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Business combinations (including the post-implementation review follow up projects)

Date recorded:

In this joint session the IASB and FASB (“the boards”) discussed their respective projects related to their Business Combinations Standards, including the timing and overlap of the projects.  These projects covered the definition of a business, accounting for intangible assets acquired in a business combination, accounting for goodwill, and the impairment of non-current assets.

Definition of a business

The FASB Project Lead provided a summary of the status of the FASB’s project on clarifying the definition of a business.  He noted that the FASB would address this project in three phases:  1) Clarifying the definition of a business; 2) Addressing issues relating to the new revenue standard; and 3) Exploring aligning asset accounting and business combination accounting differences, which would take pressure off the definition of a business in general.  He highlighted that the first phase was where there was overlap between FASB and IFRS potential projects.  He noted that to address the concerns that had been raised in this area the FASB had tentatively decided to propose the following amendments:

  1. Include a fair value threshold in the guidance as a practical screen to evaluate when a set of assets is not a business – so that if the fair value of a single identifiable asset or a group of identifiable assets represents substantially all of the fair value of the gross assets acquired, then the substance of the arrangement would be that the acquirer was just purchasing assets rather than an integrated set (i.e. a business);
  2. Introduce a requirement that for a set to be a business it must include, at a minimum, an input and a substantive process; and include a framework to assist people in assessing when those requirements would be present;
  3. Remove the requirement that a market participant should be capable of replacing the missing elements – as the focus would now be on what was in the set; and
  4. Align the definition of outputs with the new revenue Standard

He noted that the goal of the amendments was to increase consistency in application, narrow the definition of a business, and to get U.S. GAAP further aligned with IFRS in this area.  He added that the FASB was ready to issue an Exposure Draft on this in the near term.

The IASB Technical Manager provided an overview of the IASB staff’s assessment of the FASB’s decisions to date.  He noted that the IASB staff recommended that analysis on the changes tentatively decided by the FASB should be brought to a future IASB meeting to enable the IASB to consider whether to propose the same changes to IFRS 3.  He observed that the FASB had decided not to clarify the concepts of “capable of” and “market participants”.  Most respondents to the Post-Implementation Review of IFRS 3 (“PIR”) had asked the IASB to clarify or change these two concepts, and the staff recommendation was that the IASB should also consider changing or clarifying those concepts.  He further noted that the IASB staff believed that the IASB should work towards an Exposure Draft rather than a Discussion Paper because the aim of the project was not to develop a new principle but to clarify the existing definition of a business.

Observing that the FASB had decided not to make any changes to the concept of “capable of”, an IASB member questioned the FASB staff whether some of the other changes that were being made would reduce the pressure on “capable of” and address the issues that had been raised by IASB constituents with respect to this concept.

The FASB Project Lead responded noting that the biggest concern around “capable of” related to the requirement when there was a set that had a missing element, to evaluate whether a market participant was capable of acquiring the set of assets and activities and replacing all the missing elements and continuing to produce outputs.  He noted that the market participant notion combined with “capable of” in the one sentence made it appear very broad because ultimately there would be some market participant somewhere that would be capable of doing something with what had been acquired and continue to produce outputs, and that deleting that and replacing it with a minimum requirement that a set must have an input and a substantive process took a lot of pressure off of both concepts.  He added that the proposed amendment was flipping the analysis to focus on whether the acquirer had acquired enough for it to be a business rather than whether someone could replace the missing elements.

A FASB member questioned the IASB staff as to why they did not think the FASB’s proposed changes dealt with the issues around “capable of” and “market participant”.  The IASB staff member responded and acknowledged that the concerns had been addressed, albeit in an indirect way.  A FASB member clarified what the FASB had done with respect to “capable of”.  He noted that what had been taken out was the notion of a market participant being capable of producing output with what they purchased, and that what was now required was that an acquirer had purchased an input and a substantive process and the question was now whether the market participant was capable of running that as a business. 

