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Business Combinations Phase I

Date recorded:

In April 2004, the IASB published an Exposure Draft of Proposed Amendments to IFRS 3 Business Combinations - Combinations by Contract Alone or Involving Mutual Entities. The comment period closed 31 July 2004. 75 comment letters were received.

Staff presented a summary of the comment letters. The majority of respondents said that they disagreed with the Board. The various reasons for this where discussed at length. The Board agreed to proceed as follows:

  • Not to finalise the ED of proposed amendments, but rather deal with the issues in Phase II of the business combinations project.
  • Clarify that IAS 22 does not apply to business combinations that may be achieved by contract alone or involving mutual entities because that standard has been superseded and, therefore, is not within the IAS 8 hierarchy. This point was made to highlight that pooling of interests is no longer an option. Instead, preparers would have to analogise to principles within pronouncements currently in issue, and this may include IFRS 3, despite the scope exclusion. The Board noted that this may give rise to different accounting treatment depending on which pronouncements were referred to. For instance, some may look to the conceptual framework and not IFRS 3, due to the scope exclusion.
  • The descriptor 'combinations by contract alone without the obtaining of an ownership interest' would be clarified to state 'combinations by contract alone that do not involve any of the combining entities obtaining an ownership interest in the other combining entity (entities)' so as to eliminate any structuring opportunities.
  • Clarify that if an entity is a parent in terms of IFRS 3 under such arrangements, then it should apply IAS 27 effective 31 March 2004 consistently with the effective date of IFRS 3.
  • Clarify that in terms of IFRS 1, if a parent-subsidiary relationship existed on the date of transition where a 'stapling' transaction had been entered into, then the parent would, on first-time adoption, be required to consolidate the subsidiary.

The Board viewed the above as clarifications of the current requirements, not amendments, and therefore exposure of the above would not be necessary. Furthermore, the Board agreed to communicate these clarifications directly with the respondents who commented on the exposure draft as well as through its publications, including IASB Update, Insight, and posting on the website.

The following are some of the reasons discussed by the Board before agreeing to proceed on the above basis:

  • The Board's intention is to eliminate the pooling of interests method of accounting for business combinations that may be achieved by contract alone or involving mutual entities whilst Phase II of the business combinations project is being completed.
  • Removing the scope exclusion in IAS 22 would require re-exposure and would be contradictory to the Board's earlier decision to address these issues during the Phase II project.
  • Any amendments to current literature would affect the 'stable platform'.

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