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Business Combinations II

Date recorded:

Non-controlling Interests and Goodwill: Follow-up

Basis for a measurement exception

At the December 2006 meeting the Board members voted 9 to 5 in favour of the principle of full goodwill. However, the Board decided by majority of 9 votes to allow an exception to the principle.

It appeared that the majority of those Board members who favour an exception that it should be on the basis of practical difficulties (availability of data) and/or cost-benefit considerations. One Board member noted that the full goodwill principle might result in non-relevant information. For example, in case of various layers of NCI the Board member observed that the block premiums might lead to the situation that the total of fair value of the controlling interest and fair value of NCI exceeds the fair value of the acquired entity.

The Board could not agree on the rationale for an exception. The Board members in favour of exceptions were asked to discuss the various possibilities with the staff in small group sessions.

Control Model

Under the control model no additional goodwill is recognised after the acquisition date (i.e. once control is obtained) even if additional non-controlling ownership interests are acquired. It is also not derecognised if some ownership interests are sold but control is not lost. Consequently, any changes in the ownership interests after the acquisition that do not cause the acquirer to lose control would be accounted for as transactions between owners (i.e. transactions within equity). The Board decided by a majority of 10 votes that this model should be applied irrespective of how NCI and goodwill are measured.

In this context the Board discussed whether measuring NCI at a basis other than fair value is a 'measurement issue' or a 'recognition issue'. Some Board members are of the opinion that the exception would result in a 'recognition issue' since a part of the goodwill would not be recognised. No decisions were made in this respect.

Applying the measurement exception

The following alternatives were discussed:

  • Principle of full goodwill as the required principle with an exception under certain circumstances (that would still have to be agreed by the Board)
  • Accounting policy choice, that is, the acquirer should be permitted to assess whether to measure NCI at fair value or not

No decisions were made. However, it appeared from the discussion that the alternative treatment (the exception) would be to value NCI as a proportion of the acquiree's identifiable net assets.

The Board decided first to agree on the rationale for an exception as this might influence the decision on this issue.


Income Taxes

The Board unanimously affirmed the following decisions:

  • Exception to the fair value management principle for assets and liabilities for income taxes Income taxes should be accounted for in accordance with the guidance in IAS 12 Income Taxes, as amended by the amendment to IFRS 3.
  • Require that the acquirer recognises separately from the business combination accounting any changes in its deferred tax assets because of the business combination. Such changes should be recognised in post-combination profit and loss or equity.
  • Recognition of changes to the acquired deferred tax benefits subsequent to the acquisition The Board decided to modify slightly the amendments to paragraph 68 of IAS 12 to:

    a. Include a rebuttable presumption Require that qualifying measurement period adjustments (both increases and decreases) in the acquired deferred tax benefits recognised within one year from the acquisition date the measurement period be recognised as an adjustments to goodwill (until increases in the acquired deferred tax benefits recognised would be limited to reducing goodwill is reduced to zero). b. Require that other changes in the acquired deferred tax benefits one year from the acquisition date be recognised in income, rather than as an adjustment to goodwill.

  • Recognition of changes to tax uncertainties subsequent to the acquisition

The Board decided to account for these changes in the same way as for changes to the acquired deferred tax benefits subsequent to the acquisition (see above). It was decided not to address tax uncertainties in paragraph 68 of IAS 12.

  • Recognition of deferred tax assets and liabilities for indefinite lived intangible assets The Board affirmed the requirements of IAS 12, that is, decided not to provide an exception to comprehensive recognition of deferred tax assets and liabilities related to indefinite lived intangible assets.



The Board agreed to the overall approach that the amendments to IFRS 3, including guidance for accounting for contingencies acquired/ assumed in a business combination, should be finalised before the IAS 37 project. The results of the IAS 37 project might then lead to subsequent amendments to the (amended) IFRS 3.

The staff recommended that the Board retain the IFRS 3 guidance for the accounting for contingencies acquired/assumed in a business combination with the following improvements:

  • Eliminate the term contingent liability from the business combinations standard. This would clarify that only those items that meet the definition of a liability should be recognised (i.e. 'possible obligations' should not be recognised).
  • Remove the probability recognition criterion from the business combinations standard.
  • Clarify that 'possible assets' should not be recognised even if the realisation of income is virtually certain.

The proposal would result in:

  • contingencies acquired/assumed in a business combination being measured at fair value;
  • a contingency acquired/assumed in a business combination being recognised only when it satisfies the definition of an asset or liability and its fair value can be measured reliably; and
  • Subsequent to initial recognition, contingencies being measured at the higher of (a) the amount that would be recognised in accordance with IAS 37 or (b) the amount initially recognised less any amortisation recognised under IAS 18.

The Board unanimously agreed to the staff proposal.


Employee Benefit Plans

Paragraph 48 of the current version of the BC ED exempts post-employment benefits, under IAS 19 Employee Benefits from fair value measurement. The Board decided to extend this exemption to all employee benefits that are within the scope of IAS 19.


Valuation Allowances

Paragraph 34 of the BC ED states:

The acquirer shall not recognise a separate valuation allowance as of the acquisition date for assets required to be recognised at fair value in accordance with this [draft] IFRS. For example, an acquirer would recognise receivables (including loans) acquired in a business combination at fair value as of the acquisition date and would not recognise a separate valuation allowance for uncollectible receivables at that date. Uncertainty about collections and future cash flows is included in the fair value measure.

Respondents from the financial services industry raised the following concerns:

  • The measurement of receivables acquired in a business combination at fair value would bear high compliance costs and the proposal would not be cost-beneficial
  • For practical purposes, the fair value of receivables acquired in a business combination should be measured on a portfolio basis
  • An acquirer should be allowed to present a valuation allowance for assets acquired in a business combination

The Board affirmed that receivables should be measured at fair value as of the acquisition date and that only the net amount should be presented on the face of the balance sheet.

The Board acknowledged that the historical performance of receivables is of relevance for users and that the presentation of gross amounts and allowances in the notes would be useful. Some Board members pointed out that separate disclosure of the fair value adjustments as of the acquisition date might also be of relevance. The FASB staff mentioned that the FASB is going to discuss a similar issue in its February meeting. The Board decided to discuss disclosure requirements at a future meeting and to take the outcome of the FASB meeting into account.

The Board noted that guidance on the unit of measurement would not be necessary since the unit of measurement should have no effect on the fair value as of the acquisition date.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.