Referring to the fair value threshold the FASB was proposing, an IASB member pointed out that this was a convenient practical expedient and that this should be clearly explained as such in the Basis for Conclusions.

Another IASB member questioned the IASB staff as to whether there were any plans for the IASB to look at the alignment of asset accounting and business combination accounting.

The IASB Director of Implementation Activities responded noting that this was part of the feedback the IASB had received in the PIR and that the IASB staff had identified this as something that should be done in the medium to longer term.  He noted that for IFRS, one of the key differences between asset accounting and business combinations accounting was to do with deferred tax and the application or not of the initial recognition exception when an asset was acquired that had a temporary difference on day 1, and noted that this needed to be looked at first.  He added that the IASB had a separate research project on income tax accounting and that the staff would be looking to see how this could be progressed first.

All thirteen IASB members present agreed that the IASB staff should bring a paper to a future meeting with an analysis of the issues that had already been agreed by the FASB to enable the IASB to make decisions for progressing to an Exposure Draft.

Goodwill and Impairment

The IASB Senior Technical Manager introduced the IASB agenda paper on this topic.  She explained that the agenda paper provided a high level summary of how the staff proposed to address the research project and noted that the IASB staff were proposing to cover the three interrelated topics on the research agenda (identification and measurement of intangible assets, subsequent accounting for goodwill, and improving the current impairment model in IAS 36) in three steps.  She noted that the staff recommended that the IASB worked towards a Discussion Paper that covered all of the three topics together because the staff believed that the interrelationship between the three topics made it difficult to develop proposals for one topic without understanding the effects on the other topics.  She noted that the staff believed that there were a number of approaches that could be taken to address the issues, some of which had not yet been discussed by the IASB (such as the direct write off of goodwill or considering addressing components of goodwill).  Accordingly, she noted that the IASB staff believed that working towards issuing a Discussion Paper was important in order to obtain detailed feedback on the interaction of the approaches, particularly if the IASB was to consider some of the new approaches.  She further noted that given the work that had been performed in the PIR and by the FASB and other organisations, she believed that a Discussion Paper could be developed within 12 months.

The FASB Project Lead provided a summary of the status of the FASB’s progress to date on the projects on accounting for identifiable intangible assets in a business combination and accounting for goodwill.  With respect to accounting for identifiable intangible assets in a business combination, she noted that the FASB staff had presented views to the board in January 2014 with options for accounting for acquired intangible assets (as set out in paragraphs 19 through 21 of agenda paper 13D) and that the FASB was still considering those options and no decisions had yet been made.

With respect to accounting for goodwill, she reminded the boards that in response to concerns raised about the cost and complexity of the impairment model in FASB Statement No. 142 at the time it was issued, the FASB had addressed those concerns to an extent by introducing a qualitative screen allowing companies to perform a qualitative analysis which, if passed, removed the need for companies to perform the full quantitative analysis.  However, she noted that this approach had yet to be fully embraced by preparers. In relation to moving forward in this area, she noted that mixed views had been received from both users and preparers as to what the best model was and accordingly, noted that it was difficult for the FASB to figure out what the best approach to take was.  She noted that four alternatives had been presented to the FASB (as set out in agenda paper 13E) and that no decisions had yet been made.

There was discussion amongst the IASB members and staff as to whether a Discussion Paper was needed and what would be explored in a Discussion Paper that was not known today.  It was observed that the FASB plan was to go straight to an Exposure Draft.

With respect to the IASB potentially looking at the different components of goodwill, a FASB member noted that the FASB had received consistent feedback about the lack of relevance of goodwill and accounting for it.  He noted that everyone agreed that goodwill was comprised of various components, but questioned, given its apparent lack of relevancy, whether there would be any value in breaking goodwill down any further.

One IASB member suggested the IASB could further explore View C (direct write-off), and suggested an approach whereby preparers would be required to prove the discernible element of goodwill (and amortise based on definite life) and for the portion unable to be proven, be required to write this off - either directly to equity or via P&L.

