounted for in accordance with its economic substance. The component of the business combination that involves acquiring the assets and assuming the liabilities that comprise the acquiree should be accounted for as an acquisition (i.e. using the acquisition method).

Consequently, the Board agreed to include the following principle in the final BC standard:

The acquirer shall assess whether a business combination includes any transactions that are substantively separate from the acquisition of assets and assumption of liabilities that comprise the acquiree. Only the consideration transferred and the assets acquired or liabilities assumed that comprise the acquiree shall be accounted for using the acquisition method. Other transactions should be accounted for separately based on their economic substance in accordance with other IFRSs.

A transaction or event arranged by or on behalf of the acquirer and/or initiated primarily for the economic benefit of the acquirer or the combined entity (rather than for the benefit of the acquiree or its former owners prior to the business combination) is a substantively separate transaction.

A brief discussion ensued regarding proposed guidance fro pre-existing relationships, arrangements to pay for employee services and exchanges of share-based payment awards. In particular, the Board discussed the proposed guidance of reacquired rights which some Board members believe do not meet the definition of an asset and should therefore be expensed (the other alternative being to leave them subsumed in goodwill). However, this issue will be explored by the Staff and discussed by the Board in September.

Accounting for restructuring costs in a business combination

The Board affirmed its previous decision that an acquirer should recognise restructuring or exit costs as liabilities assumed in a business combination only if those costs meet the recognition criteria in IAS 37 as of the acquisition date. Those liabilities would be measured at fair value on the acquisition date. Therefore, restructuring or exit costs that do not meet the recognition criteria should be recognised when they occur as a substantively separate transaction from the business combination.

Measurement date for equity instruments issued as consideration

The BC exposure draft requires that consideration transferred in a business combination be measured at its fair value on the date control is achieved (the acquisition date). A consequence is that the fair value of any equity securities issued as consideration in a business combination is measured at the acquisition date-not at the agreement or closing date. This is a matter on which the current requirements under IFRSs differ from those under US GAAP and therefore an area where the Boards are seeking a converged solution.

The IASB reaffirmed its previous decision that equity instruments issued as consideration in a business combination should be measured at the acquisition date fair value. This decision would maintain consistency of measurement between the consideration paid and assets and liabilities acquired and assumed respectively. In addition, the Board considered that on its consolidations project, if it concluded that control was achieved through an agreement on a particular date, measurement of any consideration and the assets acquired and liabilities assumed to be measured on the acquisition date.

Discussion at the September 2006 IASB Meeting

Intangible Assets

The Board continued its deliberations on Phase II of the joint IASB-FASB project on business combinations. At the September meeting the Board focused on accounting for intangible assets acquired in a business combination.

The staff asked the Board to clarify several matters before the upcoming joint meeting with the FASB in October.

Should intangible assets be recognised separately from goodwill?

The Board agreed that intangible assets should be recognised separately from goodwill when there is a reliable and relevant measurement attribute available.

Should a market value or an entity-specific value be used to measure intangible assets?

Both IFRS 3 and FAS 141 require intangible assets to be measured at fair value. During discussions by the FASB on project, the staff has become aware that FASB members question the relevance and reliability of fair value as a measurement attribute for non-financial items when significant unobservable (non-market) input data is used. In addition, FASB members have questioned the cost/benefit of separating and measuring intangible assets when observable market values do not exist. The IASB was asked whether they want the staff to explore an entity-specific measurement attribute.

The Board confirmed that intangible asset acquired in a business combination should be recognised at a market-based estimate of fair value and that further exploration of a entity-specific value was not necessary.

The Board also had a short discussion on whether entities could measure intangible assets acquired in a business combination at zero if the acquiring entity has no intention to use the asset. Board members seemed to agree that an intangible should not be measured at zero just because an entity did not intend to use it. The value must still be determined based on whether the intangible has a market value, for example by preventing others to produce something of value.

Can intangible assets be measured separately from goodwill?

Most of the discussion focused on situations in which an entity should separate the intangible from goodwill. Some Board members expressed a view that while it is possible to separate an intangible in many cases, doing so should depend on cost/benefit considerations. For example, it may not be cost-beneficial to separate intangibles with an indefinite life from goodwill because the subsequent accounting would not be different.

At the end of this section the staff raised some specific questions for the Board:

"Do the Boards agree that a fair value measurement of an identifiable intangible asset is sufficiently reliable if it is based on inputs in Level 1 (quoted market price), Level 2 (other observable market data), or Level 3 (non-observable data) of the fair value hierarchy?"

The Board agreed.

"If not, how do the Boards want to define sufficient reliability for recognising identifiable intangible assets separately from goodwill?"

In light of the answer to the previous question, this was not discussed.

The Board did not conclude on the remaining part of the questions set out in the agenda paper.

