Business Combinations Phase II

Date recorded:

Full goodwill method

The Board agreed during its November 2002 meeting to use the full goodwill method to recognise goodwill in the acquisition of less than a 100% controlling interest in an acquired entity. However, the Board redeliberated that decision and the staff proposed several alternatives for discussion.

Five Board members expressed serious concerns with the full goodwill method for various reasons, including reliability of measurement and relevance. One other Board member was still uncertain as to how this could be measured reliably but would not object to the issuance of the Exposure Draft. The Board agreed to retain the full goodwill method (9-4 and 1 abstention) in the current project and to proceed on this basis.

Fair value hierarchy

The Exposure Draft for phase II will include a fair value hierarchy (developed in co-ordination with the FASB) as follows:

  • Level 1 - fair value should be determined by observable markets.
  • Level 2 - fair value should be determined by adjusting observable transactions for similar items.
  • Level 3 - fair value should be determined by use of a valuation technique.

The staff has proposed changes to this hierarchy as a result of the FASB deliberations on its fair value measurement project. There is concern that the hierarchy in IAS 39 could appear to be different from the proposed hierarchy in business combinations. However, the Board noted that each hierarchy is specific to the transactions it relates to (business combinations versus financial instruments). They should be consistent in theory.

The Board agreed to accept the changes to the hierarchy. However, it was noted that in Wednesday's discussion of IAS 39, the staff has proposed removal of Level 2. If removed in IAS 39, level 2 should also be removed from this proposed standard.

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