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Business Combinations – Phase II

Date recorded:

The Boards noted the following issues where each Board had reached tentative conclusions:

Measurement Period

Issue: Whether the measurement period applies to components of the consideration paid.

FASB Decision: The FASB agreed that the measurement period would include components of the consideration paid.

IASB Decision: In the IASB's proposed guidance in paragraph 61 of ED 3 (Phase I), the measurement period applies to the acquiree's identifiable assets, liabilities, and contingent liabilities as well as the cost of the combination.

Overpayments

Issue: Whether an excess of the consideration paid over the fair value of the acquirer's interest in the net assets acquired (i.e., an overpayment) should be recognised in profit or loss at the date of acquisition.

FASB Decision: The FASB decided that overpayments should not be expensed on the acquisition date. Therefore any excess of the consideration paid over the fair value of the acquirer's interest in the net assets acquired would be subsumed into goodwill and subsequently tested for impairment.

IASB Decision: At its March 2003 meeting the IASB agreed that when there is evidence to suggest that the business combination transaction is not an exchange of equal values, the excess of the consideration paid over the fair value of the acquirer's interest in the net assets acquired (i.e., any overpayment) should be recognised in profit or loss at the date of acquisition.

Transitional Provisions for Minority Interests Decisions

Issue: Whether the transitional provisions for the proposals on minority interests issues should state specifically which proposals should be applied retrospectively and which prospectively.

FASB Decision: The FASB agreed to state specifically which proposals should be applied retrospectively and which prospectively.

IASB Decision: The IASB agreed to an overall statement of principle that all of the proposals related to minority interests should be applied retrospectively, unless retrospective application would not be practicable.

However, both Boards agreed with the staff's assessment as to whether retrospective application is generally practicable for specific financial statement display requirements and minority interests transactions.

Subsequent Recognition of Deferred Tax Benefits

Issue: Whether goodwill should be adjusted for the subsequent recognition of deferred tax benefits acquired in a business combination that did not satisfy the criteria for separate recognition when the combination was initially recognised, but that are subsequently realised.

FASB Decision: The FASB affirmed its decision that deferred tax benefits recognised subsequent to the acquisition should be recognised as a reduction of income tax expense. The FASB also decided:

a. To include a rebuttable presumption that acquired deferred tax benefits recognised within one year following the acquisition date (that is, by reduction of any valuation allowance for acquired deferred tax assets) be reported as an adjustment to goodwill, rather than as a reduction of income tax expense. However, if the rebuttable presumption is overcome, the deferred tax benefit would be reported as a reduction of income tax expense for that period. The rebuttable presumption is overcome if the recognition of the acquired deferred tax benefit results from a discrete event or circumstance that occurred subsequent to the acquisition date, and, thus, was appropriately excluded from the acquirer's assessment in arriving at the valuation allowance at the date of acquisition.

b. To require disclosure of the events or change in circumstances that resulted in the subsequent recognition of deferred tax benefits.

IASB Decision: The IASB agreed that the acquirer should reduce the carrying amount of goodwill to the amount that would have been recognised under IAS 12, Income Taxes if the deferred tax asset had been recognised as an identifiable asset at the acquisition date.

Disclosure of an Additional Schedule If an Entity Is Partially Owned

Issue: Whether to require disclosure of an additional schedule that illustrates the effects of transactions with minority interests on the controlling interest's equity attributable to common shareholders and an additional per share metric that includes in the numerator the effects of equity transactions with minority interests.

FASB Decision: The FASB agreed:

  • 1. To require that entities with one or more partially owned subsidiaries disclose an additional schedule in the notes to the consolidated financial statements that illustrates the effects of transactions with noncontrolling shareholders on the controlling interest's equity attributable to common shareholders
  • 2. To require that entities that present earnings per share also disclose in that schedule an additional per share metric that includes in the numerator the effects of equity transactions with noncontrolling shareholders. IASB Decision: The IASB previously considered whether premiums and discounts on purchases of equity instruments from, and sales of equity instruments to, minority interests by members of the consolidated group without a change in control should be displayed on the face of the consolidated income statement, and rejected such a presentation. The information about the effects of such transactions on the controlling interest's equity will, under IFRS, be provided in the statement of changes in equity or in the notes to the financial statements.The IASB also previously considered whether the numerator in the earnings per share calculation should be adjusted for premiums or discounts on purchases of equity instruments from, and sales of equity instruments to, minority interests by members of the consolidated group. The IASB agreed that the effects of such equity transactions should not be treated as adjustments to the numerator. The Boards provided details as to the reasoning behind the decisions for the other Board to consider. The Boards discussed the issue of determining which assets and liabilities should be included in the business combination accounting (versus post-combination) The Boards have expressed different preferences on which assets and liabilities should be included as part of the business combination accounting. The IASB supports View A outlined below. The FASB has expressed a preference for View B. View A: The objective of business combination accounting is to reflect the economic condition of the acquiree (including the effects of the acquiree's past actions) the moment before the business combination. Under this approach, the accounting for the business combination would include the assets, liabilities, and contingent liabilities of the acquiree immediately prior to the business combination. View B: The objective of business combination accounting is to reflect the assets and liabilities that are acquired and assumed as part of the business combination. Under this approach, the accounting for the business combination would include the items acquired and assumed directly from the acquiree that met the conceptual definition of an asset or liability at the date of acquisition, as well as other assets acquired and liabilities assumed from the owners (seller) of the acquiree or third parties that are included as a condition of the combination and are essential to the business combination (for both the buyer and the seller). No consensus could be reached and it was agreed that the staff should research the issue further including a view that all assets and liabilities of the acquired entity and that are legally imposed as a result of the combination should be recognised. The Boards discussed whether certain business risks (contingencies) resulting from the acquiree's past actions constitute an obligation to stand ready when acquired. Two views were discussed in relation to the following example: An entity contaminates a river adjacent to its land in a country where there is no legislation requiring it to clean up (and the entity has not created a constructive obligation to clean up). There is, however, a possibility that a new law will be enacted in due course that will require the entity to clean up its past contamination. The likelihood of the new law being passed is assessed to be approximately 75%. View A: The entity had incurred a present obligation because it is left with little or no discretion to avoid the consequences of its past contamination. In other words, although there are no immediate consequences of the contamination, the entity is still obliged to address the consequences of its contamination, whenever they may occur. View B: The entity does not have a present obligation until the law changes because there are two things required to create a present obligation: the entity must have contaminated and that contamination must be the subject of cleanup legislation (or a constructive obligation must exist). The IASB has previously tentatively agreed with view B. FASB has still to conclude in this area. No decisions were made.

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