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Business Combinations Phase II

Date recorded:

The Board considered a paper addressing a number of issues relating to fair value measurement, and some sundry issues to be dealt with in respect of the Phase II Business Combinations project.

The IASB reaffirmed its decision from the September meeting that the Business Combinations exposure draft should incorporate the definition of fair value currently being considered by the FASB in its Fair Value project (for which the comment period on an exposure draft has recently closed). The IASB's exposure draft will note in the basis for conclusions that the revised definition of fair value is only, at this time, being considered for incorporation into IFRS 3, and not into all pronouncements that require the use of a fair value measurement. The basis for conclusions will outline the future process for including the new fair value definition in other pronouncements.

The Board discussed whether it is important to assess whether a counter party is 'knowledgeable' in determining fair value. It was agreed that for the purposes of exposure the references to 'knowledgeable parties' and 'the absence of compulsion' contained in the FASB Fair Value Exposure Draft should be retained.

It was agreed that the exposure draft should retain the requirement in the FASB Fair Value Exposure Draft to utilise multiple valuation techniques in determining the fair value of an asset for which a market price is not readily available, and that the guidance included in the FASB exposure draft should also be included in the IASB's Business Combinations Phase II exposure draft. The Board agreed that consistent with the FASB proposal, the use of multiple valuation techniques should be required unless it causes 'undue cost or effort' and noted that this exemption is less stringent than the normal wording used by the IASB that exempts entities from certain requirements where they are 'impracticable'.

The Board discussed the guidance contained in the FASB Fair Value Exposure Draft on identifying an active market. The IASB agreed to incorpore this guidance in its Business Combinations Phase II exposure draft, but that the examples should be changed to reflect a wider variety of possible active markets, as all of the examples in the FASB Fair Value Exposure Draft were US-specific.

The Board agreed that the guidance on using market inputs in obtaining fair values that was included in the FASB Fair Value Exposure Draft should be included in the Business Combinations Phase II Exposure Draft.

The Board discussed whether to use the term 'immediate access' rather than 'reasonable access' in identifying markets by which fair value can be measured with reference to. The Board discussed the true meaning of 'immediate access', including discussions related to the inaccessibility of certain markets by entities in other time zones. It was agreed that the term 'immediate access' was appropriate, but that it should be clarified that simply because a market is closed for trading on balance sheet date this does not mean an entity cannot be considered to have 'immediate access' to this market.

The Board agreed to adopt the FASB guidance stating that a fair value is determined by reference to the most advantageous market to which an entity has access. However, it was agreed that the ED should clarify that these are markets to which an entity has access at this time, rather than markets an entity can foresee having access to in a number of years.

The Board agreed that no unintended consequences arise from applying the requirement to use bid prices for assets and ask prices for liabilities to non-financial assets and non-financial liabilities. It was noted that the scenario in which this is likely to be most relevant is in relation to commodities, the markets for which behave in a similar manner to those for financial assets and financial liabilities. Therefore the Board agreed to include this requirement in the Business Combinations Phase II ED.

The Board agreed that, consistent with the FASB, they would require that for offsetting positions, the mid-market prices should be used for the matched portion.

The Board considered the issues of accounting for transactions where entities are brought together by contract alone without the obtaining of an ownership interest. The Board agreed that these transactions should be within the scope of the Phase II business combinations project. Because it seemed likely that an acquirer would be able to be identified for all such transactions with the aid of the existing IFRS 3 guidance, no further guidance would be added on this issue. The Board noted that it is not possible to consider 'fresh start' accounting as part of this project because such a wide conceptual change would surely have consequences to other transactions rather than just those described above.

The Board confirmed its view that in transactions where entities are brought together by contract alone, the total amount to be recognised by the acquirer should be the fair value of the business acquired. The Board also agreed that the Exposure Draft should explicitly state that such an accounting entry should be affected by putting the credit side of the entry to equity, and noted that much confusion had been expressed about this matter.

The Board will deliberate Business Combinations Phase II again at a future meeting with the intention of issuing an exposure draft in the near future.

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