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Business Combinations II - Purchase Method Procedures

Date recorded:

The FASB staff was present by video link.

Recognition of an acquirer's deferred tax benefits as a result of a business combination

The Board agreed that a previously unrecognised deferred tax liability (or one for which a full valuation allowance had been provided under FAS 109 Accounting for Income Taxes) may be recognised at the acquisition date and not before. This would be made explicit through a consequential amendment to IAS 12 Income Taxes.

Including deductible temporary differences or loss carryforwards of the acquirer in the combination

The Board agreed that the recognition of a deferred tax asset by the acquirer as the result of its pre-existing deductible tax differences or loss carryforwards that meet the recognition criteria in IAS 12 as a result of a business combination is a separate transaction and should be accounted for separately from the business combination.

The FASB staff noted that, in an education session, the FASB had expressed a preference (by a 5-2 vote) for including these items as part of the business combination. IASB members noted this, but expressed concerns about the application of the FASB's preferred approach in jurisdictions that do not have consolidated tax returns. The Board agreed to include a discussion of this point, and any difference with the FASB, in the Basis for Conclusions on the exposure draft. Disclosure: intangible assets that were not recognised separately from goodwill The Board agreed to remove the reliability of measurement recognition criteria for intangible assets. This converges with a FASB decision.

Disclosure: format of the disclosure of the assets acquired and liabilities assumed

The Board agreed to require disclosure of a condensed balance sheet and to provide a non-mandatory illustration of this requirement. (This approach was adopted because of concerns that there might be confusion between the disclosure required in the business combinations standard and that required by IAS 34 Interim Financial Reporting.)

Disclosure: carrying amount of assets acquired and liabilities assumed

The Board agreed to eliminate the requirement to disclose the carrying amounts immediately prior to the combination of each of the classes of assets acquired and liabilities assumed (determined in accordance with IFRSs). Some Board members saw this requirement as both onerous and as raising almost insurmountable audit issues.

Disclosure: maximum potential amount of future payments

The Board agreed to add a requirement in the business combinations exposure draft to disclose (a) the maximum potential amount of future payments (undiscounted) the acquirer could be required to make under the terms of the acquisition agreement; and (b) if there is no limitation on the maximum amount, disclosure of that fact.

Disclosure: operations to be disposed of

The Board agreed to eliminate the requirement in IFRS 3 Business Combinations to disclose the details of any operations the acquirer has decided to dispose of as a result of the business combination. This requirement has been superseded by IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.

Disclosure: scope of application for certain disclosures

The Board agreed (by an 8-5 majority) to require all entities to disclose revenue of the acquiree since the acquisition date and selected information as if the business combination had occurred as of the beginning of the annual reporting period. This will result in a difference between IFRSs and US GAAP, although entities applying IFRSs will satisfy US GAAP. The Board agreed that the derogation proposed by the FASB would be considered as part of its project on non-publicly accountable entities.

Disclosure: pro-forma disclosure for prior period

The Board expressed a preference not to add a requirement to disclose the comparable prior fiscal year if comparative financial statements are presented (for selected information as if the business combination had occurred as of the beginning of the annual reporting period). It was noted that, in the US this pro-forma disclosure was supplementary to the audited financial statements, an option that was unavailable to the IASB. The Board agreed to discuss this issue in its Basis for Conclusions on the exposure draft and to ask a question about it in the Invitation to Comment.

Disclosure: assets and liabilities for which the measurement period is still open

The Board agreed to add a requirement to disclose the assets acquired and liabilities assumed for which the measurement period is still open.

Disclosure: 'Day 2' gains or losses of significance

The Board agreed to clarify that disclosure is required of the amount and an explanation for any gain or loss recognised in relation to a business combination occurring in the current or immediately prior period that relates to the identifiable assets acquired or liabilities assumed and is of such size, nature, or incidence that disclosure is relevant to understanding the combined entity's financial statements.

Disclosure: goodwill

The Board agreed that it would expose its proposals on goodwill as part of the business combinations exposure draft. To include them as a proposed amendment of IAS 38 Intangible Assets would be a 'non-trivial exercise'. (The FASB will include its proposals as an amendment of FAS 142 Goodwill and Other Intangible Assets.) The Board did not accept a proposal to reduce the line items that are required in the reconciliation of the opening and closing balance of goodwill.

Reliability of measurement recognition criteria for intangible assets acquired in a business combination

The Board agreed to remove the reliability of measurement criteria for intangible assets. In addition, the Board agreed to include guidance similar to that in FAS 141 paragraph 39.

Incorporation of EITF guidance

The Board discussed whether the business combinations exposure draft should incorporate guidance contained in EITF 04-1 Accounting for Pre-existing Relationships between the Parties to a Business Combination. The issue was the appropriate accounting by a franchisor for the acquisition from a franchisee of a franchise right. This might occur, for example, when a franchisor repurchases a [successful] franchise either to run the location as a corporate location or, if the location is not successful, to turn it around with a view to re-franchising it later on.

The Board agreed to incorporate this guidance and to specify that the asset acquired was an intangible asset and not goodwill. The intangible asset would be amortised over the remaining franchise term.

Guidance on reverse acquisition accounting

The Board agreed to include detailed guidance on reverse acquisition accounting and related example, as revised, in its implementation guidance.

IAS 27 sweep issues

The Board agreed that IAS 27 Consolidated and Separate Financial Statements should be revised so that the gain or loss on disposal of a subsidiary includes cumulative gains and losses reflected in equity that relate to the subsidiary and that are being 'recycled' on loss of control of that subsidiary.

The Board agreed not to prescribe a specific presentation of the gain or loss on disposal of a subsidiary in the income statement.

The Board agreed that no gain or loss should be recognised with respect to noncontrolling interests on loss of control.

Correction list for hyphenation

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