The decisions reached by the FASB at its 24 November meeting relating to the drafting issues in the joint IASB-FASB business combinations Exposure Draft were discussed by the Board.

EITF 95-8 Accounting for Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in Purchase Business Combinations

The staff proposed that the guidance on this issue in EITF 95-8 (Additional Factors to Consider in Determining Whether Certain Contingent Arrangements Should be Accounted for as Part of the Exchange for the Acquiree) be included as part of the implementation guidance in the joint exposure draft.

The Board agreed with the principles of the guidance but suggested that the wording is too long to be included in the implementation guidance as it stands. The Board asked the FASB staff to re-draft the wording to retain the principles but to make the guidance shorter.

EITF 04-1 Accounting for Preexisting Relationships between the Parties to a Business Combination

There were several issues considered in relation to EITF 04-1. It should be noted that, where the Board agreed with the conclusions reached by the EITF, it was requested that the wording be reduced for inclusion in the implementation guidance for business combinations.

The issues discussed were as follows:

(i) Whether a business combination between two parties that have a pre-existing relationship should be evaluated to determine if a settlement of a preexisting relationship exists, the requiring accounting separate from the business combination

• 'Pre-existing relationship' refers to circumstances in which the acquirer and the acquiree have a contractual (e.g. licensor/licensee) or other relationship before the business combination.
• 'Settlement of a pre-existing relationship' refers to the fact that some of the pre-existing contractual relationships are effectively 'settled' as a result of the business combination.

The EITF conclusion was that the two elements (i.e. the settlement of the pre-existing relationship and the business combination) should be accounted for separately.

The Board discussed the issue and considered the situation where, if the EITF conclusion was not concurred with, there would be potential for entities to avoid accounting for items such as onerous contracts with third parties by buying the entity with whom the contract existed.

Thus, the Board agreed with the consensus in the EITF that the two items must be accounted for separately.

(ii) How the effective settlement of an executory contract in a business combination should be measured

The EITF had reached a consensus that the effective settlement of an executory contract in a business combination as a result of a preexisting relationship should be measured at the lesser of:

• (a) the amount by which the contract is favourable or unfavourable from the perspective of the acquirer when compared to pricing for current market transactions for the same or similar items; or
• (b) any stated settlement provisions in the contract available to the counterparty to which the contract is unfavourable.

The Board agreed with the consensus on the basis that the contract would effectively no longer be favourable/unfavourable upon consolidation, but requested that the wording in the guidance be reduced.

(iii) Whether the acquisition of a right that the acquirer had previously granted to the acquired entity to use the acquirer's recognised or unrecognised intangible assets should be included in the measurement of the settlement amount or included as part of the business combination

The Board agreed with the EITF consensus that the acquisition of a right that the acquirer had previously granted to the acquired entity to use the acquirer's recognised or unrecognised intangible assets should be included as part of the business combination.

(iv) Whether the acquirer should recognise, apart from goodwill, an acquired entity's intangible asset(s) that, before the business combination, arose solely from the acquired entity's contractual right to use the acquirer's recognised or unrecognised intangible asset(s).

The EITF had reached the consensus that the reacquired right should be recognised as an intangible asset apart from goodwill.

There was much debate amongst the Board members over whether the reacquired right should be recognised as a separate intangible asset or be subsumed within goodwill.

There were several views put forward:

• The reacquired right should not be recognised as a separate asset, as effectively the reacquired right is a contract between the entity and itself and therefore it is non-sensical to recognise a separate asset - it should be included within goodwill;
• The reacquired right meets the definition of an intangible asset in accordance with IAS 38, and is separately identifiable since it has previously been sold, and therefore should be treated as a separate asset apart from goodwill;
• The reacquired right may be treated as a separate asset if the 'day 2' accounting problem of how to account for the asset in terms of amortisation can be resolved.

The Board could not reach an agreement on this issue, and requested the FASB staff to consider the 'day 2' accounting problem and to present a solution to the Board for consideration.