Discussion at the October 2006 IASB Meeting

The Board continued its discussions on the proposed revision of IFRS 3 Business Combinations. At the October meeting the Board was presented five agenda papers, of which the first three papers were subject to deliberations while the last two papers were presented for educational purposes. Those Papers will also be discussed at the joint meeting with the FASB on 23-24 October 2006.

Assembled Workforce

The Business Combinations Exposure Draft (ED) proposed that an assembled workforce should not be recognised as an intangible asset separately from goodwill.

Respondents to the ED expressed mixed views on whether an assembled workforce should be recognised as an intangible. The Board discussed whether an assembled workforce represents:

• 1. intellectual capital of the employees of the entity, or
• 2. the fact that the acquired entity has a collection of employees in place in order to operate the business on day one

The Board did not tend to support the second view as it would be similar to the logic in that an existing customer relationship would meet the criteria for being recognised as an intangible asset separately from goodwill.

The Board then briefly discussed whether there are other intangible assets that need to be clarified, and decided no.

The Board also discussed whether an assembled workforce should be recognised as an intangible asset separately from goodwill. Board members' views were mixed – some members believed that it would meet the definition of an asset and others not.

In-process Research and Development

The Board briefly discussed and agreed that R&D assets acquired in a business combination should be capitalised at the acquisition date and measured using the current exchange value.

Pre-existing Relationships and Reacquired Rights

The Board discussed whether it should retain the guidance in the Business Combinations ED that would require that the effective settlement of a pre-existing relationship be accounted for separately from the business combination. The Board agreed to retain the guidance.

The Board then discussed the issue of whether reacquired rights in a business combination should be accounted for separately as an intangible asset. Board members were divided 8 to 5 in favour of recognising. The majority viewed this to be equal with acquiring any other asset that would meet the recognition criteria as an intangible asset, while the minority viewed this as allowing internally generated assets to be recognised.

As a result, the Board indicated that the final Standard should have guidance that limits the useful life of a reacquired right to the remaining contractual life of the contract between the parties.

Measurement Adjustments

The Business Combinations ED proposed that an acquirer should retrospectively recognise measurement adjustments if the acquirer at the date of acquisition did not have the necessary information to complete the initial accounting before its financial statements are issued.

Based on comments from constituents, the Board redeliberated whether it should allow prospective adjustments. After a short discussion the Board reaffirmed that the overall benefit of improved comparative information would outweigh the potential costs of retrospective application and that measurement adjustments should be made retrospectively.

Measurement Attribute

The Board held an education session on the impact on recent developments on the Boards (both the FASB and the IASB) fair value measurement projects on the business combinations project. The Boards will discuss this issue during their joint meeting next week. The education session introduced three alternative measurement attributes available for assets and liabilities assumed in a business combination.

• Each Board uses its existing definition of fair value
• Both Boards uses an entry price measurement attribute
• Both Boards uses an exit price measurement attribute

Non-controlling interests and goodwill

The Board held an education session where a new approach to measuring non-controlling interests (NCI) was introduced. The intention is to come to a joint solution between the FASB and the IASB for measuring NCI and goodwill in a business combination.

Under the 'full goodwill method' proposed in the Exposure Draft, the acquirer would recognise all of the goodwill from a business combination and as a result a portion of the goodwill would be allocated to NCI. The main concern from constituents was that this would result in a meaningless measurement of NCI.

The new approach introduced would measure NCI directly at fair value. Goodwill would then be the difference between the fair value of the consideration transferred plus the fair value of the NCI and the fair value of the net assets.

The IASB indicated agreement with the proposal, but no decisions were taken as this will be discussed at next week's joint meeting with FASB.

Discussion at the December 2006 IASB Meeting

The IASB was joined by the FASB via video link.

Non-controlling Interests and Goodwill

The Board was asked to decide on the measurement principle for non-controlling interests (NCI, historically called minority interest) in a business combination.

Paragraph 58 of the Business Combinations Exposure Draft (BC ED) states that NCI should be recognised and measured at acquisition date based on its proportional share of the fair values of the identifiable assets and liabilities plus its share of the fair value of goodwill.

The Board members in favour of this principle pointed out that measuring NCI at fair value follows from measuring all identifiable assets acquired (including the acquirer's share of goodwill) and liabilities assumed at its acquisition date fair value. Five Board members disagreed with the principle mainly for the reasons already outlined in the Alternative Views of the BC ED.

The Board members in favour of this principle pointed out that measuring NCI at fair value follows from measuring all identifiable assets acquired (including the acquirer's share of goodwill) and liabilities assumed at its acquisition date fair value. Five Board members disagreed with the principle mainly for the reasons already outlined in the Alternative Views of the BC ED.

