Assets subject to an operating lease when the acquiree is the lessor
The Board discussed the accounting in a business combination for an operating lease in which the acquiree is a lessor, that has favourable or unfavourable terms. The Board had previously asked the staff whether the favourable or unfavourable terms of the operating lease should be recognised separately from the related asset (see Update, May 2006). The Board tentatively decided that in a business combination an acquirer should measure and recognise an asset that is subject to an operating lease in which the acquiree is the lessor at its acquisition date fair value considering the terms of leases in place at the acquisition date. As such, a separate asset or liability would not be recognised if the lease is favourable or unfavourable. The Board observed that this conclusion was consistent with existing guidance in IAS 40 Investment Property. Given that the Board is likely to consider this issue again in the Fair Value Measurements and Leases projects, the Board tentatively decided not to deviate from the guidance in IAS 40 at this time.
The IASB and IFRIC have 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 contracts acquired or assumed in a business combination.
The Board asked the staff to continue to try to develop a principle that could be included in the business combinations standard.
Proposed amendments to IAS 27
The Board continued its deliberations on the proposed amendments to IAS 27 Consolidated and Separate Financial Statements. The Board tentatively decided:
(a) to add guidance in IAS 27 that the attribution of profits or losses and other changes in equity to controlling and non-controlling interests should be based on relative ownership interests. If the controlling and non-controlling interests have entered into a contractual agreement that requires profits, losses or other changes in equity to be attributed differently, the attribution should be based on the requirements of that agreement.
(b) to affirm the proposal in the IAS 27 Exposure Draft to continue allocating losses in excess of the non- controlling interest in the equity of a subsidiary to the non-controlling interest, even if that would result in non-controlling interest being reported as a deficit.
(c) to provide guidance in IAS 27 in the form of principle-based indicators that can be used to determine whether multiple arrangements (transactions) should be accounted for as a single transaction or arrangement.
(d) to affirm the proposal in the IAS 27 Exposure Draft on the accounting for a loss of significant influenor joint control. IAS 28 Investments in Associates and IAS 31 Interests in Joint Ventures should be amended to require that on the loss of significant influence or joint control, any investment remaining in a former associate or joint venture should be remeasured to its fair value with a gain or loss recognised in profit or loss.
Transition provisions for the business combinations standard and revised IAS 27
The Board tentatively reaffirmed the proposal that the business combinations standard should be applied prospectively to business combinations for which the acquisition date is on or after the date that the standard is effective. Retrospective application of the standard to acquisitions completed before the effective date should be precluded. The business combinations standard and the revised IAS 27 should be applied at the same time and at the beginning of the same annual period. However, earlier application of the business combinations standard and the revised IAS 27 would be allowed. The exposure draft included one exception to the prospective accounting principle: it proposed that contingent liabilities recognised in a business combination for which the acquisition date is before the application date of the new business combinations standard would need to be reassessed. The Board tentatively decided to remove that exception.
The Board also considered the transitional provisions in the proposed amendments to IAS 27 and tentatively reaffirmed them, except for the proposed requirement to recast prior period financial statements for decreases in a parent’s controlling interest that do not result in a loss of control that occurred before the revised IAS 27 is applied. Those transactions will be accounted for prospectively.