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IFRS 3 — Contingent consideration

Date recorded:

The Exposure Draft (ED) Annual Improvements to IFRSs 2010-2012 Cycle, published in May 2012, proposed amendments to IFRS 3 which aimed to clarify the following aspects of accounting for contingent consideration in a business combination:

  1. classification of contingent consideration as debt or equity – only on the basis of IAS 32;
  2. subsequent measurement of contingent consideration classified as debt – at FVTPL, unless the recognition of the resulting gain or loss is required in OCI in accordance with IFRS 9;
  3. disclosures – IFRS 7 disclosures might be required;
  4. other issues; and
  5. transitional provisions and effective date.

Based on the comments on the ED, however, the Staff had to re-visit some of the original proposed amendments; this resulted in the further proposed amendments mainly related to the subsequent measurement of contingent consideration:

  • Issue 2 – the wording of the requirement on non-equity contingent consideration subsequent measurement in paragraph 58(b) of IFRS 3 should be amended to ensure that it does not imply that contingent consideration can only be a financial instrument.
  • Issue 2 – that the amendment proposed in the ED to IFRS 9 paragraph 4.1.2 should not be made.
  • Issue 2 – all liability contingent consideration should be required to be subsequently measured at FVTPL.
  • Issue 5 – the wording of the transition and effective date paragraph should be amended to ensure that the proposed amendments to IFRS 3 could not be applied without also applying IFRS 9.

The Board agreed with the first three proposals without any discussion.

There was a discussion about the final proposal; more specifically about whether the transition paragraph should require the application of IFRS 9. It was considered necessary to have the reference. (NB The effective date of the annual improvement will be 2015.) A Board member commented that IFRS 9 applied to classification but not to measurement of contingent consideration. It was important to amend both standards (IFRS 3 and IFRS 9) were amended in parallel to ensure consistent messages.

The Board agreed with the above Staff proposals (as modified with the drafting comments about IFRS 9).

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