Board members voted 9 to 5 in favour of the principle of full goodwill. However, the Board was then asked whether any exceptions to fair value measurement of NCI can be justified. The Board decided by majority of 9 votes to allow exceptions, particularly on the basis of measurement reliability.

The Board directed the staff to conduct further research on alternative measurement principles for NCI. This issue will be discussed at a future meeting.

Combinations between Mutual Entities

During their initial deliberations IASB and FASB concluded that the attributes of mutual entities are not sufficiently different to justify an accounting treatment different from that provided for other entities. Therefore, the boards decided to include mutual entities within the scope of the BC ED.

The Board reaffirmed its conclusion and clarified that the definition of mutual entities in the BC ED also includes cooperatives.

Accounting for business combinations achieved by contract alone or in absence of a transaction involving the acquirer

The BC ED proposes that business combinations that occur by contract alone or in the absence of a transaction involving the acquirer should be accounted for by applying the acquisition method.

The Board reaffirmed its conclusion.

In addition the Board was asked how to account for NCI under stapling arrangements. Interpretation 1002 of the Australian Accounting Standards Board describes a stapling arrangement as a situation in which a legal entity has "issued equity securities that are combined with ('stapled' to) the securities issued by another legal entity by virtue of a contractual arrangement between the entities". Consequently under the acquisition method the NCI would amount to 100% of the acquiree's fair value.

The Board indicated that the presentation of NCI under stapling arrangements should not result in a second category of NCI but that the definition of NCI might need to be modified. The staff was directed to conduct research on this issue.

Discussion at the January 2007 IASB Meeting

The IASB was joined by the FASB staff via video link.

Non-controlling Interests and Goodwill: Follow-up

Basis for a measurement exception

At the December 2006 meeting the Board members voted 9 to 5 in favour of the principle of full goodwill. However, the Board decided by majority of 9 votes to allow an exception to the principle.

It appeared that the majority of those Board members who favour an exception that it should be on the basis of practical difficulties (availability of data) and/or cost-benefit considerations. One Board member noted that the full goodwill principle might result in non-relevant information. For example, in case of various layers of NCI the Board member observed that the block premiums might lead to the situation that the total of fair value of the controlling interest and fair value of NCI exceeds the fair value of the acquired entity.

The Board could not agree on the rationale for an exception. The Board members in favour of exceptions were asked to discuss the various possibilities with the staff in small group sessions.

Control Model

Under the control model no additional goodwill is recognised after the acquisition date (i.e. once control is obtained) even if additional non-controlling ownership interests are acquired. It is also not derecognised if some ownership interests are sold but control is not lost. Consequently, any changes in the ownership interests after the acquisition that do not cause the acquirer to lose control would be accounted for as transactions between owners (i.e. transactions within equity). The Board decided by a majority of 10 votes that this model should be applied irrespective of how NCI and goodwill are measured.

In this context the Board discussed whether measuring NCI at a basis other than fair value is a 'measurement issue' or a 'recognition issue'. Some Board members are of the opinion that the exception would result in a 'recognition issue' since a part of the goodwill would not be recognised. No decisions were made in this respect.

Applying the measurement exception

The following alternatives were discussed:

• Principle of full goodwill as the required principle with an exception under certain circumstances (that would still have to be agreed by the Board)
• Accounting policy choice, that is, the acquirer should be permitted to assess whether to measure NCI at fair value or not

No decisions were made. However, it appeared from the discussion that the alternative treatment (the exception) would be to value NCI as a proportion of the acquiree's identifiable net assets.

The Board decided first to agree on the rationale for an exception as this might influence the decision on this issue.

Income Taxes

The Board unanimously affirmed the following decisions:

• Exception to the fair value management principle for assets and liabilities for income taxes Income taxes should be accounted for in accordance with the guidance in IAS 12 Income Taxes, as amended by the amendment to IFRS 3.
• Require that the acquirer recognises separately from the business combination accounting any changes in its deferred tax assets because of the business combination. Such changes should be recognised in post-combination profit and loss or equity.
• Recognition of changes to the acquired deferred tax benefits subsequent to the acquisition The Board decided to modify slightly the amendments to paragraph 68 of IAS 12 to:

  a. Include a rebuttable presumption Require that qualifying measurement period adjustments (both increases and decreases) in the acquired deferred tax benefits recognised within one year from the acquisition date the measurement period be recognised as an adjustments to goodwill (until increases in the acquired deferred tax benefits recognised would be limited to reducing goodwill is reduced to zero).

  b. Require that other changes in the acquired deferred tax benefits one year from the acquisition date be recognised in income, rather than as an adjustment to goodwill.

• Recognition of changes to tax uncertainties subsequent to the acquisition

The Board decided to account for these changes in the same way as for changes to the acquired deferred tax benefits subsequent to the acquisition (see above). It was decided not to address tax uncertainties in paragraph 68 of IAS 12.