IFRS for SMEs — U.S. GAAP Comparison Wiki

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Business Combinations and Goodwill

SME Par.IFRS SMEU.S. GAAP
Scope of this section
19.1 This section applies to accounting for business combinations. It provides guidance on identifying the acquirer, measuring the cost of the business combination, and allocating that cost to the assets acquired and liabilities and provisions for contingent liabilities assumed. It also addresses accounting for goodwill both at the time of a business combination and subsequently.  
19.2 This section specifies the accounting for all business combinations except:
  1. combinations of entities or businesses under common control. Common control means that all of the combining entities or businesses are ultimately controlled by the same party both before and after the business combination, and that control is not transitory.
  2. the formation of a joint venture.
  3. acquisition of a group of assets that do not constitute a business.
 In addition to these scope exceptions, the general U.S. GAAP standard on business combinations excludes combinations between not-for-profit organizations and the acquisition of a for-profit business by a not-for-profit organization; such combinations and acquisitions are addressed in a separate standard.
Business combinations defined
19.3 A business combination is the bringing together of separate entities or businesses into one reporting entity. The result of nearly all business combinations is that one entity, the acquirer, obtains control of one or more other businesses, the acquiree. The acquisition date is the date on which the acquirer effectively obtains control of the acquiree. Effectively the same.
19.4 A business combination may be structured in a variety of ways for legal, taxation or other reasons. It may involve the purchase by an entity of the equity of another entity, the purchase of all the net assets of another entity, the assumption of the liabilities of another entity, or the purchase of some of the net assets of another entity that together form one or more businesses. Same.
19.5 A business combination may be effected by the issue of equity instruments, the transfer of cash, cash equivalents or other assets, or a mixture of these. The transaction may be between the shareholders of the combining entities or between one entity and the shareholders of another entity. It may involve the establishment of a new entity to control the combining entities or net assets transferred, or the restructuring of one or more of the combining entities. Same.
Accounting
19.6 All business combinations shall be accounted for by applying the purchase method. Same.
19.7 Applying the purchase method involves the following steps:
  1. identifying an acquirer.
  2. measuring the cost of the business combination.
  3. allocating, at the acquisition date, the cost of the business combination to the assets acquired and liabilities and provisions for contingent liabilities assumed.
  1. Same.
  2. Same.
  3. Unlike IFRS SMEs, U.S. GAAP also requires the recognition of contingent assets if they meet criteria analogous to those for recognition of contingent liabilities, and inclusion of those contingent assets in the cost allocation. See the recognition criteria for contingent liabilities at 19.20.
 Identifying the acquirer
19.8 An acquirer shall be identified for all business combinations. The acquirer is the combining entity that obtains control of the other combining entities or businesses. Same.
19.9 Control is the power to govern the financial and operating policies of an entity or business so as to obtain benefits from its activities. Control of one entity by another is described in Section 9 Consolidated and Separate Financial Statements. Generally the same. However, see Section 9, Consolidated and Separate Financial Statements.
19.10 Although it may sometimes be difficult to identify an acquirer, there are usually indications that one exists. For example:
  1. if the fair value of one of the combining entities is significantly greater than that of the other combining entity, the entity with the greater fair value is likely to be the acquirer.
  2. if the business combination is effected through an exchange of voting ordinary equity instruments for cash or other assets, the entity giving up cash or other assets is likely to be the acquirer.
  3. if the business combination results in the management of one of the combining entities being able to dominate the selection of the management team of the resulting combined entity, the entity whose management is able so to dominate is likely to be the acquirer.
 Same. However, U.S. GAAP provides additional indicators in identifying the acquirer and, therefore, differences may arise in practice. In addition, in a business combination in which a variable interest entity is acquired, the primary beneficiary of that entity always is the acquirer.
 Cost of a business combination
19.11 The acquirer shall measure the cost of a business combination as the aggregate of:
  1. the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the acquirer, in exchange for control of the acquiree, plus
  2. any costs directly attributable to the business combination.
 Unlike IFRS SMEs—
  • Acquisition-related costs are accounted for as expenses in the periods in which thay are incurred and the services are received.
  • Costs of issuing equity securities are recognized as a reduction of the otherwise determinable fair value of the securities.
 Adjustments to the cost of a business combination contingent on future events
19.12 When a business combination agreement provides for an adjustment to the cost of the combination contingent on future events, the acquirer shall include the estimated amount of that adjustment in the cost of the combination at the acquisition date if the adjustment is probable and can be measured reliably. Unlike IFRS SMEs, recognition of the acquisition-date fair value of contingent consideration as part of the consideration transferred in exchange for the acquiree is not subject to “probable” or “measured reliably” conditions.
