Business Combinations – Phase II

Date recorded:

The Board agreed to require disclosure of gains and losses on obtaining or losing control of subsidiaries.

The IASB had previously agreed that when a business combination is not an exchange of equal values, any excess of the consideration paid over the fair value of the acquirer's interest in the net assets acquired (ie any overpayment) should be recognised in profit or loss at the date of acquisition.

The disclosure of an overpayment would implicitly be required by the following disclosure objectives in ED 3, Business Combinations:

  • "An acquirer shall disclose information that enables users of its financial statements to evaluate the nature and financial effect of business combinations" (paragraph 65).
  • "If in any situation the information required to be disclosed by this [draft] IFRS does not completely satisfy the objectives set out in paragraphs 65, 71 and 73, the entity shall disclose such additional information as is necessary to meet those objectives" (paragraph 76).
The Board agreed to explicitly require entities to disclose the amount of any such overpayment, the income statement line item in which the overpayment is recorded, and the reasons for the overpayment.

The Board agreed to revise the disclosure in paragraph 66(i) of ED3 to also include a requirement to disclose revenue of the acquiree since the acquisition date.

The staff proposed that:

  • The term contingent asset and the existing guidance for such assets are withdrawn from IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
  • Phase II should require the recognition of non-monetary assets without physical substance separate from goodwill, if those assets have a separate fair value that can be measured reliably, irrespective of whether those assets satisfy the identifiability criterion in the proposed IAS 38.
The Board had previously tentatively concluded that definition of a contingent asset should be: "a present right that arises from past events that may result in a futu cash inflow (or other economic benefits) based on the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity."

The staff noted that this definition defines an asset and consequently the term contingent asset is misleading.

The Board agreed that this is not a definition of a contingent asset but that the contingent asset is the underlying on which the present right depends. The contingent asset would be excluded from assets recognised in a business combination. The present rights referred to above would, however, be intangible assets but may not meet the criteria for separate recognition. In these cases they would be subsumed in goodwill in the business combination. Certain Board members expressed concern that they would not be separately recognised. It was agreed that the staff would investigate this further.

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