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Revised accounting requirements for business combinations The International Accounting Standards Board (IASB) has recently issued new accounting standards on business combinations. The new standards are a revised IFRS 3 Business combinations and an amended IAS 27 Consolidated and separate financial statements. The new standards have resulted from a joint project between the IASB and the US Financial Accounting Standards Board (FASB). FASB have also issued new business combination accounting standards. Probably the most newsworthy feature of these new standards is that accounting for business combinations under IFRS has not changed greatly, but accounting for business combinations under US GAAP has significantly converged with IFRS, meaning that whether US GAAP or IFRS is used, future mergers and acquisitions will be accounted for in virtually the same way. IFRS 3 has been rewritten and the text of the standard is now clearer and easier to follow. The underlying approach of the standard has not changed. The main changes to IFRS 3 and IAS 27 are detailed below. 1. Step and partial acquisitions The requirement to measure at fair value every asset and liability at each step in a step acquisition for the purposes of calculating a portion of goodwill has been removed. Instead, goodwill is measured as the difference at acquisition date between the value of any investment in the business held before the acquisition, the consideration transferred and the net assets acquired. For a business combination in which the acquirer achieves control without buying all of the equity of the acquiree, the remaining (non-controlling) equity interests are measured either at fair value or at the non-controlling interests’ proportionate share of the acquiree’s net identifiable assets. Previously, only the latter was permitted. 2. Transparency and comparability Acquisition-related costs must be accounted for separately from the business combination, which usually means that they are recognised as expenses (rather than included in goodwill). An acquirer must recognise at the acquisition date a liability for additional consideration (contingent consideration). Changes in the value of that liability after the acquisition date are recognised in accordance with other IFRSs, as appropriate, rather than by adjusting goodwill. The disclosures required to be made in relation to contingent consideration have been enhanced. 3. New guidance to address diverging practice Requirements have been added to specify that changes in a parent’s ownership interest in a subsidiary that do not result in the loss of control must be accounted for as equity transactions, remedying a deficiency in the existing IAS 27. The requirements have been clarified for how the acquirer accounts for some of the assets and liabilities acquired in a business combination that had been proving to be problematic - replacing the acquiree’s share-based payment awards; being indemnified by the seller; rights, such as franchise rights, that the acquirer had sold to the acquiree previously and are part of the business combination; embedded derivatives; cash flow hedges; and operating leases. 4. Other improvements The scope of IFRS 3 now includes business combinations involving only mutual entities and business combinations achieved by contract alone. This ensures that the accounting for an important part of M&A activity for which there have been no IFRS requirements will be consistent with the accounting for other M&A activity. An inconsistency in the existing IAS 27 has been removed by requiring that an entity must attribute a share of any losses to the non-controlling interests even if this results in the non-controlling interests having a deficit balance. Requirements have been added to specify how, upon losing control of a subsidiary, an entity measures any resulting gain or loss and any investment retained in the former subsidiary. Effective date The new requirements take effect on 1 July 2009, although entities are permitted to adopt them earlier. The IASB have also stated that they do not expect any significant revisions to accounting for business combinations for the foreseeable future. |
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