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Business Combinations - Phase II

Date recorded:

- Application of Purchase Method

Non Monetary Consideration Exchanged in a Business Combination

In October 2002, the IASB agreed to further discuss the provisions of UITF 31. This interpretation deals with situations in which entity B issues shares to entity A, an unrelated third party, in exchange for A's business or other non-monetary assets and as a result of this transaction becomes A's subsidiary, joint venture or associate.

The Board discussed on the following issues:

  • Should A's business or other non-monetary asset exchanged for an interest in a subsidiary, joint venture or associate be accounted for at fait value at the date of the transaction, at previous carrying amount or some combination of the two?
  • How should A's gain or loss arising on the transaction be reported?
The Board considered the following two alternatives for accounting such transaction:

View 1. The business combination is accounted for at fair value, with the measurement based on either the fair value of the non-monetary consideration paid or fair value of the transaction. Similar to other identifiable acquired assets and assumed liabilities, the non-monetary asset transferred to the acquiree as consideration would be recognised on the date control is obtained, and measured at its fair value at that date. As a result, the full amount of any profit or loss arising on the transfer to the acquiree of the non-monetary asset would be recognised in the consolidated financial statements

View 2. As the first alternative, the business combination is accounted for at fair value with the measurement based on either the faire value of the non-monetary consideration paid or fair value of the business acquired. However, from the consolidated group's perspective the non-monetary asset exchanged is viewed as neither part of the consideration paid nor part of the business acquired. Therefore, the full amount of any profit or loss arising on the transfer to the acquiree of the non-monetary asset is eliminated in the consolidated statements

The Board decided on View 2, because A has the control of B and therefore should not be able to recognise a new basis for the asset with the corresponding gain or loss in the consolidated financial statements.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.