Project plan

The staff presented the project plan for completing the Business Combination project Phase I. The Board agreed with the proposed timetable, and that the final Standard should be issued in March 2004.

Analysis of comments received on questions in ED 3

The staff reported the results from the comment letter analysis on ED 3. Question 8 relating to the proposal that goodwill not be amortised will be discussed at the next meeting in London.

Question 1 - Scope

The Exposure Draft proposed to exclude from the scope of the IFRS business combinations in which separate entities or operations of entities are brought together to form a joint venture, and business combinations involving entities under common control. Commentators were asked whether they believe these scope exclusions are appropriate and, if not, why not. The Exposure Draft also proposed to include in the IFRS a definition of business combinations involving entities under common control, and additional guidance on identifying such transactions. Commentators were asked whether they found the definition and additional guidance helpful in identifying transactions within the scope exclusion and, if not, what additional guidance should be included and why. The Board concluded at this time to leave the scope exceptions as proposed in the Exposure Draft.

A majority of the respondents agreed with the scope exclusion (joint ventures and entities under common control) because it is a part of the Business Combinations Phase II project. The Board will not change the definition of common control. However there is some concern whether the Board narrowed the definition of joint ventures too far as a result of this project. The staff will explore whether all owners must have joint control or whether only the entity in question has to be one of the entities with joint control.

The staff will research issues raised on the definition of a business combination, as the current definition requires that the entities be operating (that is, does an acquisition by a holding company meet the definition of a business combination?).

Question 2 - Method of accounting for business combinations

The Exposure Draft proposed to eliminate the pooling of interests method and to require all business combinations in its scope to be accounted for by the purchase method. Commentators were asked whether this is appropriate and, if not, why not. If commentators believed the pooling of interests method should be applied to a particular class of transactions, they were asked why, and to provide criteria for distinguishing those transactions from other business combinations.

The Board was agreed (unanimous) to keep the purchase method only as proposed.

Question 3 - Reverse acquisitions

Under IAS 22, a business combination is accounted for as a reverse acquisition when an entity (the legal parent) obtains ownership of the equity of another entity (the legal subsidiary) but, as part of the exchange transaction, issues enough voting equity as consideration for control of the combined entity to pass to the owners of the legal subsidiary. In such circumstances, the legal subsidiary is deemed to be the acquirer.

The Exposure Draft proposed to modify the circumstances in which a business combination could be regarded as a reverse acquisition by clarifying that for all business combinations effected through an exchange of equity interest, the acquirer is the combining entity that has the power to govern the financial and operating policies of the other entity (or entities) so as to obtain benefits from its (or their) activities. As a result, a reverse acquisition occurs when the legal subsidiary has the power to govern the financial and operating policies of the legal parent so as to obtain benefits from its activities. Commentators were asked whether this is an appropriate description of the circumstances in which a business combination should be accounted for as a reverse acquisition and, if not, under what circumstances, if any, a business combination should be accounted for as a reverse transaction.

Commentators were also asked whether they believe the guidance in Appendix B of ED 3 on the accounting for reverse acquisitions is appropriate and, if not, why not. They were also asked whether any additional guidance should be included and, if so, what specific guidance should be added.

The Board agreed to stay with the proposal (13-0) and to add some additional guidance regarding consolidated accounts and individual accounts. In addition, the Board will clarify that all of the tests required to determine the acquirer for regular acquisitions will need to be completed for reverse acquisitions.

Question 4 - Identifying the acquirer when a new entity is formed to effect a business combination

The Exposure Draft proposed that when a new entity is formed to issue equity instruments to effect a business combination, one of the combining entities that existed before the combination should be adjudged the acquirer on the evidence available. Commentators were asked whether they believe this approach is appropriate and, if not, why not.

The Board agreed (12-1) to retain the proposals in the ED 3. The Board also agreed to add additional guidance on how to determine the acquirer when more than two entities are involved. The Board asked the staff to consider the US SFAS 141.

Question 5 - Provisions for terminating or reducing the activities of the acquiree

Under IAS 22, an acquirer must recognise as part of allocating the cost of a business combination a provision for terminating or reducing the activities of the acquiree (a "restructuring provision") that was not a liability of the acquiree at the acquisition date, provided the acquirer has satisfied specified criteria.

