Business Combinations

Date recorded:

The staff notified the Boards that, subject to the discussions that followed, they would be seeking permission to draft a pre-Ballot Draft of a final Standard (and, in the case of the IASB, revisions to IAS 27 Consolidated and Separate Financial Statements).


Sweep issues

The Boards discussed various issues for which they had individually reached different, non-convergent answers.


Off-market portions of operating leases

The IASB agreed to change its original decision and adopt the FASB's tentative position. Thus, an acquirer should measure and recognise an asset subject to an operating lease at its acquisition-date fair value without considering the terms of the operating lease (that is, the acquirer accounts for the above- or below-market value of the lease separately). If the terms of the operating lease are favourable (unfavourable) relative to market terms at the acquisition date, the acquirer would recognise an intangible asset (liability) separate from the asset subject to the operating lease. This decision (a) affirms the guidance that was proposed in the business combinations Exposure Draft, (b) is the same as the requirements of FASB Statement 141, and (c) is consistent with an example provided in EITF Issue No. 01-3 Accounting in a Business Combination for Deferred Revenue of an Acquiree.


Classification of long-lived assets as held-for-sale in a business combination

The FASB agreed to change its tentative decision and adopt the IASB's tentative decision. Thus, an acquirer would classify long-lived assets as held for sale if the sale is expected to be completed within one year and the other criteria are probable of being met within a short period from the acquisition date (usually within three months). That is, the guidance in paragraph 32 of FASB Statement 144 is retained.


Recognising and measuring an indemnification asset when the related liability is recognised or measured on a different basis

The Boards agreed that an acquirer, at the acquisition date and subsequently, should recognise an asset for an indemnification at the same amount as the related liability. In other words, the entity should measure the liability first and then recognise the indemnification asset at the same amount as the liability.


Designating an effective date other than the acquisition date

The Boards agreed not to permit an acquirer to designate as the effective date the end of an accounting period between the date a business combination is initiated and the date that combination is consummated. In agreeing this, the Boards asked the staff to ensure the Basis for Conclusions discussed this decision in sufficient depth to avoid restatements over otherwise immaterial amounts.


Reclassifications of assets and liabilities

The Boards discussed a paper that was tabled at the meeting and was not made available to Observers.

The issue was whether the Business Combination Standard should require reassessment of all contracts, including embedded derivatives, to which the acquirer becomes a party on the acquisition of the acquiree. There is existing guidance in FASB Statement 133 that requires reassessment, and the FASB did not wish to revisit this principle. Staff asserted that enquiries made had determined that much of the reassessment was undertaken as part of the due diligence process and that, with respect to those contracts containing embedded derivatives, many were closed out prior to the consummation of the business combination.

The Boards agreed that the Standard should state that the acquiree should reassess all contracts acquired as a result of the business combination other than leases and insurance contracts.


Cost-benefit assessment

The Board reviewed the cost-benefit assessments of the changes to US GAAP and IFRS made as a result of the Business Combinations package. Overall, the significant improvement to US GAAP and IFRS made by the package was thought to outweigh the short-term costs.


Non-controlling interests

The staff summarised the quandary facing the IASB: that no single measurement approach commanded a qualifying majority of the Board. Consequently, the IASB had concluded, with great reluctance, that an acquirer would be permitted a choice, to be made on a transaction-by-transaction basis, to measure non-controlling interests (a) at fair value or (b) at the non-controlling interest's percentage of the fair value of the acquiree's identifiable assets and liabilities. All subsequent increases and decreases of non-controlling interests (provided that control was not lost) would be treated as transactions among owners within equity. Consequently, if an entity does not recognise non-controlling interests at fair value and subsequently increases its ownership interest, goodwill will not be recorded for the subsequent purchase.

FASB members expressed distress that the Boards' flagship convergence project was reaching a non-converged answer on a significant principle. However, none was willing to lose the considerable progress and improvement to financial reporting being achieved as a result of the overall package.

A formal poll was taken independently by each Board.

FASB: Six in favour (no option to measure non-controlling interests based solely on the acquiree's identifiable assets). Ms Seidman indicated her intention to dissent. She cited several reasons, including using the consummation date as the accounting date (rather than agreement date) - too much market noise would be translated into the measure goodwill. Mr Herz, who had dissented to the Exposure Draft, stated that he was voting in favour primarily because he wanted a common answer to a pervasive accounting issue. He saw the package as a major step towards convergence, but not necessarily as an improvement.

IASB: Amendments to IFRS 3 (with the option to measure non-controlling interests based solely on the acquiree's identifiable assets): 11 in favour; 3 opposed. Amendments to IAS 27: Nine in favour; five opposed.

Mr Garnett (dissenting to both documents) supported the comments of Ms Seidman. He noted that goodwill is a 'sink' into which all the measurement error is placed and thought that the costs of measuring this sink at fair value outweighed any benefits it might provide. Professor Barth and Mr Smith (IFRS 3 only) supported the principle in IFRS 3 and did not support the introduction of an option, which would impair comparability. In addition, the operational application of the exception was likely to be small, and to provide an exception in such circumstances, in their view, sent the wrong message about the IASB's commitment to convergence and principle-based standards.

Messrs Engstrom, Gelard, and Yamada (IAS 27 only) objected to the counterintuitive effects on equity produced by the Board's decisions. Mr Danjou (IAS 27 only) was not convinced that the accounting for post-control transactions with non-controlling interests was appropriate.



Independently, the Boards agreed unanimously that the business combinations package did not meet the requirements for re-exposure. Consequently, formal approval was given to the staff to begin preparation of a Pre-Ballot Draft.

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