Business Combinations - Phase II

Date recorded:

There are three components of phase II of the project:

  • application of the purchase method;
  • fresh start accounting (re entities under common control); and
  • issues excluded from the scope of phase I, being business combinations involving two or more mutual entities, and business combinations creating a reporting entity via contract and not through ownership interest, e.g., a dual listed company.
Components (1) and (2) are running as joint projects with FASB.

All matters discussed at the meeting related to the application of the purchase method.

The Board accepted the following working principle:

The accounting for a business combination is based on the assumption that the transaction is an exchange of equal values. The total amount to be recognized should be measured based on the fair value of the consideration paid or the fair value of the net assets acquired, whichever is more clearly evident.

  • If the consideration paid is cash or other assets (or liabilities incurred) of the acquiring entity, the fair value of the consideration paid determines the total amount to be recognized in the financial statements of the acquiring entity.
  • If the consideration is in the form of equity instruments, the fair value of the equity instruments ordinarily is more clearly evident than the fair value of the net assets acquired and, thus, will determine the total amount to be recognized by the acquiring entity.
In a business combination, the acquiring entity obtains control over the acquired entity and is therefore responsible for the assets and liabilities of the acquired entity. An amount equal to the fair value, on the date control is obtained, should be assigned to the identifiable assets acquired and liabilities assumed.
  • If the total fair value exchanged in the purchase transaction exceeds the amounts recognized for identifiable net assets, that amount is the implied fair value of goodwill.
  • If the total fair value exchanged in the purchase transaction is less than the amounts recognized for identifiable net assets, that amount should be recognized as a gain in the income statement.
At its meeting in January the Board will discuss the final bullet point in the working principle above and ensure that its application ties in to the principle agreed in October that where negative goodwill arises, the carrying amounts recognised for those acquired identifiable net assets that do not have a 'readily ascertainable market value' are reduced (if necessary to nil). The tentative view was that the working principle would apply to any residual and so was not inconsistent with what was agreed in October.

It was agreed that issues within the scope of phase II are:

  • how is minority interest recorded (tentative view is to record identifiable assets and liabilities at 100% of fair value rather than part at fair value and part (re minority interest) at historic carrying values);
  • if subsequently buy out the minority how is the transaction measured;
  • step acquisitions (the improvements project will clarify what IAS 22's rules require whereas phase II will look again at the issue from first principles);
  • what is the measurement date for equity consideration paid;
  • what is the date of acquisition;
  • when measuring equity consideration should large blocks be valued at a discount/premium to the market value;
  • should direct costs of acquisition be included in the cost of acquisition (as part of the improvements project it has been agreed that the costs of issuing equity should be deducted from equity and are not part of the cost of acquisition);
  • contingent consideration;
  • acquisition provisions for restructuring;
  • deferred revenues;
  • recognition of deferred tax asset/liability arising as a result of the acquisition;
  • assets to be disposed of (it was suggested that the US and IAS definitions of temporary control differ);
  • contingencies of the acquired entity (in particular, can fair value be determined for contingent assets);
  • hindsight period for adjusting fair values.
The project will not consider:
  • stock options issued to employees (this will be considered as part of the stock options project);
  • whether current standards on income taxes give fair values for taxes;
  • whether the standard on pensions gives the fair value of pensions.
The project director reported that she did not think that convergence between FASB and IASB would be reached on in-process research and development because FASB is not currently reconsidering IPR&D.;

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