The Exposure Draft proposed that an acquirer should recognise a restructuring provision as part of allocating the cost of a business combination only when the acquiree has, at the acquisition date, an existing liability for restructuring recognised in accordance with IAS 37. Commentators were asked whether they believe this proposal is appropriate and, if not, what criteria an acquirer should be required to satisfy to recognise as part of allocating the cost of a combination a restructuring provision that was not a liability of the acquiree, and why.

Most commentators agreed with the proposal, but a majority of preparers disagreed as they did not believe the proposal reflects economic reality. The Board agreed to retain the position in the ED as they believe they have already clearly addressed the preparers' concerns in the Basis for Conclusions.

Question 6 - Contingent liabilities

The Exposure Draft proposed that an acquirer should recognise separately the acquiree's contingent liabilities at the acquisition date as part of allocating the cost of a business combination, provided their fair values can be measured reliably. Commentators were asked whether this is appropriate and, if not, why not.

Some comment letters said that this proposal was inconsistent with the Framework and IAS 37. Additionally, concern was expressed over the different treatments for contingent assets and contingent liabilities. However, the Board confirmed its decision that the contingent liability should be recognised at fair value (12-2).

The ED proposed that contingent liabilities be recognised at fair value with changes recognised in income until the contingent liability meets the requirements of IAS 37. The Board asked the staff to work on a fair value measurement model and to look at IAS 39 and FASB Statements 141 and 142 for guidance. This issue will be further discussed at a future Board meeting.

Question 7 - Measuring the identifiable assets acquired and liabilities and contingent liabilities assumed

IAS 22 includes a benchmark and an allowed alternative treatment for the initial measurement of the identifiable net assets acquired in a business combination, and therefore for the initial measurement of any minority interests.

The Exposure Draft proposed requiring the acquiree's identifiable assets, liabilities and contingent liabilities recognised as part of allocating the cost to be measured initially by the acquirer at their fair values at the acquisition date, so that any minority interest in the acquiree would be stated at the minority's proportion of the net fair values of those items. This proposal is consistent with IAS 22's allowed alternative treatment. Commentators were asked whether they believe the proposed measurement is appropriate and, if not, how the acquiree's identifiable assets, liabilities and contingent liabilities recognised as part of allocating the cost of a business combination should be measured when there is a minority interest in the acquiree, and why.

The Board agreed to retain the approach proposed in the ED (13-0) and noted the FASB intends to converge with this decision.

Question 9 - Negative Goodwill

The Exposure Draft proposed that if negative goodwill exists, an entity should:

(a) reassess the identification and measurement of the acquiree's identifiable assets, liabilities, and contingent liabilities and the measurement of the cost of the combination; and

(b) recognise immediately in profit or loss any excess remaining after that reassessment.

Commentators were asked whether they believe this treatment is appropriate and, if not, how any such excess should be accounted for and why.

The majority of the comment letters disagreed with the proposal. Some comment letters cited the asymmetric treatment of goodwill and negative goodwill, while others noted that recording assets at an amount greater than what was paid is inconsistent with the historical cost concept.

The Board agreed to stay with the proposal in the ED 3 (12-1) for the reasons set out in the Basis for Conclusions.

Question 10 - Completing the initial accounting for a business combination and subsequent adjustments to that accounting

The Exposure Draft proposed that if the initial accounting for a business combination can be determined only provisionally by the end of the reporting period in which the combination occurs because either the fair values to be assigned to the acquiree's identifiable assets, liabilities or contingent liabilities or the cost of the combination can be determined only provisionally, the acquirer should account for the combination using those provisional values. Any adjustment to those values as a result of completing the initial accounting is to be recognised within twelve months of the acquisition date. Commentators were asked whether they believe twelve months from the acquisition date is sufficient time for completing the accounting for a business combination and, if not, what period would be sufficient and why.

The Exposure Draft also proposed that with some specified exceptions carried forward as an interim measure from IAS 22, adjustments to the initial accounting for a business combination after that accounting is complete should be recognised only to correct an error. Commentators were asked whether they believe this is appropriate and, if not, under what other circumstances the initial accounting should be amended after it is complete and why.

Most of the comment letters agreed with the window of 12 months, and the Board agreed to stay with this proposal (12-1). The Board also decided that the adjustment of provisional amounts should retrospective (13-0), and business combinations outside of this 12-month window should only be adjusted for the correction of an error (13-0).