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IFRS 3 — Acquisition of a group of assets

Date recorded:

Background

This was a new issue.

The IC received a request to clarify how an entity accounts for the acquisition of a group of assets that does not constitute a business. Specifically, the submitter asked for clarity on how to allocate the transaction price to the identifiable assets acquired and liabilities assumed when (a) the sum of the individual fair values of the identifiable assets and liabilities in the group differs from the transaction price, and (b) the group includes identifiable assets and liabilities initially measured both at cost and at an amount other than cost.

IFRS 3.2(b) requires an entity to do the following on acquisition of a group of assets:

  1. identify and recognise the individual identifiable assets acquired and liabilities assumed; and
  2. allocate the cost of the group to the individual identifiable assets and liabilities based on their relative fair values at the date of the acquisition.

The submitter believed that the above requirement is tantamount to establishing initial measurement requirements for a group of assets acquired that is not a business. However, other Standards also specify the initial measurement requirements for particular assets and liabilities. Accordingly, the submitter believed that there is a conflict between the initial measurement requirements of IFRS 3.2(b) and the other Standards, and sought clarification on which Standard takes precedence in such cases.

Staff analysis

The Staff believe that if a material difference exists between the transaction price of the group and the sum of the individual fair values of the identifiable assets and liabilities, the entity should reassess (1) whether it has correctly identified all of the assets acquired and all of the liabilities assumed, and (2) the determination of the individual fair values, to reconfirm whether, and why, such a difference exists.

As regards the cost allocation issue, the Staff considered two possible views:

View 1 (preferred view)

Under this view, IFRS 3.2(b) is not interpreted as providing initial measurement requirements. Instead, it sets out how to determine the transaction price of the individual assets acquired and liabilities assumed. Once the transaction price of each identifiable asset and liability has been determined, each of the assets and liabilities will then be measured initially by applying the relevant Standards. The steps to be applied under this view are as follows:

  1. Identify and recognise the individual identifiable assets acquired and liabilities assumed at the date of acquisition.
  2. Determine the individual transaction price for each identifiable asset and liability by allocating the cost of the group based on the relative fair values of those assets and liabilities at the date of acquisition.
  3. Apply the initial measurement requirements in the applicable Standards to each identifiable asset acquired and liability assumed. Any difference between the initial measurement of the individual asset or liability and its allocated transaction price should be accounted for by applying the relevant requirements, e.g. IFRS 9.B5.1.2A for financial instruments.

The Staff believe that the existence of a day-1 gain/loss under this view is not inconsistent with extant IFRS literature. This is because various Standards (e.g. IFRS 9 and IAS 41) already provide for such a situation and include guidance on how to account for it.

View 2 (alternative view)

This view interprets IFRS 3.2(b) as providing initial measurement requirements. To the extent that the IFRS 3.2(b) requirement conflicts with the more specific initial measurement requirements in the other Standards, the latter prevails. Accordingly, the steps to be applied under this view are as follows:

  1. An entity identifies the assets acquired and liabilities assumed within the acquired group, which it recognises on the date of acquisition.
  2. For any identified asset or liability that is required by the relevant Standards to be initially measured at an amount other than cost, the entity initially measures such asset or liability according to those Standards. For example, IFRS 9 for financial instruments and IAS 41 for biological assets.
  3. The entity deducts the amounts determined in Step 2 above from the transaction price of the acquired group. The entity then allocates the residual transaction price of the acquired group to the remaining identifiable assets and liabilities based on their relative fair values.

The Staff, however, illustrated with examples how this view could lead to inconsistent allocation results, and how a day-1 gain/loss could still exist (similar to view 1), e.g. when the group contains only assets that are initially measured at fair value and the transaction price of the group (assumed to equal its fair value) differs from the sum of the fair values of the individual assets (although the Staff admitted that such a situation is expected to be rare).

Staff recommendation

The Staff recommend that the IC not add this issue to its agenda on grounds that there is not sufficient evidence that the two views set out above would lead to materially different outcomes. Instead, the Staff recommend that the IC issue a tentative agenda decision containing the two views set out above, and indicate that they are the only reasonable ways in which to interpret the requirements of IFRS 3.2(b).

Discussion

Seven out of the twelve attending members approved the Staff’s recommendation.

Most IC members were in favour of view 1 but acknowledged that view 2 cannot be precluded. They noted that view 2 is mostly applied in practice when level 1 financial instruments are included in the group of assets acquired. Allocating to level 1 financial instruments a transaction price that equals their fair value would likely reflect the economics of how the transaction price for the group of assets was negotiated in the first place. Furthermore, view 2 is used in practice mainly to avoid recognising a day-1 gain/loss on financial instruments.

The IC also debated at length whether: (1) further research on the topic is needed to ascertain whether the two views would lead to materially different outcomes, (2) any standard-setting activities should be undertaken to narrow the existing practice to any particular view, and (3) the tentative agenda decision should allow a choice of two views as that might inadvertently lead to more diversity in practice especially for entities that thought view 1 was the only possible interpretation.

Throughout the discussion, most IC members repeatedly observed that even though the two views may be conceptually different, in practice they do not lead to materially different outcomes. Further research would unlikely shed any light on the differences between these two views because entities simply do not provide such comparative information in their financial statements. However, the stakeholders can comment on the tentative agenda decision if they think that the different views would indeed lead to materially different outcomes, especially in light of the proposed revised definition of a business, which is expected to result in more acquisitions being accounted for as asset deals, as opposed to business combinations.

On this basis, the Staff’s recommendations were approved by a narrow margin. However, the IC members suggested that the tentative agenda decision:

  • emphasise the need to reassess the correct identification of assets acquired and liabilities assumed, as well as their fair values, if there is a significant difference between the transaction price and the sum of the fair values of the individual assets;
  • do not state a preference for either view (given that both views are allowed on grounds that practically they do not lead to materially different outcomes); and
  • state that an entity should select a view as their accounting policy and apply that view consistently to all applicable transactions.

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