IAS 22, Business Combinations

Date recorded:

Subsequent Cash Flow Test for Goodwill

At its last meeting the Board decided that goodwill should not be amortised but should be subject to an annual impairment review that is calculated based on cash flows. The discussions considered whether extra disclosure is needed.

It was agreed that extra disclosure was needed to show how the impairment or non-impairment is arrived at and would include: -

  • Methodology of the process
  • Sensitivity to future events
  • If the estimation process was changed or if there was a change in assumptions, how would this impact on the value of goodwill in the balance sheet.
Draft disclosures had been drawn up and were to be discussed during the afternoon session. Discussion is expected to continue at the December or January meetings.

Identifying an Acquirer when a New Entity is Formed to Effect a Business Combination

The Board continued its discussion of whether, when a new entity is formed to issue equity instruments to effect a business combination, that new entity or one of the combining entities that existed prior to the business combination should be determined to be the acquirer. The Board had tentatively agreed not to take a position in the Phase I exposure draft but, rather, to seek respondants' views. The Board is reconsidering that decision, with a view to reaching a tentative conclusion to include in the Exposure Draft.

Business Combinations Issues Arising in the Improvements Project

1. Can a finance lease be reclassified to an operating lease on acquisition using a new fair value calculation on acquisition? The Board decided that under IAS 17.10 it is the classification at the inception of the lease which is important, and this classification should continue on acquisition (unless there are certain conditions defined within IAS 17). The Board concluded that no additional guidance was required and no changes would be made.

2. Accounting for a reverse acquisition: The Board deferred discussion until its next meeting.

3. Possible contradiction between IAS 22 and IAS 39 on whether to include the costs of arranging debt for acquisition: The Board concluded to make the IAS 22 wording consistent with IAS 39.

4. Measurement of acquirer's shares issued for acquisition: Which date should be used? Should the quoted market price on that date always be used if available? The Board will consider these at its December meeting.

5. Costs of registering and issuing equity instruments: The Board concluded that reference in IAS 22 to the cost of issuing equity instruments should be deleted.

6. IAS 22.39(k) states that the fair value of onerous contracts equals the present value of the amounts to be disbursed. A query had been raised concerning non-onerous executive contracts. The Board agreed that all contracts should be included in the fair value assessments including non-onerous executive contracts, and IAS 22 should be clarified.

7. There is a discrepancy within IAS 22 regarding a subsidiary's recognition of deferred tax. The Board concluded not to address this in Phase I.

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