Identifying the components of a business combination (BC)

A business combination might be comprised of several substantively separate, but related, transactions and events. It is important to identify each of the components of a business combination so that each component is accounted for in accordance with its economic substance. The component of the business combination that involves acquiring the assets and assuming the liabilities that comprise the acquiree should be accounted for as an acquisition (i.e. using the acquisition method).

Consequently, the Board agreed to include the following principle in the final BC standard:

The acquirer shall assess whether a business combination includes any transactions that are substantively separate from the acquisition of assets and assumption of liabilities that comprise the acquiree. Only the consideration transferred and the assets acquired or liabilities assumed that comprise the acquiree shall be accounted for using the acquisition method. Other transactions should be accounted for separately based on their economic substance in accordance with other IFRSs.

A transaction or event arranged by or on behalf of the acquirer and/or initiated primarily for the economic benefit of the acquirer or the combined entity (rather than for the benefit of the acquiree or its former owners prior to the business combination) is a substantively separate transaction.

A brief discussion ensued regarding proposed guidance fro pre-existing relationships, arrangements to pay for employee services and exchanges of share-based payment awards. In particular, the Board discussed the proposed guidance of reacquired rights which some Board members believe do not meet the definition of an asset and should therefore be expensed (the other alternative being to leave them subsumed in goodwill). However, this issue will be explored by the Staff and discussed by the Board in September.

Accounting for restructuring costs in a business combination

The Board affirmed its previous decision that an acquirer should recognise restructuring or exit costs as liabilities assumed in a business combination only if those costs meet the recognition criteria in IAS 37 as of the acquisition date. Those liabilities would be measured at fair value on the acquisition date. Therefore, restructuring or exit costs that do not meet the recognition criteria should be recognised when they occur as a substantively separate transaction from the business combination.

Measurement date for equity instruments issued as consideration

The BC exposure draft requires that consideration transferred in a business combination be measured at its fair value on the date control is achieved (the acquisition date). A consequence is that the fair value of any equity securities issued as consideration in a business combination is measured at the acquisition date-not at the agreement or closing date. This is a matter on which the current requirements under IFRSs differ from those under US GAAP and therefore an area where the Boards are seeking a converged solution.

The IASB reaffirmed its previous decision that equity instruments issued as consideration in a business combination should be measured at the acquisition date fair value. This decision would maintain consistency of measurement between the consideration paid and assets and liabilities acquired and assumed respectively. In addition, the Board considered that on its consolidations project, if it concluded that control was achieved through an agreement on a particular date, measurement of any consideration and the assets acquired and liabilities assumed to be measured on the acquisition date.