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FROM: MAY-JUN 2008 ISSUE | BY STEPHEN SPECTOR
In January 2008, the International Accounting Standards Board (IASB) issued a revised version of International Financial Reporting Standard (IFRS) 3, Business Combinations, and an amended version of International Accounting Standard (IAS) 27, Consolidated and Separate Financial Statements, both with an effective date of July 1, 2009; however, early adoption is permitted.
The business combinations project became part of the agenda when the IASB was formed in 2001, as it was seen to be an area of significant divergence within and across jurisdictions. In early 2001, the Financial Accounting Standards Board (FASB) finalized SFAS 141 Business Combinations, which removed the pooling of interests method and replaced amortization of goodwill with a goodwill impairment test. In Canada, similar changes were made to Handbook sections 1581 and 3062.
In order to eliminate the continual “leap-frogging” between U.S. and IASB versions of GAAP, the IASB worked with the FASB to complete the business combinations project. By sharing resources and debating the issues, the two standard-setting bodies recognized that they would ensure a “level playing field,” by eliminating as many of the differences between IFRS 3 and SFAS 141 as possible.
The 2008 revised standards introduce significant changes, including:
- A greater emphasis on the use of fair value, potentially increasing the judgment and subjectivity around business combination accounting and requiring greater input by valuation experts;
- A focus on changes in control as significant economic events; requirements to re-measure interests to fair value at the time when control is achieved or lost. The impact of all transactions between controlling and non-controlling shareholders not involving a loss of control is recognized directly in equity; and
- A focus on what is given to the vendor as consideration, rather than what is spent to achieve the acquisition. Transaction costs, changes in the value of contingent consideration, settlement of pre-existing contracts, share-based payments, and similar items will generally be accounted for separately from business combinations and will generally affect profit or loss.
Step and Partial Acquisitions
The requirement to measure every asset and liability at fair value 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 at fair value or at the non-controlling interests’ proportionate share of the acquiree’s net identifiable assets. Previously, only the latter was permitted.
Transparency and Comparability
Acquisition-related costs must be accounted for separately from the business combination, which means that they are to be recognized as expenses rather than included in goodwill.
An acquirer must recognize at the acquisition date a liability for contingent consideration. Changes in the value of that liability after the acquisition date are recognized in accordance with other IFRS, as appropriate, rather than by adjusting goodwill. The disclosures required for contingent consideration have been expanded.
Changes in Ownership Interests
Changes in a parent’s ownership interest in a subsidiary that do not result in a loss of control are to be accounted for as equity transactions, remedying a deficiency in the existing IAS 27; however, upon losing control of a subsidiary, any resulting gain or loss is to be recognized, and any investment retained in the former subsidiary is treated accordingly.
An inconsistency in the existing IAS 27 has been eliminated by requiring that an entity must attribute a share of any losses to non-controlling interests, even if this results in the non-controlling interests having a deficit balance.
The CICA has indicated it will amend the Handbook to adopt the IASB changes and it is expected that the changes will be made coincident with the move to IFRS.
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