1. IFRS 3 - Business combinations

2. Executive summary
There is a fair amount of conformity between IFRS and US GAAP in the area of business combinations. Both standards use the acquisition method of accounting. Both standards similarly identify the acquirer and determine the acquisition date. In addition, both standards similarly measure the price paid by the acquirer.
Both IFRS and GAAP measure the assets and liabilities of the acquired company at fair value.
Under IFRS, preacquisition contingent liabilities are recognized if there is a present obligation that arises from past events and the fair value of the obligation can be measured reliably.  Contingent assets are never recognized.  Under US GAAP, preacquisition contingent assets and liabilities are recognized at the acquisition date at fair value, if fair value can be determined during the measurement period. However, if fair value cannot be determined, contingent assets and liabilities are recognized if information prior to the end of the measurement period indicates that it is probable that an asset existed or a liability had been incurred at the acquisition date, and the amount of the asset or liability can be reasonably estimated.

3. Executive summary
Under both IFRS and US GAAP, any excess of the amount paid at the acquisition date and the fair value of the net assets acquired is recognized as goodwill. In the rare circumstance when the fair value of the net assets is greater than the acquisition price, the difference is recognized in earnings immediately (after the measurements utilized in the acquisition accounting are reassessed).
The accounting treatment for contingent consideration is similar between IFRS and US GAAP. Under both US GAAP and IFRS, contingent consideration is recognized initially at fair value as part of the price paid for the acquired company, and subsequent adjustments to contingent consideration are recognized in income. Under both standards, contingent consideration that is classified as equity is never adjusted through income, but rather the ultimate settlement should be accounted for within equity. Differences do exist in determining whether contingent consideration is classified as equity versus a liability.
Push-down accounting is not allowed under IFRS but is required in certain circumstances by the SEC.

4. Progress on convergence
With the issuance of IFRS 13 in May 2011and the issuance of ASU No the definition of fair value has converged. Fair value is now defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.
No further convergence is planned at this time.

5. General
US GAAP
IFRS
Business combinations (with limited exceptions) 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 and liabilities and non-controlling interests of the acquired entity are measured.
Similar

6. Initial steps in the acquisition model Identification of the acquirer
US GAAP
IFRS
Identification of the acquirer is required.
Similar
Factors such as relative sizes of the companies, relative voting rights, composition of the entity’s governing body and management team are considered in determining which company is the acquirer.
Similar

7. Initial steps in the acquisition model Determination of the acquisition date
US GAAP
IFRS
The date of acquisition is the date that control is transferred to the acquirer.
Similar

8. Initial steps in the acquisition model Measuring fair value of the acquiree
US GAAP
IFRS
The fair value of the acquiree is generally considered to be the price paid by the acquirer. The price paid is the sum of the fair values of the assets transferred, liabilities incurred, equity interests issued and any contingent consideration.
Acquisition-related costs (and any costs associated with equity issuance) are not included in the fair value of the acquired company.
Similar
The fair value of the acquired company is determined on the acquisition date.
Similar

9. Valuing and recording the acquiree’s assets and liabilities
US GAAP
IFRS
With certain exceptions (e.g., income taxes), the acquirer is required to measure the identifiable assets acquired and the liabilities assumed at their acquisition-date fair values.
Similar
A separate intangible asset is recognized if it is identifiable. Both systems define “identifiable” as the asset meeting either the separability or contractual legal criteria.
Similar

10. Valuing and recording the acquiree’s assets and liabilities
US GAAP
IFRS
Any excess of the amount paid at the acquisition date and the fair value of the net assets acquired is recognized as goodwill.
In the rare circumstance when the fair value of the net assets is greater than the acquisition price, the difference is recognized in net income immediately (after the measurements utilized in the acquisition accounting are reassessed).
Similar

11. Valuing and recording the acquiree’s assets and liabilities
US GAAP
IFRS
Adjustments can be made to amounts recorded in the business combination during the measurement period, which cannot exceed 12 months past the acquisition date.
Adjustments made during the measurement period are applied retrospectively.
Adjustments after the measurement period are made only to correct an error. These adjustments are accounted for like any other error correction.
Similar

12. Valuing and recording the acquiree’s assets and liabilities Definition of fair value before the issuance of IFRS 13 and ASU No :
US GAAP
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.
Extensive guidance on the determination of fair value is contained in ASC
IFRS
Fair value is defined as the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s-length transaction.
No detailed guidance on the determination of fair values.
Due to the different definitions of fair value, it is possible that differences may arise in determining the acquisition-date fair values of certain assets acquired and liabilities assumed in a business combination.

