IASB/FASB Joint Discussions: Business Combinations (Phase II)

Date recorded:

This is a joint IASB/FASB project on purchase method procedures and application guidance. The discussion focused on areas on which the IASB and the FASB have tentatively reached different conclusions. Those areas include:

  • Measurement date for equity instruments issued as consideration. Tentatively, IASB would use the date on which the business combination is agreed to, while FASB would use acquisition date (date control passes). After discussion, an informal joint vote of members of the two Boards showed a slight preference (11 to 9) for acquisition date.
  • Initial measurement of equity consideration -- blockage factors. Tentatively, IASB would take blockage factors into account in the case of a 'thin market' while FASB would not.
  • Assets held for disposal. FASB favours net selling price (fair value less costs of sale). IASB would use fair value.
  • Amendments to postemployment benefit plans that are a condition of the business combination.
  • Intended changes by the acquirer to employee benefits and other postretirement benefit plans.
  • Employee benefit payments triggered by a business combination.
  • Constructive obligations.
  • Initial measurement of acquired assets and assumed liabilities -- selection of a disposition market price if multiple disposition markets exist. To what extent is replacement cost an appropriate measure of fair value?
Both Boards have tentatively agreed to the following guidance for measuring the fair values of acquired assets and liabilities initially recorded at fair value by the acquirer in a business combination (the 'fair value hierarchy'):
  • Level 1: By reference to an observable market transaction (for example, cash purchases of the same or a similar item at or near the transaction date).
  • Level 2: If Level 1 is not available, through valuation methods or techniques (such as present value or option pricing models) that incorporate market-based assumptions.
  • Level 3: If neither Level 1 nor Level 2 is available, through valuation methods or techniques that incorporate assumptions not contrary to market assumptions. As a practical matter, an entity can use its own assumptions in instances in which market-based assumptions are not available.
Among the potential remaining issues the staff plan to tackle in the project are:
  • Measurement of minority interest and related goodwill.
  • Step acquisitions.
  • Sale of shares by a subsidiary ('deemed disposals').
  • Disclosure and presentation.
Staff of the two Boards are working toward an exposure draft to be issued by both Boards in March or April of 2003.

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