Business Combinations Phase II
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.