The Board tentatively affirmed that measurement period adjustments (ie adjustments to provisional amounts recognised at the acquisition date) should reflect only new information obtained about facts and circumstances that existed as of the acquisition date and, if known, would have affected the measurement of the amounts recognised as of that date. Changes in market conditions after the acquisition date should not be accounted for as measurement period adjustments.
The Board tentatively affirmed the proposal in the exposure draft that an acquirer should measure and recognise contingent consideration at its acquisition-date fair value. An acquirer should classify contingent consideration as either a liability or equity on the basis of other IFRSs. After initial recognition:
- contingent consideration classified as equity should not be remeasured.
- contingent consideration classified as a liability should be remeasured to fair value, unless it is in the scope of IAS 37, in which case it should be measured in accordance with IAS 37.
- changes in the amount recognised for contingent consideration liabilities that do not qualify as measurement period adjustments should be recognised in profit or loss or directly in equity in accordance with other IFRSs.
The Board also tentatively affirmed the following disclosures related to contingent consideration:
- the acquisition-date fair value of any contingent consideration.
- the range of the potential amount of future payments (undiscounted) the acquirer could be required to make under the terms of the acquisition agreement. If there is no limitation on the maximum potential amount of future payments, that fact should be disclosed.
- any changes in the amounts recognised for contingent consideration and in the range of potential payments and the reasons for those changes.
- the valuation techniques used to measure contingent consideration.
The Board continued its redeliberations of the measurement of non-controlling interests (NCI) in a business combination.
In December 2006 the Board tentatively decided that the proposed standard should include the principle that all components of a business combination, including NCI, should be measured at fair value at the acquisition date. In reaching that decision, the Board gave weight to its goal of ensuring that the underlying principles are clearly stated in the standard. Having made a decision in principle, the Board also tentatively decided that there were grounds for making an exception to this principle. In January the Board discussed this matter further, but did not reach a conclusion on how best to proceed. The Board asked the staff to undertake additional analysis on the potential loss of comparability of financial information if either two measurement bases for NCI were permitted in the final standard, or fair value measurement of NCI was not permitted. The Board discussed this analysis at its March meeting.
The Board expressed a preference for having the proposed standard provide relief if measuring NCI at fair value would cause undue cost and effort for an entity. If it would cause undue cost and effort, the acquirer would measure NCI at its proportionate interest in the identified assets and liabilities of the acquiree. In such circumstances, an acquirer would be required to identify and disclose the reasons for not measuring NCI at fair value.
The Board tentatively affirmed that measuring NCI at its proportionate interest in the identified assets and liabilities of the acquiree does not change the nature of subsequent exchanges between controlling and non-controlling interests. Once control has been achieved, any changes in ownership interests (such as subsequent acquisitions or dispositions) between controlling and non-controlling interests are transfers between owners and there should be no adjustment to goodwill. The Board tentatively affirmed that this decision also applies to transactions with non-controlling interests in which the related NCI was recognised before the application of the revised IFRS 3.
The Board discussed the measurement of NCI and goodwill when the fair value of the acquirer’s interest in the identifiable net assets of the acquiree exceeds the fair value of the consideration transferred for that interest (also known as bargain purchases).
The Board tentatively decided that the existence of a bargain purchase should not change the measurement attribute used for NCI. In other words, an acquirer should measure NCI in a bargain purchase consistently with how it would measure the NCI in the absence of a bargain purchase. The acquirer should compare (i) the acquisition-date fair value of the consideration transferred in exchange for the acquiree plus the recognised amount of the NCI and (ii) the recognised amounts of the identifiable net assets acquired. If (i) is larger than (ii), the excess is recognised as goodwill. If (ii) is larger than (i), the excess is recognised as a bargain purchase gain attributable to the acquirer.
In October 2006 the IASB and the FASB reached different conclusions on the recognition of an acquired assembled workforce separately from goodwill in a business combination. Because of this divergence, the Board discussed again whether to require or preclude the recognition of an assembled workforce separately from goodwill.
The Board observed that an assembled workforce would not meet the separability criterion on the basis that it is unlikely that an assembled workforce would be separable with a single related contract, asset or liability. Rather, an assembled workforce could be sold or exchanged only with a group of related assets or liabilities. On this basis the Board tentatively decided that the application guidance of the business combinations standard should define an assembled workforce and explain why it does not meet the separability criterion.
Valuation allowances disclosures
In January the Board asked the staff to conduct further research into whether the proposed standard should require the disclosure of information about the historical performance of receivables acquired in a business combination.
At this meeting the Board considered a possible requirement to disclose for each major class of receivable acquired in a business combination its fair value, gross contractual amounts, and the best estimate of the contractual cash flows not expected to be collected at the acquisition date. The Board tentatively decided to include this disclosure requirement in the final business combinations standard.
Loss of control of a business resulting from a distribution to owners
The Board discussed the accounting for when an entity transfers its shares in a subsidiary to its own shareholders with the result that the entity loses controls of the subsidiary (commonly referred to as a spin-off). The IFRIC had previously discussed this matter, but decided not to take it onto its agenda while the Business Combinations project was in progress.
The Board decided not to address in phase II of the Business Combinations project the measurement basis of distributions to owners. That said, the Board tentatively decided that the revised business combinations standard should clarify that an entity should measure any retained interest in the previously controlled subsidiary at fair value at the date control is lost.