The International Accounting Standards Board has issued a revised version of its standards for accounting for business combinations such as mergers and acquisitions, in coordination with the Financial Accounting Standards Board, in a move that will highlight the expenses of business combinations that used to be considered assets.
While FASB has not yet issued its own revised standards, they're expected to closely resemble the new ones released by the IASB. The two boards are working together on a convergence process that will ultimately unite International Financial Reporting Standards with U.S. generally accepted accounting principles.
"Investors and their advisers have a difficult enough job assessing how the activities of the acquirer and its acquired business will combine," said IASB Chairman Sir David Tweedie in a statement. "But comparing financial statements is more difficult when acquirers are accounting for acquisitions in different ways, whether those differences are a consequence of differences between U.S. GAAP and IFRS, or because IFRS or U.S. GAAP are not being applied on a consistent basis."
The changes in IFRS are relatively minor, compared to the changes that are being made in U.S. GAAP, he noted. The rules for both boards will tighten up how fees charged for a merger can be expensed. Acquisition-related costs must be accounted for separately from the business combination, which in most cases means they will need to be recognized as expenses, rather than included in goodwill.
The two boards have also agreed to simplify the measurement of goodwill in a step acquisition. An acquirer must recognize a liability for additional consideration, or contingent consideration, at the acquisition date. Changes in a parent's ownership interest in a subsidiary that do not result in the loss of control must be accounted for as equity transactions.
Changes in U.S. GAAP to bring it into line with IFRS are more extensive. They include classifying non-controlling interests as equity, and requiring restructuring charges to be accounted for as they are incurred, rather than allowing them to be anticipated at the time of the business combination. Each asset and liability in a partial acquisition must be measured at 100 percent of its fair value.
Gains on a bargain purchase are now recognized as income, rather than being allocated to some of the acquired assets. Another change requires in-process research and development to be recognized as a separate intangible asset, rather than immediately written off as an expense. A further change aligns the U.S. GAAP acquisition date with the date in IFRS, moving the date to when control is achieved, rather than the agreement date.
However, FASB and IASB still remain apart on some issues, including the measurement of non-controlling interests. IFRS now permits an acquirer to measure the non-controlling interests in an acquiree either at fair value or at their proportionate share of the acquiree's net assets. However, the U.S. standard still requires the non-controlling interests in an acquiree to be measured at fair value. The boards also have different definitions of control. In addition, IFRS continues to define fair value based on an exchange value, while U.S. GAAP defines fair value as an exit value. The two boards are working on projects to resolve these differences.
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