Several FASB members expressed disappointment at the IASB staff’s recommendation to go down the Discussion Paper route as this would be a much longer route than going straight to an Exposure Draft. They pointed out that the FASB had been waiting for over a year to understand what the IASB was going to do for convergence purposes and that it would be difficult for the FASB if the IASB was not going to be in the game for another year and a half or so.  One FASB member questioned the extent to which a Discussion Paper would be needed, noting that IF it was decided that nothing would be done in relation to changing identifiable intangibles, the issues to be taken forward were all well-known and well-researched .   Several FASB members questioned the IASB as to when they would be in a position to decide whether to go down the Discussion Paper or Exposure Draft route, and asked specifically whether the IASB needed to wait until they had the results of their agenda consultation. 

The IASB responded noting that they would be in a position to make such a decision prior to collating the results of the agenda consultation with the IASB Technical Director noting that from some of the outreach performed people had told the IASB that they should go to standard-setting on this, and the IASB Chairman adding that the IASB was following the PIR so it was logical that the IASB would take decisions on this, and that there was no need to wait for the results of the agenda consultation.

The IASB Director of Implementation Activities noted that the IASB already had a good idea of what the issues were through the PIR so it was not a case of gathering more information about the issues, but about developing the accounting model responses, and depending on how that developed would determine whether the Discussion Paper or Exposure Draft route would be more appropriate.

There was discussion amongst the IASB members, with some favouring the Discussion Paper route, while others observing that at least some of the issues could likely be dealt with by going straight to an Exposure Draft.  The general consensus was that the IASB was not in a position to make a decision on this until they had had an in depth discussion at a future meeting.

An IASB member suggested that the IASB should also discuss the difference between goodwill paid in cash and goodwill paid in the form of issuing new shares of the acquiring entity when considering the accounting for goodwill.

The IASB Chairman stressed that it would be a bad thing if the FASB and IASB ended up in different places, and that the IASB should do its utmost to prevent that and if it meant speeding up the IASB should seriously consider doing so.  He also stressed the importance of taking into consideration the fact that there was no clear answer and cautioned about making unnecessary changes, noting that there was no one answer that would keep everyone happy.

Another IASB member noted that he believed composition of goodwill, subsequent accounting for goodwill, and impairment were all connected and should be looked at together, and accordingly noted that he was against deferring the simplification of impairment issue until after the other two steps had been considered (as suggested in the agenda paper).

He asked the FASB members whether those FASB members who supported the amortisation of goodwill supported it because it would be a way of simplifying cost or because they believed that conceptually it was the right answer.

One FASB member noted that he struggled conceptually with whether goodwill met the definition of an asset (aside from the statement in the literature that it does) and noted that amortisation seemed the most effective way to get something that he did not believe was an asset off the books.

Another FASB member noted that there was an argument, from a practical standpoint, that much of the goodwill that was left 5 or 10 or 20 years after the acquisition was not really the goodwill related to that acquisition but the replacement of goodwill that had been created subsequent to that acquisition and so by not amortising, an entity was indirectly capitalising internally generated goodwill.

A further FASB member noted that he would never support impairment with amortisation unless there was information to investors in that amortisation about a period of recovery expected under the initial acquisition.  He added that he was reluctant to move to an amortisation approach because he suspected if amortisation was introduced, it would likely be arbitrary amortisation over an extended period which would be meaningless in terms of the relevance of the information.

The IASB Chairman noted that if the IASB was starting with a blank sheet of paper, he could be in favour of amortisation but noted that, on the other hand, there were no good known amortisation methods, and that users found it worthless information, so questioned why the IASB would want to make such a change.  However, he noted that there would be a lot of benefit in looking at the impairment model.

The FASB Chairman summed up the discussion noting that there was work that both boards could do to make improvements in this area, and acknowledged that there was no simple solution here.  He encouraged the staff of both boards to share information and further noted that the FASB should also seek information from the IASB’s PIR with respect to how well the Standard operates without the two step impairment test to see whether this was another path the FASB could consider.

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