Business Combinations Phase 2
Non-controlling Interests (NCI)
Fair value measurement
The Board members reaffirmed the measurement principle of NCI, that is, there was no quorum for fair value measurement as the only allowed accounting treatment.
As the FASB is strongly in favour of measuring NCI at fair value in all circumstances the purpose of this meeting was to find a solution that is supported by the required majority of Board members and simultaneously minimises any difference to US GAAP.
The discussion focussed on the following alternatives:
Alternative 1: 'The option'
Allow an accounting policy choice such that NCI may be measured at fair value or at its proportionate interest in the identified assets and liabilities.
Alternative 2: 'The exception'
Require NCI to be measured at fair value unless this accounting treatment requires undue cost and efforts. After a thorough discussion the Board voted 9 to 5 in favour of alternative 2.
Adjusting NCI for subsequent acquisitions
Following the decision on fair value measurement of NCI the Board decided by a majority of 10 votes that any acquisitions or dispositions of NCI should be accounted for as transactions within equity, that is, they would never be reflected in profit or loss while control is retained.
A majority of 8 Board members affirmed that no adjustments to goodwill should be permitted for changes between the carrying amount of the NCI and the fair value of the NCI acquired. Regarding NCI carried forward on transition to the revised Standard
11 Board members agreed to this principle.
Some respondents to the Business Combinations Exposure Draft (BC ED) commented that it was not clear if or when a change in the fair value of performance-based contingent consideration would be 'measurement period' adjustments. In addition, the Board was informed that the FASB had changed their view and decided to push back to the acquisition date all changes to contingent consideration occurring during the measurement period. The FASB staff mentioned that this outcome had surprised them.
The Board unanimously disagreed with the FASB's view and reaffirmed its view that only better knowledge about facts and circumstances already existing at the acquisition date give rise to an adjustment as at the acquisition date and that all facts and circumstances arising subsequent to the acquisition date are not part of the business combination but part of subsequent accounting. The Board confirmed that this view relates to changes in identifiable assets or liabilities, goodwill and contingent consideration. In particular, meeting future performance-based or market-based targets and [US] Food and Drug Administration approvals for in-process research and development assets were considered to be subsequent events. Some Board members were concerned that to change this view would open the door for pushing back the results of subsequent events to the balance sheet date in general.
There seemed to be a consensus to change the term 'contingent consideration' to 'conditional consideration' in order to clarify that changes to the initially measured contingent consideration are normally caused by conditions met after the acquisition date.
Additionally, the Board decided to change the disclosure requirements as follows:
- Paragraph 76(b) of the BC ED is changed such that instead of the rollforward, the acquirer be required to disclose changes in the amounts recognized for the conditional [contingent] consideration, changes in the range of outcomes (undiscounted), and the reasons for the changes.
- The acquirer is required to an additional disclosure of the valuation techniques used to measure conditional [contingent] consideration.
Accounting for bargain purchases
In light of the Board's decision regarding the measurement of NCI, three alternatives for measuring NCI and goodwill in a bargain purchase were discussed. An illustrative example is included in Agenda Paper 2C available on the IASB website.
Measure NCI at fair value and calculate goodwill or a bargain purchase gain as the final residual. In this case an acquirer would compare (i) the consideration transferred plus the fair value of the NCI and (ii) the recognised amounts of the identifiable net assets acquired. If (i) is larger than (ii), the excess is recognised as goodwill. If (ii) is larger than (i), the excess is recognised as a bargain purchase gain attributable to the acquirer.
Measure NCI as its proportional interest in the identifiable net assets. No goodwill would be recognised. A gain attributable to the acquirer would be recognised at the acquisition date for the excess of the acquirer's interest in the recognised amounts of the identifiable net assets acquired over the consideration transferred.
Measure NCI at fair value and recognise goodwill attributable to NCI (calculated as the difference between the fair value of NCI and NCI's proportional interest in the identifiable net assets). A gain attributable to the acquirer would be recognised at the acquisition date for the excess of the acquirer's interest in the recognised amounts of the identifiable net assets acquired over the consideration transferred.
The Board agreed that NCI should always be measured at the amount recognised at the acquisition date, that is, to apply alternative 1 when NCI is measured at fair value and to apply alternative 2 when NCI is measured at its proportional interest in the identifiable net assets. Alternative 3 was rejected as it might result in recognising goodwill (that is, the portion of goodwill allocated to NCI) in a bargain purchase situation.
Loss of control of a business resulting from a non-reciprocal transfer to owners
The Board decided not to address this issue as part of the business combinations project. Accounting for non-reciprocal transfers (including also demergers, spin-offs and in-specie distributions) was considered to be a broader issue that would be outside the scope of the business combinations project.
It was agreed to clarify in the guidance on the accounting for the loss of control of a subsidiary that it excludes non-reciprocal transfers to owners.
Currently, the BC ED prohibits the recognition of an acquired assembled workforce separately from goodwill. In October the IASB decided not to continue with the guidance in the BC ED but to allow separate recognition. The FASB affirmed the provision in FASB Statement No. 141 stipulating that assembled workforces should not be recognised separately from goodwill. The Board discussed the following approaches to account for an assembled workforce:
Preclude the separate recognition of an assembled workforce on the basis that either an assembled workforce is not separable under any circumstances or an assembled workforce would be separable so rarely that it is not worth preparers expending the effort to determine whether or not it should be recognised.
Permit the separate recognition of an assembled workforce, but provide application guidance that clarifies that an at-will (non-contractual) assembled workforce is separable only in rare circumstances.
By a majority of 11 votes the Board decided to adopt option 1, that is, the guidance in the IASB's BC ED was reaffirmed.
Valuation allowance disclosure
The Board agreed to a valuation allowance disclosure included in an email sent to Board members. The content of the email was not available to observers.
Based on the statements made during the discussion it appeared that as at acquisition date the nominal/contracted amount of the receivables and the expected uncollectible amounts need to be disclosed.