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US GAAP versus IFRS - Business combinations - EY - United States

US GAAP versus IFRS

Business combinations

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Similarities

The principal guidance for business combinations in US GAAP (ASC 805, Business Combinations) and IFRS (IFRS 3(R), Business Combinations) represents the culmination of the first major convergence project between the IASB and the FASB. Pursuant to ASC 805 and IFRS 3(R), all business combinations are accounted for using the acquisition method.

Upon obtaining control of another entity, the underlying transaction is measured at fair value, establishing the basis on which the assets, liabilities and noncontrolling interests of the acquired entity are measured. As described below, IFRS 3(R) provides an alternative to measuring noncontrolling interest at fair value with limited exceptions.

Although the new standards are substantially converged, certain differences still exist.

Significant differences


 US GAAPIFRS
Measurement of noncontrolling interestNoncontrolling interest is measured at fair value, including the noncontrolling interest's share of goodwill.Noncontrolling interest is measured either at fair value including goodwill, or at its proportionate share of the fair value of the acquiree's identifiable net assets, exclusive of goodwill.
Acquiree's operating leasesIf the terms of an acquiree operating lease are favorable or unfavorable relative to market terms, the acquirer recognizes an intangible asset or liability, respectively, regardless of whether the acquiree is the lessor or the lessee.Separate recognition of an intangible asset or liability is required only if the acquiree is a lessee. If the acquiree is the lessor, the terms of the lease are taken into account in estimating the fair value of the asset subject to the lease. Separate recognition of an intangible asset or liability is not required.
Assets and liabilities arising from contingenciesInitial Recognition
Assets and liabilities arising from contingencies are recognized at fair value (in accordance with ASC 820, Fair Value Measurement) if the fair value can be determined during the measurement period. Otherwise, those assets or liabilities are recognized at the acquisition date in accordance with ASC 450, Contingencies, if those criteria for recognition are met.Contingent assets and liabilities that do not meet either of these recognition criteria at the acquisition date are subsequently accounted for in accordance with other applicable literature, including ASC 450. (See "Provisions and Contingencies" for differences between ASC 450 and IAS 37).

Subsequent Measurement
If contingent assets and liabilities are initially recognized at fair value, an acquirer should develop a systematic and rational basis for subsequently measuring and accounting for those assets and liabilities depending on their nature.
If amounts are initially recognized and measured in accordance with ASC 450, the subsequent accounting and measurement should be based on that guidance.
Initial Recognition
Liabilities arising from contingencies are recognized as of the acquisition date if there is a present obligation that arises from past events and the fair value can be measured reliably. Contingent assets are not recognized.

Subsequent Measurement
Liabilities subject to contingencies are subsequently measured at the higher of (i) the amount that would be recognized in accordance with IAS 37, or (ii) the amount initially recognized less, if appropriate, cumulative amortization recognized in accordance with IAS 18.
Combination of entities under common controlThe receiving entity records the net assets at their carrying amounts in the accounts of the transferor (historical cost).Outside the scope of IFRS 3(R). In practice, either follow an approach similar to US GAAP or apply the acquisition method if there is substance to the transaction (policy election).

Other differences may arise due to different accounting requirements of other existing US GAAP and IFRS literature (e.g., identifying the acquirer, definition of control, definition of fair value, replacement of share-based payment awards, initial classification and subsequent measurement of contingent consideration, initial recognition and measurement of income taxes, initial recognition and measurement of employee benefits).

Convergence

No further convergence is planned at this time.



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