Business Combinations

IFRS and US GAAP have largely converged in this area. The revised business combinations standards which were recently issued eliminated many historical differences, although certain important differences remain, the details of which are included in the following table:

Issue IFRS US GAAP

Cost of acquisitions – Contingent Consideration

Contingent consideration classified as an asset or liability will likely be a financial instrument measured at fair value, with any gains or losses recognised in profit or loss (or OCI as appropriate).

Contingent consideration classified as an asset or liability that is not a financial instrument is subsequently accounted for in accordance with the provisions standard or other IFRSs as appropriate.

Contingent consideration classified as an asset or liability is remeasured to fair value at each reporting date until the contingency is resolved.

The changes in fair value are recognised in earnings unless the arrangement is a hedging instrument for which ASC 815, as amended by new business combination guidance (included in ASC 805), requires the changes to be initially recognised in other comprehensive income.

Recognition of contingent liabilities and contingent assets

The acquiree’s contingent liabilities are recognised separately at the acquisition date provided their fair values can be measured reliably.

The contingent liability is measured subsequently at the higher of the amount initially recognised or the best estimate or the best estimate of the amount required to settle (under the provisions guidance).

Contingent assets are not recognised.

Acquired liabilities and assets subject to contingencies are recognised at fair value if fair value can be determined during the measurement period. If fair value cannot be determined, companies should typically account for the acquired contingencies using existing guidance. An acquirer shall develop a systematic and rational basis for subsequently measuring and accounting for assets and liabilities arising from contingencies depending on their nature.

Contingent consideration – Seller accounting

Under IFRS, a contract to receive contingent consideration that gives the seller the right to receive cash or other financial assets when the contingency is resolved meets the definition of a financial asset.

When a contract for contingent consideration meets the definition of a financial asset, it is measured using one of the measurement categories specified in IAS 39.

Under US GAAP, the seller should determine whether the arrangement meets the definition of a derivative. If the arrangement meets the definition of derivative, the arrangement should be recorded at fair value. If the arrangement does not meet the definition of derivative, the seller should make an accounting policy election to record the arrangement at either fair value at inception or at the settlement amount at the earlier of when consideration is realised or is realisable.

Appendix B – IFRS/US GAAP dif fe rences

Issue IFRS US GAAP

Non controlling interests Entities have an option, on a transaction-by-transaction basis, to measure non controlling interests at their proportion of the fair value of the identifiable net assets or at full fair value. This option applies only to instruments that represent present ownership interests and entitle their holders to a proportionate share of the net assets in the event of liquidation.

All other components of non controlling interest are measured at fair value unless another measurement basis is required by IFRS. The use of the full fair value option results in full goodwill being recorded on both the controlling and non controlling interest. In addition non gains or losses will be recognised in earnings for transactions between the parent company and the non-controlling interests, unless control is lost.

Non controlling interests are measured at fair value. In addition, no gains or losses are recognised in earnings for transactions between the parent company and the non controlling interests, unless control is lost.

Combinations involving entities under common control

IFRS does not specifically address such transactions. Entities develop and consistently apply an accounting policy;

Management can elect to apply purchase accounting or the predecessor value method to a business combination involving entities under common control.

The accounting policy can be changed only when criteria for a change in an accounting policy are met in the applicable guidance.

Combinations of entities under common control are generally recorded at predecessor cost, reflecting the transferor’s carrying amount of the assets and liabilities transferred.

12. Goodwill

Issue IFRS US GAAP

Impairment of goodwill Goodwill impairment testing is performed under a one-step approach:

Recoverable amount (higher of its fair value less costs to sell and its value in use) is compared with its carrying amount.

Impairment loss recognised in operating results as the excess of the carrying amount over the recoverable amount.

Impairment loss is allocated first to goodwill and then on a pro rata basis to the other assets of the CGU or group of CGU’s to the extent that impairment loss exceeds the book value of goodwill.

Goodwill impairment testing is performed under a two-step approach:

1) Fair value and carrying amount of the reporting unit, including goodwill, are compared. If the fair value of the reporting unit is less than the carrying amount, Step 2 is completed to determine the amount of the goodwill impairment loss, if any.

2) Goodwill impairment is measured as the excess of the carrying amount of goodwill over its implied fair value. The implied fair value of goodwill calculated in the same manner that goodwill is determined in a business combination – is the difference between the fair value of the reporting unit and the fair value of the various assets and liabilities included in the reporting unit.

Any loss recognised is not permitted to exceed the carrying amount of goodwill. The impairment charge is included in operating income.

Appendix B – IFRS/US GAAP dif fe rences 13. Fair value of assets and liabilities

Issue IFRS US GAAP

Definition of fair value Fair value is the amount for which the asset could be exchanged or a liability be settled between knowledgeable, willing parties in an arm’s length transaction. IFRS does not specifically refer to either an entry or exit price.

IFRS does not contain guidance about which market should be used as a basis of measuring fair value when more than one market exists.

The fair value definition of a liability uses a settlement concept.

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 at the measurement date. The exchange price represents an exit price.

Fair value measurements include the concept of ‘highest and best use’ which refers to how the market participants would use an asset to maximise the value of asset or group of assets.

The fair value definition of a liability is based on a transfer concept and reflects

non-performance risk, which generally considers the entity’s own

credit risk.

Under both IFRS and US GAAP, observable markets typically do not exist for many assets acquired in a business combination. As a result for many non financial assets, the principal or most advantageous market will be represented by a hypothetical market, which likely will be the same under both frame works.

Acknowledgements

Authors

Mary Dolson

Telephone: +44 20 7804 2930 Email: mary.dolson@uk.pwc.com Derek Carmichael

Telephone: +44 20 7804 1963

Email: derek.j.carmichael@uk.pwc.com Akhil Kapadiya

Telephone: +44 20 7804 2167 Email: akhil.x.kapadiya@uk.pwc.com Alfredo Ramirez

Telephone: +44 20 7804 0508 Email: alfredo.ramirez@uk.pwc.com