IFRS3 and FAS141: Stuart Whitwell analyses changes to the FASB's and IASB's standards on business combinations and considers how close they are to convergence

Financial Management (UK), April, 2008 by Stuart Whitwell

Stuart Whitwell is joint managing director of brand valuation consultancy Intangible Business (www.intangiblebusiness.com).

Changes to FAS141

New treatment                       Previous treatment

Recognition of all acquired         Some assets and liabilities not
assets and assumed liabilities      recognised--and some not at fair
at fair value at the acquisition    value
date

Restructuring costs, expected       Included in cost of acquisition
but not obligated to incur, to
be expensed

Recognition of the full fair        Only the proportion of assets
values of acquired assets and       attributable to the acquirer
assumed liabilities in a            were fair-valued, with minority
business combination achieved       interest based on book values
in stages

Assets and liabilities arising      Deferred recognition was
from contractual contingencies      permitted
to be recognised at their fair
value at the acquisition date

Negative goodwill resulting         Fair values of acquired assets
from a bargain purchase is taken    were reduced pro rata
to profit

Acquired R&D assets to be           R&D assets with no alternative
reported at fair value              use immediately charged to
                                    expense

Disclosure of the factors that      No disclosure required
make up goodwill

The other significant remaining differences

                       FAS141R                IFRS3R

Minority interests     Must be measured at    May be measured at
                       fair value             fair value or as a
                                              proportionate share
                                              of net assets

Operating leases       Requires recognition   No recognition
                       of an intangible       required
                       asset, or liability,
                       if the lease terms
                       are other than
                       market terms

Contingent assets      Recognise              Recognise contingent
and liabilities        contractual, and       liabilities for
                       some non-              present obligations
                       contractual,           arising from past
                       contingencies          events--that can be
                                              measured reliably

Goodwill disclosure    Disclosure by          Not required
                       reportable segment
                       for each business
                       combination

Changes to FAS141 and IFRS3

New treatment                       Previous treatment

Costs of acquisition to be          Included in cost of acquisition
expensed

Contingent consideration to be      Recognised only when additional
recognised at fair value at the     consideration became payable
acquisition date

Re-measure fair value of            Changes in fair value treated as
previously held equity interests    a revaluation
in a step or partial acquisition