13. Differences in fair value example
On January 1, 201X, Doodlebug’s Clothing and Accessories (Doodlebug) purchased a 100% interest in Halle’s Fashion Accessories (HFA). Doodlebug issued 50,000 shares of common stock ($1 par value) that were trading at $30 on January 1 (the acquisition date).
The book value of HFA’s net assets was $750,000 on January 1. The fair value of net assets, exclusive of PP&E, was $1.0 million. HFA’s PP&E is particularly hard to value as there is no active market. Consequently, the assessment of the fair value of this PP&E under IFRS is $150,000, whereas the assessment of fair value under US GAAP is $200,000.
Provide the acquisition journal entry under both US GAAP and IFRS.

14. Differences in fair value example
Example 1 solution:
US GAAP:
Net assets (excluding PP&E) $1,000,000
PP&E ,000
Goodwill ,000
Common stock $ ,000
Additional paid-in capital 1,450,000
IFRS:
Net assets (excluding PP&E) $1,000,000
PP&E ,000
Goodwill ,000
Common stock $ ,000
Additional paid-in capital ,450,000

15. Convergence update
With the issuance of IFRS 13 in May 2011, the definition of fair value has converged with the US GAAP definition. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.
IFRS 13 is effective for annual periods beginning on or after January 1, Earlier application is permitted.
ASU No is effective for public companies for interim and annual periods beginning after December 15, Earlier application is not permitted.
ASU No is effective for nonpublic companies for annual periods beginning after December 15, Earlier application is permitted.

16. Valuing and recording the acquiree’s assets and liabilities Measurement of non-controlling interests
US GAAP
Non-controlling interests are measured at the acquisition date at fair value (including goodwill).
IFRS
A choice is allowed whereby non-controlling interests can be measured either at the fair value (including goodwill) or the proportionate interest in the values assigned to the assets acquired (excluding goodwill) and the liabilities assumed.

17. Non-controlling interests example
Peter Piper’s Peppers, Inc. (PPPI) acquired a 60% interest in Peter N’s Tomatoes, Inc. (PNTI) on January 1, 201X. PPPI paid $600 in cash for their interest in PNTI. The fair value of PNTI’s assets is $1,300, and the fair value of its liabilities is $500.
Provide the journal entry for the acquisition using US GAAP.
Provide the journal entry for the acquisition using IFRS, assuming that PPPI does not wish to report the non-controlling interest at fair value.

18. Non-controlling interests example
Example 2 solution:
US GAAP:
Acquired assets $1,300
Goodwill (1)
Cash $600
Acquired liabilities
Non-controlling interests (2)
(1) 600 – (1,300 – 500 – 400)
(2) (600/60%) x 40%

19. Non-controlling interests example
Example 2 solution (continued):
IFRS:
Acquired assets $1,300
Goodwill (1)
Cash $600
Acquired liabilities
Non-controlling interests (2)
(1) 600 – (1,300 – 500 – 320)
(2) 40% x (1,300 – 500)

20. Valuing and recording the acquiree’s assets and liabilities Initial recognition of preacquisition contingent assets and liabilities
US GAAP
Under ASC 805, preacquisition contingent assets and liabilities are recognized at the acquisition date at fair value if fair value can be determined during the measurement period. However, if fair value cannot be determined at the acquisition date or during the measurement period, contingent assets and liabilities are recognized if information prior to the end of the measurement period indicates that it is probable that an asset existed or a liability had been incurred at the acquisition date (it is implicit in this condition that it must be probable that one or more future events will occur confirming the existences of the asset, liability or impairment) and the amount of the asset or liability can be reasonably estimated. The guidance in ASC 450 should be used for purposes of determining whether these conditions have been met.
IFRS
Under IFRS, liabilities subject to contingencies are recognized as of the acquisition date if there is a present obligation (even if it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation) and the fair value of the obligation can be measured reliably. Thus, if the fair value of the obligation cannot be measured reliably, no liability is recognized. Contingent assets are not recognized in a business combination.

21. Valuing and recording the acquiree’s assets and liabilities Subsequent recognition of preacquisition contingent assets and liabilities
US GAAP
Subsequent measurement of these assets and liabilities is done on a systematic and rational basis.
IFRS
Under IFRS, liabilities subject to contingencies should be subsequently measured at the higher of: (1) the amount that would be recognized in accordance with IAS 37, Provisions, Contingent Liabilities and Contingent Assets; or (2) the amount initially recognized less, when appropriate, cumulative amortization recognized in accordance with IAS 18, Revenue.
For contingent liabilities that are initially recognized and measured at fair value under IFRS 3(R) but at an amount other than fair value under ASC 805 (using the probable and reasonably estimable criteria in ASC 450), such contingent liabilities may be derecognized earlier under US GAAP than IFRS. This is because under US GAAP, contingent liabilities may be derecognized once it becomes remote that a liability exists. In contrast, under IFRS 3(R), because contingent liabilities are subsequently accounted for at the higher of: (1) the amount that would be recognized in accordance with IAS 37; or (2) the amount recognized less any amortization, such liabilities may not be derecognized if it becomes remote that a liability exists.

