RECENT AMENDMENTS TO IFRS 3 EFFECTIVE FOR ANNUAL PERIODS BEGINNING ON OR AFTER JULY 1, 2009

10. RECENT AMENDMENTS TO IFRS 3 EFFECTIVE FOR ANNUAL PERIODS BEGINNING ON OR AFTER JULY 1, 2009

10.1 On January 8, 2008, the IASB published revised IFRS 3 and IAS 27. The revised IASB standards were the result of a joint project with the US Financial Accounting Standards Board (FASB). FASB also issued similar standards in December 2007 (SFAS 141[R] and SFAS 160). It is interesting to note, that while these revised IASB standards were born out of the IASB’s joint convergence project with the FASB, there still remain a few fundamental differences between the revised FASB standard, SFAS 141(R), and the revised IFRS 3, for instance, while it is an option under the revised IFRS 3 to use the “full goodwill method” (explained later) the FASB standard, SFAS 141(R), requires it (as opposed to permitting it).

10.2 IFRS 3 (revised 2008) has significantly enhanced the use of fair values (involving grater input from valuation experts). This revised Standard has introduced the requirement of recognizing change in control as a significant economic event requiring (or triggering) remeasuring interests to

fair value at the time when control is achieved or lost and recognizing in equity all transactions between controlling and noncontrolling shareholders not involving a loss of control. It also focuses on what is given to the seller as consideration as opposed to what is spent on achieving acquisition.

10.3 Set out below is an overview of the major amendments to IFRS 3.

1. Acquisition-related costs. While costs associated with issuance of debt or equity in- struments are accounted for under IAS 39, all other costs of acquisition (i.e., finder’s fees, legal, and advisory costs and general and administrative costs, including the cost of maintaining an “in-house” acquisitions department) must be expensed; this includes reimbursements to the acquiree for bearing some of the cost of acquisition.

2. Step acquisitions. Business combination requiring acquisition accounting is triggered only at the point of attaining control in the acquiree. It has different implications de- pending upon whether the acquirer has a preexisting equity interest in the acquiree (in which case, prior to attaining control in the acquiree, the equity interest in the acquiree may be accounted for either as a financial asset in accordance with IAS 39, or as an as- sociate under IAS 28, or as a joint venture under IAS 31, as appropriate), subsequently, upon further increase in equity interest in the acquiree in stages, once the equity own- ership in the acquiree reaches the (trigger) point when control is achieved, the acquirer must remeasure its previously held equity interest in the acquiree at fair value on the acquisition date and recognize the resulting gain or loss, if any, in profit or loss. Once control is attained in the acquiree, all further increases and decreases in equity interests are treated as transactions among equity holders and reported within equity (neither goodwill arises on any increase in equity interest, nor is any gain or loss recognized on any decrease in equity interest).

3. Noncontrolling interest (under the existing version of IFRS 3 referred to as “minority interest”). In a much talked-about departure from its earlier stand taken in the Exposure Draft on this subject, the ASB issued IFRS 3 (revised 2008) allowing an option, available on a transaction-by-transaction basis, to measure any noncontrolling interest (NCI) in the acquiree either at fair value or at the NCI’s proportionate share of the net identifiable assets of the entity acquired. (In the current version of IFRS 3 the latter treatment corresponds to the measurement basis.)

4. Contingent consideration payable on business combination. All consideration for the acquisition must be measured at fair value and that includes contingent considera- tion payable. Once recognized, IFRS 3 (revised 2008), permits a few changes to this measurement as a result of any postacquisition events unless those result from addi-

Chapter 35 / Business Combinations (IFRS 3)

tional information about facts and circumstances that existed at the date of business combination. All other changes (say, changes resulting from postacquisition events such as the acquiree meeting a certain earnings target, or achieving a milestone such as on postacquisition significant cost reduction) are recognized in profit or loss, (Under the existing version of IFRS 3 subsequent adjustments resulting from contingent con- sideration are possible and are adjusted against goodwill or equity.)

5. Preexisting relationships and reacquired rights. If the parties to the business com- bination had a preexisting relationship (say, the acquiree had contracted with the ac- quirer to use certain intellectual property rights owned by the acquirer on the date of the business combination), this must be accounted for separately from the accounting for the business combination. The accounting treatment of such a preexisting relation- ship would depend upon

a. Whether the preexisting relationship arose from a contractual right, in which case the gain or loss is measured at the lesser of (1) the favorable/unfavorable contract position and (2) any stated settlement provisions in the contract available to the counterparty to whom the contract is unfavorable; or

b. Whether the preexisting relationship arose from a noncontractual right (say a law- suit), in which case, by reference to fair value.

If the transaction effectively represents a reacquired right, an intangible asset is recog- nized and measured on the basis of the remaining contractual term of the related con- tract (excluding any renewals). The asset is subsequently amortized over the remain- ing contractual term, excluding any renewals.

6. Goodwill: The acquirer accounts for goodwill at the date of acquisition measured as a difference between

a. The aggregate of (1) The fair value on the acquisition date of the consideration transferred;

(2) The amount of any noncontrolling interest (NCI) in the acquiree; and (3) In case of a “business combination achieved in stages,” the acquisition-date

fair value of the acquiree’s previously held equity interest in the acquiree; and

b. The net of the acquisition-date amounts of the identifiable assets acquired and the acquired liabilities assumed, both measured in accordance with the provisions of IFRS 3 (revised).