Business Combinations Phase II

Date recorded:

IASB Meeting IASB Chairman David Tweedie welcomed Jan Engstrom to his first Board meeting. Mr. Engstrom joined the Board effective 1 May 2004. His term expires 30 June 2009.

The IASB discussed various sweep issues related to the proposed exposure draft on the application of the purchase method. These issues were:

  • Whether the IASB should reconsider the definition of a business included in IFRS 3 and also whether the IASB should include application guidance on identifying a business similar to the guidance that the FASB plans to provide.
  • Whether the purchase method should be renamed the acquisition method.
  • Whether IAS 12 should be amended to explicitly address deferred tax assets arising from excess tax goodwill.
  • The recognition and measurement of operating leases acquired in a business combination.

Definition of a Business

The staff noted that the definitions of a business as set out in the IASB's and FASB's proposals were broadly consistent. The differences related to:

  • Whether development stage entities were businesses.
  • The inclusion of the word "generally" in the IASB's definition.
  • The IASB presumption that where goodwill is present a business exists.
The staff noted that the purpose of the goodwill presumption was to cause a careful examination of the nature of a transaction in which goodwill arises.

The staff recommended that the definitions not be changed.

Some Board members noted that the recognition of the purchase of a basket of assets under the business combination criteria would give rise to different results than if individual asset recognition standards such as those in IAS 16 were applied, and that difference was what caused problems. The Board agreed to discuss with FASB examining initial recognition of assets outside a business combination. In the meantime the Board agreed to eliminate the word "generally", to provide further guidance in this area, and to provide further guidance for using the goodwill presumption.

Change of Name of the Project

The Board agreed to change the name of the project and the wording of IFRS 3 to refer to the Acquisition Method and not the Purchase Method.

Deferred Tax Assets Arising from Excess Tax Goodwill

The Board considered whether a deferred tax asset should be recognised if the amount of goodwill deductible for tax purposes is more than the amount recognised for financial reporting purposes. The Board agreed it should be recognised.

Recognition and Measurement of an Operating Lease Acquired in a Business Combination

Under IFRS 3 favourable and unfavourable operating lease contracts are recognised net.

The Board considered whether the reference to all assets and liabilities acquired in a business combination included the rights and obligations under an operating lease that is neither favourable nor unfavourable. The Board agreed that these were recognised but net at nil. It was noted that this was not to disturb the initial classification and could be affected by future decisions.

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