Business Combinations – Phase I

Date recorded:

The Board discussed responses to the proposal that an entity should disclose a variety of information for each segment, based on the entity's primary reporting format, that includes within its carrying amount goodwill or intangible assets with indefinite useful lives.

The staff proposed the following disclosures:

  • An entity shall disclose the information required under (a) to (f) for each cash-generating unit for which the carrying amount of goodwill or intangible assets with indefinite useful lives allocated to that unit is significant in comparison to the total carrying amount of goodwill or intangible assets with indefinite useful lives:
    • (a) The carrying amount of goodwill allocated to the unit.
    • (b) The carrying amount of intangible assets with indefinite useful lives allocated to the unit.
    • (c) The basis on which the unit's recoverable amount has been determined (value in use or net selling price).
    • (d) The amount by which the unit's recoverable amount exceeds its carrying amount. If the entity determines a range of values for the unit's recoverable amount and does not proceed to agree a single value within that range because the lowest value exceeds the unit's carrying amount, that fact shall be disclosed together with the range of amounts by which the recoverable amount values exceed the unit's carrying amount.
    • (e) If the unit's recoverable amount is based on value in use: — A description of each key assumption on which management has based its cash flow projections for the period covered by the most recent budgets/forecasts. Key assumptions are those to which the unit's recoverable amount is most sensitive. — A description of management's approach to determining the value(s) assigned to each key assumption, whether those value(s) reflect past experience and/or, if appropriate, are consistent with external sources of information, and, if not, how and why they differ from past experience and/or external sources of information. — The period over which management has projected cash flows based on financial budgets/forecasts approved by management and, when a period used for a cash-generating unit, an explanation of why that longer period is justified. — The growth rate(s) used to extrapolate cash flow projections beyond the period covered by the most recent budgets/forecasts, and the justification for using any growth rate that exceeds the long-term average growth rate for the products, industries, or country or countries in which the entity operates, or for the market to which the unit is dedicated. — The discount rate(s) applied to the cash flow projections.
    • (f) If the unit's recoverable amount is based on net selling price, the methodology used to determine net selling price. If net selling price is not determined using an observable market price for the unit, the following information shall also be disclosed: — A description of each key assumption on which management has based its determination of net selling price. Key assumptions are those to which the unit's recoverable amount is most sensitive. — A description of management's approach to determining the value(s) assigned to each key assumption, whether those value(s) reflect past experience and/or, if appropriate, are consistent with external sources of information, and, if not, how and why they differ from past experience and/or external sources of information.
  • If some or all of the carrying amount of goodwill or indefinite life intangible assets is allocated to multiple cash-generating units, and the amount so allocated to each unit is not significant in comparison to the total carrying amount of goodwill or indefinite life intangible assets, that fact shall be disclosed, together with:
    • (a) The aggregate carrying amount of goodwill or indefinite life intangible assets allocated to those units.
    • (b) The number of those units.
  • If, in the circumstance described above, (1) the aggregate carrying amount of goodwill or indefinite life intangible assets allocated to some or all of those units is significant in comparison to the total carrying amount of goodwill or indefinite life intangible assets, and (2) the recoverable amounts of those units are based on the same key assumption(s), that fact shall be disclosed, together with:
    • (a) The aggregate carrying amount of goodwill allocated to those units.
    • (b) The aggregate carrying amount of intangible assets with indefinite useful lives allocated to those units.
    • (c) A description of the key assumption(s).
    • (d) A description of management's approach to determining the value(s) assigned to the key assumption(s), whether those value(s) reflect past experience and/or, if appropriate, are consistent with external sources of information, and, if not, how and why they differ from past experience and/or external sources of information.
  • If this is accepted the following disclosures proposed in the exposure draft would not be required:
    • (a) The value assigned to each key assumption on which management has based its cash flow projections or its determination of net selling price.
    • (b) The amount by which the value assigned to each key assumption must change, after incorporating any consequential effects of that change on the other variables used to measure recoverable amount, in order for the unit's recoverable amount to be equal to its carrying amount.
    • (c) The change in the growth rate used to extrapolate cash flow projections beyond the period covered by the most recent budgets/forecasts that would cause the recoverable amount of the unit to be equal to its carrying amount.
    The Board agreed with the disclosures except that (d) would be amended to require disclosure of a key assumption where there is a reasonable possibility of a change in that assumption that would give rise to an impairment. In these cases the assumption, the value assigned and a description of the change possibilities would be required. The Board discussed the transitional provisions of the draft standard and agreed that the requirements should be applied prospectively from the effective date of the standard and that retrospective application would be permitted provided the necessary information was obtained at the time of the combination and that the retrospective impairment tests could be performed. It was noted that the draft standard would be effective for all combinations after it is issued. The staff proposed that goodwill previously written off directly to equity would not be recycled to the income statement. The Board agreed. The staff proposed adding undue cost and effort exemptions together with disclosures of this fact and explanations of why this is the case for paragraphs 66(f), 66(i), 69 and 70. The Board agreed. The staff proposed amending paragraph 67 of IAS 12 as follows:

    "As a result of a business combination, an acquirer may consider it probable that it will recover its own deferred tax asset that was not recognised prior to the business combination. For example, the acquirer may be able to utilise the benefit of its unused tax losses against the future taxable profit of the acquiree. In such cases, the acquirer recognises a deferred tax asset, but does not include it as part of the accounting for the business combination, and therefore does not take into account in determining the goodwill or the amount of any excess over the cost of the combination of the acquirer's interest in the net fair value of the acquiree's identifiable assets, liabilities and contingent liabilities."

    The Board agreed. The Board agreed that any goodwill impaired in an associate would be reversed prior to determining the investor's share of profit. The investor would then test the investment in the associate for impairment.

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