At its meeting in March 2007 the Board tentatively decided to require an acquirer to measure non-controlling interests (NCI) at fair value unless to do so would impose undue cost or effort on the acquirer. Initial feedback from constituents and staff research indicated that it is unlikely that the term undue cost or effort would be applied consistently. The Board tentatively decided, given these concerns, to permit an acquirer to measure NCI either at fair value or at its proportionate interest in the fair value of the acquiree’s identifiable net assets, on a transaction-by-transaction basis.
It was clear that providing a measurement option was not the first preference of most Board members. However, the Board accepted that providing an option was the only viable way of achieving support for the package of changes and preserving the other significant improvements to financial reporting developed in this project.
The Board also acknowledged that this might be an area on which IFRSs and US GAAP could not converge. The measurement of NCI had already been identified as a sweep issue for discussion at the IASB-FASB joint meeting, when both boards would be given the opportunity to affirm their decisions. The outcome of those discussions is included in the summary of the joint meeting.
Measurement attribute in a business combination
At their joint meeting in October 2006, the IASB and the FASB discussed the measurement attribute in a business combination. With the publication of SFAS 157 Fair Value Measurements, and given that the IASB’s Fair Value Measurements project is still in progress, IFRSs and US GAAP currently have different definitions of fair value.
Both boards had asked the staff to develop an understanding of how the different definitions of fair value might affect the valuation of assets acquired and liabilities assumed in a business combination. To do this, the staff developed a case study of a hypothetical business combination and assembled a working group of valuation professionals familiar with making valuations for both IFRS and US GAAP purposes. The working group responded that in most circumstances they would use the same models, inputs and methodologies under IFRSs and US GAAP. However, in some areas differences in fair value might arise.
On the basis of the results of the case study, the Board affirmed that fair value is the measurement attribute in a business combination and that the IFRS 3 definition of fair value (ie the amount for which an asset could be exchanged, or liability settled, between knowledgeable, willing parties in an arm’s length transaction) should be retained in the revised business combinations standard.
In making this decision, the Board observed that in a business combination fair value measurements under IFRSs and US GAAP will be consistent in virtually all cases, and any differences are unlikely to affect how users view a business combination. Such differences should be addressed as part of the Fair Value Measurements project.
Some of the differences arise because the IASB and the FASB use different words to articulate similar concepts in IFRSs and US GAAP, respectively. For clarity, the Board asked the staff to include a discussion of those concepts in the application guidance or basis for conclusions of the revised business combinations standard.
Classification and designation of assets, liabilities and equity instruments acquired or assumed in a business combination
The IASB has received requests to provide guidance on whether, and in what circumstances, a business combination triggers a reassessment of the acquiree’s classification or designation of assets, liabilities and equity instruments acquired or assumed in a business combination. In February, the Board asked the staff to develop a principle that could be included in the business combinations standard.
The staff presented a proposed principle and explained the consequences of applying the principle to the:
- classification of leases, insurance contracts, assets held for sale and financial instruments (eg as held-to-maturity, available-for-sale or fair value through profit or loss);
- separation of embedded derivatives from the host; and
- continuation of the designation of a hedging relationship.
While indicating that it supported the approach suggested by the staff, the Board did not make a final decision because the staff reported that the FASB did not support the inclusion of the proposed principle. The FASB instead preferred to affirm the guidance in other US standards for classification or designation or, if no guidance exists, to affirm the accounting that is typical in US practice. The difference in the approach would mean that the accounting for embedded derivatives acquired or assumed as part of a business combination would not converge. The staff noted that this matter would be added to the sweep issues to be discussed at the joint meeting. The outcome of those discussions is included in the summary of the joint meeting.
The Board tentatively decided that the revised business combinations standard and the revised IAS 27 Consolidated and Separate Financial Statements should be applied at the same date and should be effective for annual reporting periods beginning on or after 1 January 2009. Earlier application will be permitted. If the revised standards are applied before their effective dates, that fact should be disclosed.
The Board tentatively affirmed the proposed disclosures in the business combinations exposure draft with some minor clarifications and improvements based on decisions made during its redeliberations. The Board also tentatively decided to retain the existing disclosures in IFRS 3 related to items currently described as contingent assets and contingent liabilities with the following improvements:
- If a contingent liability cannot be measured reliably, the acquirer should disclose the reasons that the contingent liability cannot be measured reliably. The acquirer should also disclose the information in paragraph 86 of IAS 37 regardless of whether the possibility of any outflow is remote.
- If a contingent asset that meets the definition of an asset in the Framework cannot be measured reliably, the acquirer should disclose the reasons that the contingent asset cannot be measured reliably. The acquirer should also disclose the information required in paragraph 89 of IAS 37 regardless of whether the inflow of economic benefits is probable.
The Board discussed the accounting for insurance contracts acquired in a business combination. The Board tentatively decided that insurers should continue to apply IFRS 4 Insurance Contracts to insurance contracts acquired in a business combination and the revised business combination standard would not introduce any additional requirements.
Replacement share-based payment awards
The Board discussed the accounting for acquirer share-based payment awards exchanged for awards held by the employees of the acquiree (replacement awards) and tentatively decided:
- to modify the guidance in the exposure draft to require that excess fair value in the acquirer’s replacement award over the acquiree’s award should be recognised over the post-combination vesting period of the acquirer’s replacement award along with any portion of the award attributable to future services.
- to clarify the guidance in the exposure draft related to the allocation of the remaining fair value (ie after considering any excess fair value) of the acquirer award between consideration transferred in the business combination and post-combination compensation cost by revising the description of the calculation of amounts attributable to past services. The requirements would be applicable to all share-based payments within the scope of IFRS 2 Share-based Payment.
- to require a forfeiture estimate to be included in the fair value of unvested awards that represent consideration transferred in a business combination.
- to affirm the guidance in the exposure draft that post-combination forfeitures of awards regarded as consideration transferred in the business combination do not affect the purchase price. In other words, all changes in post-combination forfeiture estimates should be accounted for as adjustments to compensation cost in the periods in which the change in estimate occurs.
- the requirements for the post-combination effects of replacement share-based payment awards would be applicable to all share-based payments within the scope of IFRS 2.
- the income tax effects related to replacement share-based payments awards in a business combination should be consistent with the requirements in IAS 12 Income Taxes. The staff will consider the implications of this tentative decision.