19.13 However, if the potential adjustment is not recognised at the acquisition date but subsequently becomes probable and can be measured reliably, the additional consideration shall be treated as an adjustment to the cost of the combination. See 19.12 and 19.19.
 Allocating the cost of a business combination to the assets acquired and liabilities and contingent liabilities assumed
19.14 The acquirer shall, at the acquisition date, allocate the cost of a business combination by recognising the acquiree’s identifiable assets and liabilities and a provision for those contingent liabilities that satisfy the recognition criteria in paragraph 19.20 at their fair values at that date. Any difference between the cost of the business combination and the acquirer’s interest in the net fair value of the identifiable assets, liabilities and provisions for contingent liabilities so recognised shall be accounted for in accordance with paragraphs 19.22–19.24 (as goodwill or so-called ‘negative goodwill’). Same, except that—
  • The recognition criteria for contingent liabilities are different from those in IFRS SMEs. See 19.20.
  • Contingent assets are also recognized and included in the cost allocation. See 19.7 and 19.20.
  • Liabilities (or assets) related to the acquiree’s employee benefit arrangements, such as pensions and compensated absences, are recognized and measured in accordance with separate standards addressing those arrangements.
  • Deferred tax assets or liabilities arising from assets acquired and liabilities assumed are recognized and measured in accordance with the standard on accounting for income taxes. See Section 29.
  • Uncertain tax positions are measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon settlement with a taxing authority that has full knowledge of all relevant information.
  • Assets resulting from the seller’s contractual indemnification of the acquirer for the outcome of a contingency or uncertainty related to all or part of a specific asset or liability (indemnification assets) are measured on the same basis as the indemnified item, subject to the need for a valuation allowance for uncollectible accounts.
19.15 The acquirer shall recognise separately the acquiree’s identifiable assets, liabilities and contingent liabilities at the acquisition date only if they satisfy the following criteria at that date:
  1. In the case of an asset other than an intangible asset, it is probable that any associated future economic benefits will flow to the acquirer, and its fair value can be measured reliably.
  2. In the case of a liability other than a contingent liability, it is probable that an outflow of resources will be required to settle the obligation, and its fair value can be measured reliably.
  3. In the case of an intangible asset or a contingent liability, its fair value can be measured reliably.
  1. Like IFRS SMEs, the “probable” criterion must be met in order to meet the definition of an asset. Unlike IFRS SMEs, however, “measured reliably” is not an explicit criterion.
  2. Like IFRS SMEs, the “probable” criterion must be met in order to meet the definition of a liability. Unlike IFRS SMEs, however, “measured reliably” is not a recognition criterion.
  3. Unlike IFRS SMEs, it is assumed that information should exist to measure reliably the fair value of an intangible asset if that asset has an underlying contractual or legal basis or if it is capable of being separated from the entity See 19.20 regarding contingencies.
19.16 The acquirer’s statement of comprehensive income shall incorporate the acquiree’s profits and losses after the acquisition date by including the acquiree’s income and expenses based on the cost of the business combination to the acquirer. For example, depreciation expense included after the acquisition date in the acquirer’s statement of comprehensive income that relates to the acquiree’s depreciable assets shall be based on the fair values of those depreciable assets at the acquisition date, ie their cost to the acquirer. Same.
19.17 Application of the purchase method starts from the acquisition date, which is the date on which the acquirer obtains control of the acquiree. Because control is the power to govern the financial and operating policies of an entity or business so as to obtain benefits from its activities, it is not necessary for a transaction to be closed or finalised at law before the acquirer obtains control. All pertinent facts and circumstances surrounding a business combination shall be considered in assessing when the acquirer has obtained control. Same.
19.18 In accordance with paragraph 19.14, the acquirer recognises separately only the identifiable assets, liabilities and contingent liabilities of the acquiree that existed at the acquisition date and satisfy the recognition criteria in paragraph 19.15. Therefore:
  1. the acquirer shall recognise liabilities for terminating or reducing the activities of the acquiree as part of allocating the cost of the combination only when the acquiree has, at the acquisition date, an existing liability for restructuring recognised in accordance with Section 21 Provisions and Contingencies; and
  2. the acquirer, when allocating the cost of the combination, shall not recognise liabilities for future losses or other costs expected to be incurred as a result of the business combination.
  1. Generally the same. However, U.S. GAAP does not specify as a condition for recognizing costs to exit an activity that the costs have been recognized as a liability by the acquiree. Thus, it would seem that a difference could arise if restructuring costs met the definition of a liability after the acquiree issued its most recent financial statements but before the acquisition date.
