Business Combinations II
The FASB staff joined the meeting by video conference.
The Board discussed several sweep issue identified while drafting the revised version of IFRS 3 Business Combinations and consequential amendments to other standard.
Accounting for the off-market value attributable to an operating lease in which the acquiree is a lessor
The issue was whether the off-market value attributable to an operating lease in which the acquiree is the lessor should be aggregated with or recognised separately from the underlying asset.
In February 2007 the IASB tentatively decided that an acquirer should measure and recognise an asset subject to an operating lease at its acquisition date fair value considering the terms of leases in place at the acquisition date. As such, a separate asset or liability would not be recognised if the lease is favourable or unfavourable. The FASB tentatively decided that the acquirer should measure and recognise an asset subject to an operating lease at its acquisition date fair value without considering the terms of leases in place at the acquisition date. If the terms of the lease are favourable (unfavourable) relative to market terms at the acquisition date, the acquirer would recognise an intangible asset (liability) separately from the asset subject to the operating lease.
The Boards discussed the issue again at the April 2007 joint meeting, and the IASB decided to converge with the FASB on this issue.
The staff identified a question regarding the application of the fair value model in periods after a business combination, particularly, how to determine the fair value of the investment property in periods after the combination.
The Board discussed the following options for measuring the fair value of an investment property in periods after the business combination.
Consistent with the provisions of IAS 40, measure the fair value of the investment property considering the cash flows from operating leases in place. However, in order to avoid double counting, this amount is adjusted by the current balance of the asset (liability) relating to the favourable (unfavourable) terms of an operating lease that was recognised separately at the acquisition date.
Measure the fair value of the investment property without considering the terms of any operating leases in place, even leases entered into after the acquisition.
Measure the fair value of the investment property without considering the terms of leases in place at the acquisition date. However, the entity does consider the terms of operating leases entered into or modified after the acquisition date.
The Board noted that all three options could result in a situation where identical assets appear dissimilar depending on how the asset was acquired. The Board acknowledged that IAS 40 Investment Property would have to be amended to avoid inconsistencies and that given the significance of such an amendment an exposure draft would be required.
To avoid amendments to IAS 40 the Board decided to reaffirm its February decision. It was noted that this decision does not affect goodwill but exclusively accounting under IAS 40.
Non-controlling interest (NCI)
The staff noted that the transition section of the pre-ballot draft of the NCI standard proposes to require that if the parent controls the subsidiary when the standard is applied, the parent would recast consolidated net income attributable to the parent to deduct any losses that were attributed to the parent because those losses exceeded the non-controlling interest in the equity capital of the subsidiary. Accordingly, those losses would be reattributed to the non-controlling interest.
The staff raised the concern that this decision may cause practice issues that will outweigh the benefits of comparability:
- The NCI transition decisions were premised on the view that the disclosure provisions should be applied retrospectively for comparability, but that transactions and amount recognized in the financial statements should not be changed. However, recasting for excess losses would require preparers to restate their earnings attributable to the controlling interest and, therefore, would affect earnings per share in prior periods.
- Additional guidance would be required about how far back earnings should be recasted.
- Additional guidance would be required on how to record that recast in the period of adoption, that is, whether it would be a charge to beginning retained earnings.
The Board unanimously agreed to the staff recommendation and decided that the amounts attributable to the parent and the non-controlling interest should not be changed if excess losses were previously attributed to the parent.
The Board unanimously affirmed its decision that the accounting for replacement awards in the revised version of IFRS 3 should be limited to situations in which the acquirer is obligated to issue replacement awards.
The Board unanimously decided:
- To clarify that an indemnification asset should only be recognised to the extent that it is collectible by adding the following sentence to paragraph 43 of the standard: 'The recognised indemnification asset shall be subject to management's assessment of the collectibility of that amount.'
- To clarify that the subsequent accounting for an indemnification asset should be the same as the acquisition date requirements; that is, that the acquirer, based on the specific terms of the agreement, would continue to recognise and measure the indemnification asset, using assumptions that are consistent with those used to measure the liability.