Business Combinations Phase II
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.
- 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
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.
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
The Board agreed with the staff's proposed disclosure requirements.
Note: Discussion of this topic continued on Thursday 30 March 2006.