Transition .1 General principles

Assets and liabilities that arose from business combinations whose acquisition dates preceded the application of the Standard are not adjusted upon application of IFRS 3(2008). [IFRS 3(2008).65]

Similarly, many of the changes introduced in IAS 27(2008) only apply on a prospective basis, and the accounting adopted for transactions that occurred prior to the beginning of the first annual reporting period in which IAS 27(2008) is applied is not adjusted. [IAS 27(2008).45]

The acquisition date in a business combination, combined with the relevant annual reporting period to which IFRS 3(2008) is first applied, determines which version of IFRS 3 to apply when accounting for a particular business combination.

Acquisition date before IFRS 3(2008) is applied Where the acquisition date is before the beginning of the annual reporting period during which the IFRS 3(2008) is first applied, IFRS 3(2004) is applied when accounting for the business combination. Therefore:

• the initial accounting for the business combinations is in accordance with IFRS 3(2004);

• the initial accounting for the business combination (e.g. capitalised acquisition costs, initial measurement of non-controlling interests, adjustments to goodwill for the different method of accounting for step acquisitions, and so on) is not restated to reflect the new or revised requirements in IFRS 3(2008) when the revised Standard is adopted;

• contingent consideration adjustments that arise in respect of the business combination are adjusted against the initial accounting for the business combination in accordance with IFRS 3(2004), resulting in an adjustment to goodwill; and

• comparative information is not adjusted.

However, the new requirements in IFRS 3(2008) and IAS 27(2008) are applied to:

• changes in ownership interests in a subsidiary occurring after the beginning of the annual reporting period in which IFRS 3(2008) and IAS 27(2008) are first applied, regardless of whether or not the subsidiary was acquired in a business combination that occurred prior to initial application of IFRS 3(2008) and IAS 27(2008); and

• deferred tax adjustments occurring after the beginning of the annual reporting period in which IFRS 3(2008) and IAS 27(2008) are first applied – see section 15.3.3 below.

Contingent consideration The intent of the Board appears to be that contingent consideration arising on business combinations occurring before IFRS 3(2008) is applied continues to be accounted for under IFRS 3(2004). Consequently, any adjustments continue to be made against goodwill. However, the interaction of this requirement in IFRS 3(2008) and the consequential amendment to IAS 39 is currently the subject of debate. As a consequence of IFRS 3(2008), paragraph 2(f) of IAS 39 is deleted with the effect that contracts for contingent consideration in a business combination are no longer excluded from the scope of IAS 39. The amendment to IAS 39 does not provide any transitional relief for contingent consideration relating to business combinations occurring before the implementation of IFRS 3(2008) with the effect that IAS 39 would apply to such ‘brought forward’ contingent consideration. On the basis that the US version of this requirement provides such transitional relief, it is suggested that the Board’s drafting does not reflect their intent.

Effective date and transition

Mutual entities and combinations by contract alone were previously outside the scope of IFRS 3.

IFRS 3(2008) will apply to those entities prospectively, as described above. For business combinations occurring in earlier periods:

[IFRS 3(2008).B68 – B69]

• classification – earlier business combinations continue to be classified in accordance with the entity’s previous accounting policy;

• previously-recognised goodwill – elimination of any amortisation accumulated under the entity’s previous accounting policy, but no change to net carrying amount;

• goodwill previously recognised as a deduction from equity – not recognised as an asset. Nor is the goodwill recognised in profit or loss when the business to which it relates is disposed of or when the relevant cash-generating unit is determined to be impaired;

• subsequent accounting for goodwill – discontinue amortisation (if any) and test for impairment; and

• previously-recognised negative goodwill – derecognise any amount carried as a deferred credit and adjust retained earnings.

15.3.3 Deferred tax assets arising in a business combination

Paragraph 68 of IAS 12 Income Taxes, which deals with changes in the measurement of deferred tax assets arising in business combinations, has been amended by IFRS 3(2008) (see section 11.3.6).

