The Board discussed four issues that were identified in drafting the revised IFRS 3 Business Combinations and amendments to IAS 27 Consolidated and Separate Financial Statements.
Operating leases in which the acquiree is the lessor
In February 2007 the IASB and the FASB reached different conclusions on the accounting for off-market terms of an operating lease in which the acquiree is the lessor. To address this difference, the IASB tentatively decided at the joint meeting in April 2007 to change the tentative decision it made in February to converge with the FASB. The converged decision was to require the acquirer to measure and recognise an asset subject to an operating lease at its acquisition date fair value without considering the terms of the operating lease. If the terms of an operating lease were favourable (unfavourable) relative to market terms at the acquisition date, the acquirer would recognise an intangible asset (liability) separately from the asset subject to the operating lease.
However, the drafting of the revised IFRS 3 highlighted that the tentative decision in April 2007 made applying the fair value model to investment property under IAS 40 Investment Property more complex in periods after the business combination. IAS 40 requires the fair value of an investment property to reflect, among other things, rental income from current leases. After reconsideration the Board affirmed the tentative decision it had previously made in February 2007. As such, any favourable or unfavourable terms of an operating lease, relative to market terms at the acquisition date, would be recognised in the fair value of the asset subject to the operating lease.
The Board noted that when the asset subject to the operating lease is accounted for under the cost model and depreciated in periods after the business combination, the entity should depreciate the value attributable to the operating lease as a separate component of the asset. The Board directed the staff to include a consequential amendment to IAS 16 Property, Plant and Equipment to emphasise this point. The Board also noted that as a result, the difference between its decision and the FASB’s was one of presentation only.
Transition provisions for amendments to IAS 27
In February 2007 the Board tentatively affirmed the proposal in the IAS 27 exposure draft that losses should continue to be allocated to the non-controlling interest in a subsidiary even if that would result in non-controlling interest being reported as a deficit. At this meeting the Board tentatively decided not to require retrospective application of the proposal.
Replacement share-based payment awards
The Board discussed the accounting for an acquirer’s share-based payment awards that are exchanged for awards held by the acquiree’s employees (replacement awards). The Board tentatively affirmed that all or a portion of the acquirer’s replacement awards should be included in measuring the consideration transferred only if the acquirer is obliged to replace the acquiree awards.
In April 2007 the boards tentatively decided that an acquirer should recognise an indemnification asset at the same amount and at the same time as the related liability.
The Board tentatively decided to clarify the following issues that were identified in drafting the revised IFRS 3:
§ an indemnification asset should be recognised only to the extent that it is collectible.
§ the subsequent accounting for indemnification assets should be the same as the acquisition date accounting, ie an indemnification asset should continue to be recognised and measured using assumptions that are consistent with those used to measure the related liability.