  2. Same.
19.19 If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the acquirer shall recognise in its financial statements provisional amounts for the items for which the accounting is incomplete. Within twelve months after the acquisition date, the acquirer shall retrospectively adjust the provisional amounts recognised as assets and liabilities at the acquisition date (ie account for them as if they were made at the acquisition date) to reflect new information obtained. Beyond twelve months after the acquisition date, adjustments to the initial accounting for a business combination shall be recognised only to correct an error in accordance with Section 10 Accounting Policies, Estimates and Errors. Like IFRS SMEs, the measurement period may not exceed one year.

Changes in the fair value of contingent consideration are accounted for as measurement period adjustments if they result from additional information about facts and circumstances that existed at the acquisition date.
 Contingent liabilities
19.20 Paragraph 19.14 specifies that the acquirer recognises separately a provision for a contingent liability of the acquiree only if its fair value can be measured reliably. If its fair value cannot be measured reliably:
  1. there is a resulting effect on the amount recognised as goodwill or accounted for in accordance with paragraph 19.24; and
  2. the acquirer shall disclose the information about that contingent liability as required by Section 21.
 Note: “contingent liability” in IFRS SMEs has the same meaning as what in the U.S. is referred to as a contingent liability that does not meet the general criteria for recognition, i.e., that is not both probable and reasonably estimable. See Section 21.

Unlike IFRS SMEs, all liabilities assumed that arise from contingencies related to contracts are recognized and measured at their acquisition-date fair values; there is no condition that fair value can be measured reliably. Other (noncontractual) contingencies are not recognized unless it is more likely than not that the contingency gives rise to a liability, as defined. Thus, contingent liabilities, as defined in IFRS SMEs, would not be recognized, unlike IFRS SMEs.
19.21 After their initial recognition, the acquirer shall measure contingent liabilities that are recognised separately in accordance with paragraph 19.14 at the higher of:
  1. the amount that would be recognised in accordance with Section 21, and
  2. the amount initially recognised less amounts previously recognised as revenue in accordance with Section 23 Revenue.
  1. There are differences in the measurement guidance in Section 21 of IFRS SMEs and U.S. GAAP—see Section 21.
  2. Unlike IFRS SMEs, the analogous U.S. GAAP does not explicitly mention any reduction of the acquisition-date fair value. [The reference to Section 23 presumably refers to cumulative amortization. Wiki users are invited to comment on this issue.]
 Goodwill
19.22 The acquirer shall, at the acquisition date:
  1. recognise goodwill acquired in a business combination as an asset, and
  2. initially measure that goodwill at its cost, being the excess of the cost of the business combination over the acquirer’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised in accordance with paragraph 19.14.
  1. Same.
  2. Unlike IFRS SMEs, under U.S. GAAP, the measurement of goodwill includes goodwill related to the noncontrolling interests in subsidiaries that are not wholly owned. In addition, the cost of the business combination as well as the recognition and measurement of assets acquired and liabilities assumed may differ from IFRS SMEs (see above). Furthermore, if the business combination was effected by exchanging only equity instruments and the acquisition-date fair value of the acquiree’s equity interests are more reliably measurable than the acquisition-date fair value of the acquirer’s equity interests, the amount of goodwill is determined using the acquisition-date fair value of the acquiree’s equity interests instead of the acquisition-date fair value of the equity interests transferred.
19.23 After initial recognition, the acquirer shall measure goodwill acquired in a business combination at cost less accumulated amortisation and accumulated impairment losses:
  1. An entity shall follow the principles in paragraphs 18.19–18.24 for amortisation of goodwill. If an entity is unable to make a reliable estimate of the useful life of goodwill, the life shall be presumed to be ten years.
  2. An entity shall follow Section 27 Impairment of Assets for recognising and measuring the impairment of goodwill.
 Unlike IFRS SMEs, goodwill is not amortized. Rather, goodwill is tested for impairment at least annually. In addition, there are differences in the methodology for measuring impairment under IFRS SMEs and U.S. GAAP (see Section 27).
 Excess over cost of acquirer’s interest in the net fair value of acquiree’s identifiable assets, liabilities and contingent liabilities
19.24 If the acquirer’s interest in the net fair value of the identifiable assets, liabilities and provisions for contingent liabilities recognised in accordance with paragraph 19.14 exceeds the cost of the business combination (sometimes referred to as ‘negative goodwill’), the acquirer shall:
  1. reassess the identification and measurement of the acquiree’s assets, liabilities and provisions for contingent liabilities and the measurement of the cost of the combination, and
  2. recognise immediately in profit or loss any excess remaining after that reassessment.
 Same.
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