22. Contingent liability example
XYZ Company acquired ABC Company on January 1, 201X. ABC is a defendant in a lawsuit as of January 1, 201X. The contingency is considered to be a present obligation and the fair value of the obligation can be reliably measured as $23,000. As of the acquisition date it is not believed that an out flow of cash or other assets will be required to settle this matter.
What amount should be initially recorded under both US GAAP and IFRS for this contingent liability?

23. Contingent liability example
Example 4 solution:
US GAAP: Preacquisition contingent liabilities are recognized at the acquisition date at fair value, so a liability of $23,000 would be recorded.
IFRS: Preacquisition liabilities subject to contingencies are recognized as of the acquisition date if there is a present obligation (even if it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation) and the fair value of the obligation can be measured reliably, so a liability of $23,000 would be recorded.

24. Accounting for contingent consideration
US GAAP
IFRS
Contingent consideration is recognized initially at fair value as part of the price paid for the acquired company and is classified as an asset, liability or equity. (Contingent consideration would be classified as an asset when the acquirer has the right of return of previously transferred consideration when certain conditions are met.)
Similar
Subsequent adjustments to contingent consideration that is due to additional information about circumstances that existed at the acquisition date that the acquirer obtains during the measurement period are adjusted, with the offset going to goodwill.
Similar

25. Accounting for contingent consideration
US GAAP
IFRS
Subsequent adjustments that are related to events that occur after the acquisition date (e.g., meeting an earnings target) are generally recognized in income if the consideration was originally classified as an asset or liability.
Similar
Under both standards, contingent consideration that is classified as equity is not adjusted through income, but rather the ultimate settlement should be accounted for within equity.
Similar

26. Accounting for contingent consideration
US GAAP
Whether contingent consideration is classified as equity versus a liability is generally based on ASC
IFRS
The distinction is generally based on IAS 37 or IAS 39.

27. Push-down accounting US GAAP
Push-down accounting (whereby the acquiree recognizes the fair value adjustments, including goodwill, in their financial statements) is required by the SEC when the subsidiary becomes substantially wholly owned.
The SEC does not permit push-down accounting when a subsidiary is less than 80% owned.
When ownership is greater than 80% but less than 95%, push-down accounting is permitted but not required.
When ownership is greater than or equal to 95%, push-down accounting is generally required.
IFRS
Push-down accounting is not allowed.

28. Push-down accounting example
Example 5: On January 1, 201X, Doodlebug’s Clothing and Accessories (Doodlebug) purchased a 100% interest in Halle’s Fashion Accessories (HFA). Doodlebug issued 50,000 shares of common stock ($1 par value) that were trading at $30 on January 1 (the acquisition date).
The book value of HFA’s net assets (including PP&E) was $750,000 on January 1. The balance in the PP&E account was $78,000. The balance in HFA’s retained earnings account was $55,000. The fair value of net assets, exclusive of PP&E, was $1.0 million. HFA’s PP&E is particularly hard to value as there is no active market. Consequently, the assessment of the fair value of this PP&E under IFRS is $150,000, whereas the assessment of fair value under US GAAP is $200,000.
Provide the necessary journal entries under both US GAAP and IFRS to record push-down accounting.

29. Push-down accounting example
Example 5 solution:
US GAAP:
Net assets (excluding PP&E) $328,000
PP&E ,000
Goodwill ,000
Retained earnings ,000
Additional paid-in capital $805,000
IFRS:
No journal entry is required since IFRS does not allow push-down accounting.

30. Disclosures US GAAP IFRS
The disclosure requirements for US GAAP are found in ASC , and
Similar. The requirements are found in IFRS 3(R), paragraphs 59 through 63 and B64 through B67. Most of the disclosure requirements have identical wording. Since these disclosure requirements are extensive, they are not reproduced here.

31. Disclosures US GAAP IFRS
Differences between US GAAP and IFRS in disclosures of contingent liabilities are included in the module on contingent liabilities.
The acquirer must disclose, for each business combination that occurs during the period or in the aggregate for individually immaterial business combinations that are material collectively and that occur during the period, the amount of goodwill by reportable segment if the combined entity is required to disclose segment information in accordance with ASC , Segment Reporting, unless such disclosure is impracticable.
IFRS
The disclosure of contingent liabilities recognized in a business combination may differ as IFRS 3(R) refers back to IAS 37.
The disclosure by reportable segment is not required.

32. Disclosures
US GAAP
If comparative financial statements are presented and the entity is a public business enterprise (as described in ASC ), ASC requires disclosure of revenue and earnings of the combined entity for the comparable prior reporting period as though the acquisition date for all business combinations that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period (supplemental pro forma information).
IFRS
No similar requirement.

33. Disclosures US GAAP No similar requirement. IFRS
Requires the acquirer to disclose the amount and an explanation of any gain or loss recognized in the current period that: (a) relates to the identifiable assets acquired or liabilities assumed in a business combination that was effected in the current or previous reporting period; and (b) is of such a size, nature or incidence that disclosure is relevant to understanding the combined entity’s financial statements.