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US GAAP vs. IFRS: the basics, March 2010 - Business combinations - Ernst & Young - United States

US GAAP vs. IFRS: the basics, March 2010

Business combinations

Similarities

The guidance in ASC 805 Business Combinations (formerly FAS 141(R)) and IFRS 3(R) (both entitled Business Combinations) represents the culmination of the first major collaborative 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. Under the acquisition method, upon obtaining control of another entity, the underlying transaction should be measured at fair value, and this should be the basis on which the assets, liabilities and noncontrolling interests of the acquired entity are measured (as described in the table below, IFRS 3(R) provides an alternative to measuring noncontrolling interest at fair value), with limited exceptions. Even though the new standards are substantially converged, certain differences still exist.

The revised standards are effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 15 December 2008 and 1 July 2009 for companies applying US GAAP and IFRS, respectively. Unlike ASC 805, early adoption of IFRS 3(R) is permitted if certain criteria are met.

Significant differences


US GAAPIFRS
Measurement of noncontrolling interestNoncontrolling interest is measured at fair value, which includes 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 and Disclosures (formerly FAS 157), if the fair value can be determined during the measurement period. If the fair value of a contingent asset or liability cannot be determined during the measurement period, that asset or liability should be recognized at the acquisition date in accordance with ASC 450 Contingencies (formerly FAS 5 and FIN 14) if it meets the criteria for recognition in that guidance.
Contingent assets and liabilities that do not meet the recognition criteria at the acquisition date are subsequently accounted for pursuant to other literature, including ASC 450. (See “Provisions and Contingencies” for differences between ASC 450 and IAS 37).		Initial Recognition
Liabilities subject to contingencies are recognized as of the acquisition date if there is a present obligation that arises from past events and its fair value can be measured reliably. Contingent assets are not recognized.
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 assets and liabilities arising from contingencies depending on their nature.
If amounts are initially recognized and measured under the contingencies guidance in ASC 450, the subsequent accounting and measurement should be based on the same guidance.		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-IFRS literature (for example, 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, and initial recognition and measurement of employee benefits).

Convergence

No further convergence is planned at this time.

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