Business Combinations - Phase II

Date recorded:

At its November 2002 meeting, the IASB agreed that the full goodwill method should be used to recognise goodwill in the acquisition of less than 100 per cent controlling interest in the acquiree. Under the full goodwill method, all of the goodwill of the acquiree, including goodwill attributable to minority interests, is recognised. The Board discussed several issues that stem from the application of this method when the cost of the acquisition is to be determined by reference to the net assets acquired.

The Board concluded that expected synergies and other benefits from combining the business of the acquiree and the acquirer should enter into the measurement of the fair value of the acquiree-but only up to the level of synergies that would be expected in the market. The synergies should be therefore measured at fair value.

The Board concluded that goodwill should be allocated on a reasonable basis to the controlling and non-controlling interests when the combination is an exchange of equal values. The Board concluded that issues related to the measurement of fair value are not unique to this project and, therefore, it would be inappropriate to provide detailed guidance here. The Board did not discuss where or whether such guidance should be provided.

The Board concluded that if the fair value of the acquirer's interest in the acquiree is less than the consideration it paid for that interest (overpayment), that amount should be recorded as an expense. If the result is an underpayment, that amount is a gain. Several Board members expressed serious concern about this decision, as an amount historically attributed to goodwill could become an expense based on the ability of the entity to use internal synergies to improve the asset. For example, an entity may pay 100 more for an asset then anyone else because of its unique abilities to make more money from the asset than anyone else. However, since the market would not presume those synergies, the entity must write off the overpayment even if it thinks it could return 1,000 more.

Another effect of this decision is whether the distinction between measurement of equity securities issued in a business combination at the agreement date or acquisition date will be important. That is, based on the Board's decision, any change in the market price shares to be issued between the agreement date and the acquisition date would imply the valuation at the acquisition date is not longer valid. Therefore requiring measurement of the net assets acquired to determine the cost of acquisition. The Board also concluded that negative goodwill should never be in the financial statements.

The Board also discussed issues related to noncontrolling interests and the possibilities for gaming on disposition of a subsidiary that result from a prior IASB decision. Due to time constraints, the Board did not discuss this issue at length. However, the Board noted general agreement with the Staff's proposal (which was not described in any sufficient detail to the observers). Please refer to the minutes of the IASB for further details on this issue.

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