Business Combinations:

Date recorded:

Presentation by IASB Member Tatsumi Yamada

  • At its July meeting, the Board tentatively agreed that all business combinations should be accounted for as acquisitions using purchase accounting. Tatsumi Yamada (Japanese Liaison Member) felt that in Japan there were examples of transactions where it was not possible to identify an acquirer. He identified five examples.
  • In each of the cases, the pooling method was used. During discussion, Board members acknowledged that there are transactions that 'economic common-sense' suggests to be mergers and where fresh-start accounting would be appropriate; however, the Board previously agreed to leave this to phase two of the project.
  • The Board concluded that the five cases did not have any characteristics unique to Japan and that similar cases had been examined in reaching the conclusions implemented in the US and Canada.
  • The Board concluded that the position unique in Japan is a cultural one, where it is not acceptable to portray an acquiree and an acquirer. The Board hopes to address this by providing specific guidance for identifying an acquirer and to ask Mr. Yamada to provide wording making this more culturally acceptable in Japan.

Definitions and Scope

  • The definition of business combination from the previous meeting was discussed in draft format. It was felt necessary to tighten up exclusions, since those combinations scoped in would all be required to use purchase accounting. On this basis, it was felt appropriate to remove the word 'acquisitions' as it may result in misinterpretation. It was also felt that 'reporting entity' must be defined.
  • The Board will amend IAS22 rather than issue a new IFRS. Therefore, conclusions reached on presentation of standards issued by the new IASB will not apply.
  • The exposure draft should include the guidance that SIC has been developing on common control.
  • The Board discussed whether mergers by contract should be included in the scope of the standard or dealt with in phase two of the project. No decision was reached.
  • The Board discussed the linked subjects of step-acquisitions and presentation of minority interests. Discussion centred on whether step-acquisitions should be scoped in or put in to the consolidation project in phase two, and whether an increased holding in a subsidiary should be accounted for as a step-acquisition or as treasury stock. These issues will be discussed further in October.
  • The Board concluded that minority interest is an equity item, not a liability.
  • The Board discussed fresh-start accounting, particularly for circumstances in which an acquirer is clear but for tax/legal/practical reasons a new company is set-up to acquire both parties. In Australia, this transaction would be treated as if the new company were the acquirer (even if the substance is clearly to the contrary) with the combining parties both revalued to fair value. The Board had planned to consider fresh-start accounting in phase two, but it does not want amend IAS 22 in a way that stops countries already using the method from using it, only to re-introduce the method at a later date. Concerns were expressed about (1) the potential abuse of such a method if it was permitted without clear criteria for its use and (2) whether it is inconsistent with the guidance in IAS 22.12 on reverse acquisitions. The Board tentatively decided to remove IAS 22.12 from the exposure draft, to explain the discussion held, and to invite comment.

Intangibles other than goodwill and IPR&D

  • The illustrative list of potential acquired intangibles from FAS 141 will be included in the standard.
  • Accounting for intangibles with a finite useful economic life should follow IAS 38.
  • The Board agreed that intangible assets can have an indefinite (but not infinite) useful economic life, even if this requires subsequent actions. Guidance for identifying such assets will be included in the exposure draft. The Board concluded that such intangibles should be reviewed for impairment rather than amortised over an arbitrary period, but once the life of the asset becomes determinable, amortisation should commence. The IAS 36 impairment approach is to be used with an annual test for unamortised intangibles.
  • The Board agreed that revaluation should be allowed for intangible assets that (a) have an indefinite useful life and (b) are acquired in a business combination (using IAS 38 revaluation procedures) even if no active market exists for them. Otherwise this would be inconsistent with recognising the asset in the first place. IAS 38 may subsequently be amended to allow this for all acquired intangibles.

In-process research and development (IPR&D)

  • The Board's tentative view: both research and development acquired in an acquisition must be recognised as assets if they satisfy the normal acquired intangibles criteria -- even though an asset would not be recognised if such costs are incurred directly by the acquirer. Subsequent accounting will follow IAS 38.
  • The Board debated whether subsequent R&D expenditure relating to acquired IPR&D should be treated under paragraphs 42 and 45 of IAS 38 (no capitalisation of any research and capitalisation of development only after strict commercial viability criteria are met) or whether paragraph 60 (all subsequent expenditure adds to the original IPR&D asset, subject to impairment) should apply. The concern expressed with the second option is if a minimal amount, say $20, of research is acquired and capitalised, then a further expenditure of $20 billion can be capitalised. The $20 billion would not have been capitalised if the initial $20 not been acquired. The Board saw this as a potential abuse and concluded that paragraphs 42 and 45 should apply.


  • Initial discussion considered whether goodwill is an asset. Most standard-setters say that it is (although not UK or Germany, although they still capitalise the cost). Under IAS it is considered an asset although it does not appear to meet the criteria in the Framework. The Board concluded that it is an asset, because the purchase price was paid for a reason, although it is not a separately measurable asset.
  • The Board concluded that non-amortisation was the correct treatment for goodwill, with an impairment test that is stringent but does not create an onerous implementation workload. The Board noted that this conflicted with the 4th EU Directive.
  • Issues relating to the impairment test were debated, with Board conclusions noted:
    • Level at which the test should be applied: The existing definition of 'cash-generating unit' should be strengthened to mean the lowest level possible within the existing management structure, to minimise the cost of performing the exercise.
    • The value-in-use measure in IAS 36 will be retained.
    • The IAS 36 guidance on the assumptions permitted in assessing the worth of goodwill (budgets, growth rates, etc.) will also be retained, but the expected value notion will now be required, not just permitted.
    • The comparison should include assets and liabilities that were unrecognised at the date of acquisition but that would be recognised if the purchase took place on the date the test is being performed. However, this is necessary only if an initial review at the unit level has indicated impairment. This effectively means a two-step test.
    • Where detailed calculations have been necessary for the company to illustrate that there is no impairment or what the level of impairment is, these should be reviewed in subsequent periods to ensure that they are comparable with the actual results achieved. The frequency of such tests is to be further debated at the next meeting.

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