Global Standards for the world economy

Saturday 11 July 2020

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Business combinations

The revised IFRS 3 and amended IAS 27

Changes to the IFRSs

The main changes the revised IFRS 3 and amended IAS 27 will make to existing requirements or practice are:

  • Partial acquisitions. Non-controlling interests are measured either as their proportionate interest in the net identifiable assets (which is the original IFRS 3 requirement) or at fair value (which is the new requirement in US GAAP).
  • Step acquisitions: The requirement to measure at fair value every asset and liability at each step for the purposes of calculating a portion of goodwill has been removed. Instead, goodwill is measured as the difference at acquisition date between the fair value of any investment in the business held before the acquisition, the consideration transferred and the net assets acquired.
  • Acquisition-related costs. Acquisition-related costs are generally recognised as expenses (rather than included in goodwill).
  • Contingent consideration. Contingent consideration must be recognised and measured at fair value at the acquisition date. Subsequent changes in fair value are recognised in accordance with other IFRSs, usually in profit or loss (rather than by adjusting goodwill).
  • Transactionswith non-controlling interests . Changes in a parent’s ownership interest in a subsidiary that do not result in the loss of control are accounted for as equity transactions.

Changes to US GAAP

The changes made by the FASB to US GAAP are more fundamental than the changes we have made to IFRSs. Among the more significant of the changes it has made, all of which bring US GAAP into line with existing IFRSs, are:

  • classifying non-controlling interests as equity.
  • requiring restructuring charges to be accounted for as they are incurred, rather than allowing these to be anticipated at the time of the business combination.
  • requiring in-process research and development (IPR&D) to be recognised as a separate intangible asset, rather than immediately written off as an expense.
  • aligning the acquisition date with the date defined in the existing IFRS 3 (at present US GAAP uses the agreement date).
  • recognising a gain on a bargain purchase in income (rather than by allocating it to some of the assets acquired).

Changes from the exposure drafts

The revised IFRS 3 and amended IAS 27 incorporate many changes from the exposure drafts that we made as a result of debating the proposals in the light of comments we received during our consultations.

Among the more notable changes were:

  • We decided not to proceed with the full goodwill model, which required the fair value measurement of the acquiree as a whole. Instead, we allow preparers to choose to measure non-controlling interests either as their proportionate interest in the net identifiable assets of the acquiree or at fair value.
  • We have added a requirement to present a schedule that will make it easier to assess the interests the parent shareholders have in the group.

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