(v) Whether it is appropriate for an acquirer to recognise a settlement gain in conjunction with the effective settlement of a lawsuit or an executory contract in a business combination

The Board agreed with the EITF consensus that a settlement gain or loss should be recognised in conjunction with the effective settlement of a lawsuit or executory contract in a business combination, unless otherwise specified in existing authoritative literature.

Other Business Combination II issues:

(a) Definition of a Business Combination

At its 17 November meeting, the Board expressed its preference for developing a new definition of a business combination if it could be done quickly and not delay issuance of the joint Exposure Draft. As a second choice, the Board stated that it would adopt the FASB definition that was developed in phase II. That definition is "a transaction or other event in which an acquirer obtains control over one or more businesses."

Prior to the FASB's meeting, the staff distributed a memo to the FASB that provided two new alternatives for defining a business combination. Those alternatives were:

• Alternative One - A business combination is a transaction or event that brings one or more businesses into a reporting entity by means of obtaining control or otherwise.
• Alternative Two - A business combination is any transaction or event that results in the initial inclusion of one or more businesses in the financial statements of an acquirer.

Neither the staff nor the FASB could come to agreement on any one definition. Each had their pros and cons. Because the FASB believed that a new definition could not be developed quickly and because a majority still preferred the FASB's definition, the FASB decided to retain its definition.

The majority of the Board agreed.

(b) Identifying the Acquirer

Consistent with the Board's 17 November decision, the FASB agreed to explore developing converged guidance for identifying the acquirer. Prior to the FASB's meeting, the staff distributed a memo to the FASB that illustrated the approach that the staff suggested for converging the guidance. That approach is the same as the approach discussed by the IASB at its November 17 meeting, which is:

• a. The first step would be to identify the party who obtained control-Neither Board would provide any control guidance in the joint Exposure Draft. The IASB's Exposure Draft would refer to IAS 27 and the FASB's Exposure Draft would refer to ARB No. 51, Consolidated Financial Statements (as revised), and FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities, for guidance on control.
• b. If it is not obvious which party obtained control, the second step would be to consider other factors-Those factors would then be similar to the factors provided in both IFRS 3 and Statement 141.

The FASB agreed with that approach and agreed to provide suggested wording for guidance in the joint Exposure Draft. The guidance was discussed briefly by the Board and the majority voted in favour (only 1 against).

(c) Definition of goodwill

The FASB had agreed that it prefers the Board's approach for defining goodwill by its nature rather than by its measurement. However, the FASB suggested a modification to the IASB's definition of goodwill that it would like the Board to consider.

The FASB proposed modifying the definition as follows (part in square brackets marked for deletion):

Future economic benefits arising from assets that are not [capable of being] individually identified and separately recognized.

The Board agreed that capable is not the right word to describe whether an intangible asset should be recognized separately from goodwill. For example, in many instances intangible assets that are subsumed in goodwill are capable of being individually identified, however they are not recognized separately from goodwill because they do not meet the recognition criteria.

(d) Report Issues

• Reliable Measurement of Intangible Assets. The Board discussed whether the criteria for recognising intangible assets separately from goodwill needed to include the requirement that the fair value of an intangible asset must be reliably measurable to be recognised separately from goodwill. The Board had discussed this at its 17 November meeting and concluded that this requirement for 'reliably measurable' should be retained. However, the FASB had decided not to include this in its criteria. The Board held with its original view on the basis that intangible assets could not be reliably separated from goodwill if they are not reliably measurable. The Board asked the FASB staff to encourage the FASB to reconsider its reasons.
• Adjustments Made to the Provisional Amounts Recorded in a Business Combination. It was reported to the Board that the FASB had agreed to adopt the Board's approach in IFRS 3 and require that any adjustments made to the provisional amounts recorded in a business combination be accounted for retroactively (that is, adjust previously reported amounts) rather than prospectively. Thus, this issue is resolved.