Impairment testing

The Board discussed the issue of the second step of the impairment of goodwill and its possible inconsistencies with the impairment rules for other assets under IAS 36. The majority of the Board members agreed that goodwill should be tested for impairment consistently between IAS and FAS 141/142 ('we should get the same figures') despite the inconsistency. Therefore:

• the implied value of goodwill will be calculated as the difference between the recoverable amount of the goodwill's cash-generating unit and the fair value of all the assets and liabilities at the date of the test;
• an impairment loss will be recognised if the implied value of goodwill is less than the carrying amount in the books;
• however, some assets (and liabilities) at the date for which a fair value is calculated may not be reflected in the books. Even if those assets are not on the books, goodwill should be impaired as a result of the test above. This means that, if some assets are not reflected in the books but for which fair value is considered to arrive at the implied value of goodwill, it is possible that an impairment loss will be recognised for goodwill where the recoverable amount of the cash generating unit is higher than the aggregate fair values of the cash-generating unit's recognised assets and liabilities. This would be contrary to the current requirements under IAS 36.

Contingent liabilities

On 18 December 2001, the board discussed the issue of the recognition and measurement of contingent liabilities in a business combination. The issues raised were:

• Does IAS 37 allow the recognition of a contingent liability in the balance sheet after the acquisition?
• How should those contingent liabilities be measured subsequent to acquisition and should it be a different basis than the measurement of other liabilities under IAS 37? The proposal would be to override the IAS 37 recognition criteria for contingent liabilities recorded in a business combination.

The Board tentatively agreed that:

• A contingent liability should be recognised in a business combination and initially measured at its expected value,
• This contingent liability should subsequently be remeasured to fair value according to IAS 37. Some Board members however acknowledged that the conclusion could be different under FASB depending on the decisions on Business Combinations phase II. Measurement date for equity securities issued IAS 22, Business Combinations, currently requires the fair value of the purchase consideration given in a business combination, including equity securities issued as purchase consideration, to be measured at the date of exchange. Although the US Standard FAS 141, Business Combinations, requires, as a general rule, the cost of an acquired entity to be determined as of the date of acquisition (being the date that assets are received and other assets are given, liabilities are assumed or incurred, or equity interests are issued), FAS 141 states that, in the case of equity interests issued, the market price for a reasonable period before and after the date the terms of the acquisition are agreed to and announced should be considered in determining the fair value of those equity interests. The Board considered at this meeting whether to retain the current approach in IAS 22 or move to an approach in which equity securities issued as purchase consideration are measured at the earliest date that a substantive agreement between the parties is reached and announced to the public. The board also wanted to consider whether, as part of the measurement of those equity securities, price movements for a reasonable period before and after the measurement date should be considered. The board discussed the proposal of the staff relating to which date should be the date 'a substantive agreement is reached'. The board tentatively decided that IAS 22 should be revised to require the 'date of agreement' and that it should be the date when substantive terms are agreed, ('date an agreement is reached and announced'). The staff was however required to provide guidance on the 'agreement date' especially when dealing with hostile take-overs.