The Board continued its discussions on the proposed revision of IFRS 3 Business Combinations. At the October meeting the Board was presented five agenda papers, of which the first three papers were subject to deliberations while the last two papers were presented for educational purposes. Those Papers will also be discussed at the joint meeting with the FASB on 23-24 October 2006.

Assembled Workforce

The Business Combinations Exposure Draft (ED) proposed that an assembled workforce should not be recognised as an intangible asset separately from goodwill.

Respondents to the ED expressed mixed views on whether an assembled workforce should be recognised as an intangible. The Board discussed whether an assembled workforce represents:

• 1. intellectual capital of the employees of the entity, or
• 2. the fact that the acquired entity has a collection of employees in place in order to operate the business on day one

The Board did not tend to support the second view as it would be similar to the logic in that an existing customer relationship would meet the criteria for being recognised as an intangible asset separately from goodwill.

The Board then briefly discussed whether there are other intangible assets that need to be clarified, and decided no.

The Board also discussed whether an assembled workforce should be recognised as an intangible asset separately from goodwill. Board members' views were mixed - some members believed that it would meet the definition of an asset and others not.

In-process Research and Development

The Board briefly discussed and agreed that R&D; assets acquired in a business combination should be capitalised at the acquisition date and measured using the current exchange value.

Pre-existing Relationships and Reacquired Rights

The Board discussed whether it should retain the guidance in the Business Combinations ED that would require that the effective settlement of a pre-existing relationship be accounted for separately from the business combination. The Board agreed to retain the guidance.

The Board then discussed the issue of whether reacquired rights in a business combination should be accounted for separately as an intangible asset. Board members were divided 8 to 5 in favour of recognising. The majority viewed this to be equal with acquiring any other asset that would meet the recognition criteria as an intangible asset, while the minority viewed this as allowing internally generated assets to be recognised.

As a result, the Board indicated that the final Standard should have guidance that limits the useful life of a reacquired right to the remaining contractual life of the contract between the parties.

Measurement Adjustments

The Business Combinations ED proposed that an acquirer should retrospectively recognise measurement adjustments if the acquirer at the date of acquisition did not have the necessary information to complete the initial accounting before its financial statements are issued.

Based on comments from constituents, the Board redeliberated whether it should allow prospective adjustments. After a short discussion the Board reaffirmed that the overall benefit of improved comparative information would outweigh the potential costs of retrospective application and that measurement adjustments should be made retrospectively.

Measurement Attribute

The Board held an education session on the impact on recent developments on the Boards (both the FASB and the IASB) fair value measurement projects on the business combinations project. The Boards will discuss this issue during their joint meeting next week. The education session introduced three alternative measurement attributes available for assets and liabilities assumed in a business combination.

• Each Board uses its existing definition of fair value
• Both Boards uses an entry price measurement attribute
• Both Boards uses an exit price measurement attribute

Non-controlling interests and goodwill

The Board held an education session where a new approach to measuring non-controlling interests (NCI) was introduced. The intention is to come to a joint solution between the FASB and the IASB for measuring NCI and goodwill in a business combination.

Under the 'full goodwill method' proposed in the Exposure Draft, the acquirer would recognise all of the goodwill from a business combination and as a result a portion of the goodwill would be allocated to NCI. The main concern from constituents was that this would result in a meaningless measurement of NCI.

The new approach introduced would measure NCI directly at fair value. Goodwill would then be the difference between the fair value of the consideration transferred plus the fair value of the NCI and the fair value of the net assets.

The IASB indicated agreement with the proposal, but no decisions were taken as this will be discussed at next week's joint meeting with FASB.