Business Combinations

Date recorded:


Business Combinations - Phase I

Subsequent Recognition of, or Changes in the Values Assigned to, the Acquiree's Ientifiable Assets, Liabilities and Contingent Liabilities

The Board confirmed that at the acquisition date, the best estimate of fair values of net assets should be used. Regarding new information the comes to light after the acquisition has been initially accounted for, the Board agreed that an adjustment to the initial numbers (and hence to goodwill) should only be made where it is an adjustment for an error. The adjustment of the error in the fair values should be made as a prior year adjustment. Revisions of estimates other than errors should not lead to an adjustment to the fair values but, instead, should recognised in the income statement. The IFRS will provide guidance on what is an error and what is a change of estimate.

SIC 22, Business Combinations - Subsequent Adjustments of Fair Values and Goodwill Initially Reported, is being incorporated into the IFRS but will be amended to reflect the decision agreed on.

The draft IFRS is almost finished. It will be distributed to the Board on the evening of 22 May. The Board will have a 3 week period on which to make their comments.

Business Combinations - Phase II

The Board discussed several of the issues associated with the application of the purchase method that are being considered as part of the phase II joint project with the FASB:

Application of the Purchase Method - Value of Large Block of an Equity Instrument

The fair value of a large block of equity instruments might differ from the market price of a single equity instrument multiplied by the number of equity instruments issued. The FASB has tentatively agreed that consideration of this issue should be deferred until the resolution of a current SEC project addressing fair value and the blockage factor related to valuing unrestricted investments. Therefore, the FASB's Exposure Draft will note, consistent with the current guidance in Statements 141 and 142, that discounts may be appropriate in some circumstances when determining the fair value of securities issued in a business combination. However, current practice in the US for measuring the value of a business combination is to exclude discounts, or blockage factors, in determining the fair value of the consideration paid.

As part of phase I of the business combinations project, the IASB had agreed to include in the IFRS paragraph 10 of SIC 28. At today's meeting the Board agreed to remove the sentence of this paragraph that relates to where the "published price at the date of exchange is an unreliable indicator only when it has been affected by an undue price fluctuation or a narrowness of the market" and replace it with wording that is consistent with the revised IAS 39.

Application of the Purchase Mthod - Accounting for Acquisition-related Costs Incurred in a Business Combination

Acquisition-related costs

IAS 22, Business Combinations, includes directly attributable acquisition expenses (such as professional fees) as part of the cost of the investment. FASB agreed, however, that acquisition related costs are not part of the fair value of the exchange transaction and, therefore, should be expensed as incurred. The IASB agreed to adopt the FASB approach but agreed to defer finalising this decision until the outcome of the measurement basis project had been reached.

Restructuring provision

A previous IASB decision continued to require, in certain circumstances, the recognition of liabilities for terminating or reducing the activities of the acquiree that were not liabilities of the acquiree at the date of acquisition. The Board agreed that such liabilities should be included as part of the apportionment of the cost of acquisition only when the acquiree has, as at the date of acquisition, an existing liability for restructuring recognised in accordance with IAS 37, Provisions, Contingent Liabilities and Contingent Assets.

The FASB tentatively agreed that the acquirer in a business combination should account for the costs of a restructuring plan as an acquisition-related cost (and thus expense all costs incurred under the plan) unless the acquiree has a pre-existing obligation that meets the liability recognition criteria. In such circumstances, the liability would be treated as an 'assumed liability' of the acquiree and included as part of the apportionment of the cost of acquisition.

The IASB reconsidered its previous decision but reaffirmed that IASB still does not not believe that a liability exists at the date of acquisition. Thus, IASB did not change its earlier decision.

Post-employment benefit obligation triggered by a business combination

The FASB tentatively agreed that when a post-employment benefit obligation is triggered by a business combination, this is an assumed obligation in a business combination that should therefore be included as part of the apportionment of the cost of acquisition.

In a previous meeting, the IASB concluded that liabilities arising as a consequence of the business combination were not liabilities of the acquiree immediately before the business combination and therefore should not be included as part of the apportionment of the cost of acquisition. The IASB concluded that such obligations represent post-acquisition expenses of the combined entity and should, therefore, be recognised in the income statement of the combined entity.

The Board stated that it did not want to create any further areas of divergence but, at the same time, it did not fully understand the basis of the FASB's decision. Therefore, the Board delayed changing its previous decision in this area.

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