These amendments are to be applied prospectively to the recognition of deferred tax assets acquired in business combinations from the effective date of IFRS 3(2008). [IAS 12.93]

Therefore, following the adoption of IFRS 3(2008), the rules of the revised Standard as regards subsequent recognition or remeasurement of deferred tax assets arising in business combinations apply both to business combinations occurring after the adoption of IFRS 3(2008), and prospectively to the recognition or remeasurement of deferred tax assets acquired in business combinations occurring before the adoption of IFRS 3(2008). Therefore, following the adoption of IFRS 3(2008), irrespective of the date of the original acquisition, the impact of the recognition or remeasurement of such deferred tax assets is recognised in profit or loss unless the benefits are recognised within the measurement period and those adjustments result from new information about facts and circumstances that existed at the acquisition date. [IAS 12.94]

Effective date and transition

Example 15.3.3A

Deferred tax assets determined provisionally

Company M has an annual reporting period that ends in December. On 15 November 2009, Company M acquires a 100% controlling interest in Company N and the business combination is accounted for in accordance with IFRS 3(2004). At the acquisition date, Company N has certain carry-forward tax benefits. It is not clear that Company N will be able to carry forward those tax benefits following its acquisition – the position requires detailed assessment under the relevant tax law of the jurisdiction in which Company N operates.

Company M engages tax advisors to assess whether the tax benefits will be available to Company N after the acquisition. At 31 December 2009, this assessment has not been completed and, based on preliminary assessment of the application of the relevant laws, a deferred tax asset is not recognised in the initial accounting for the business combination in accordance with IFRS 3(2004). Accounting for the acquired deferred tax benefits is identified as an item determined only provisionally in the 31 December 2009 financial statements.

Company M first applies IFRS 3(2008) in the accounting period ending 31 December 2010. On 30 April 2010, Company M’s tax advisers conclude that 50 per cent of Company N’s tax benefits can be carried forward. Accordingly, the deferred tax asset arising from 50 per cent of the tax benefits is recognised and an adjustment is made to the goodwill arising in the initial accounting for the business combination (which is sufficient to absorb the adjustment).

In February 2011, when the case comes for final ruling by the taxation authorities, it is determined that all of the tax benefits are available for carry-forward. Under the requirements of IFRS 3(2008), because this adjustment arises after the end of the measurement period, the benefit is not adjusted against goodwill but is recognised in profit or loss. The requirements of IFRS 3(2008 are applied even though the acquisition of Company N was originally accounted for under IFRS 3(2004).

Example 15.3.3B

Favourable change in tax law during the measurement period

Assume the same facts as in example 15.3.3A except that, in making their assessment in April 2010, the tax advisers make reference to a favourable change in the tax law that is

substantively enacted in February 2010. Without this change in tax law, the tax benefits could not have been carried forward by Company N.

In this case, the recognition of the deferred tax asset is a direct result of the change in tax law that occurs in February 2010 and, therefore, it does not result from new information about facts and circumstances that existed at the acquisition date. Accordingly, the recognition of the deferred tax asset in April 2010 is recognised in profit or loss, even though it is recognised during the measurement period.

IAS 27(2008) effects consequential amendments to IAS 28 and IAS 31 to introduce accounting requirements for the loss of significant influence over an associate or joint control over a jointly controlled entity (see section 12.5). These requirements are required to be applied to annual reporting periods beginning on after 1 July 2009, or such earlier period to which IFRS 3(2008) and IAS 27(2008) has been applied by the entity.

The amendments to IAS 28 and IAS 31 are not expressed as applying on a prospective or retrospective basis, and do not have transitional provisions equivalent to those under IAS 27 to prohibit the restatement of prior transactions that result in a loss of significant influence or joint control. However, it is suggested that it would be appropriate to apply these changes on a basis that is consistent with the transitional provisions in IAS 27, i.e. only apply the new requirements to transactions occurring after the beginning of the annual reporting period beginning after initial application of IFRS 3(2008) and IAS 27(2008).

15.3.5 Amendments to other IFRSs

IFRS 3(2008) and IAS 27(2008) introduce a number of consequential amendments to various other IFRSs. These amendments are required to be applied to annual reporting periods beginning on after 1 July 2009 or such earlier period to which IFRS 3(2008) and IAS 27(2008) has been applied by the entity. Although not specifically stated, the effect of these amendments is effectively applied on a prospective basis due to their nature.

Disclosure

16. Disclosure