Summary
Developments, Key Differences & History
Compared to IFRS
Interpretations
Rejection Notices
Questions & Answers
Articles
AASB website
Contingent transaction costs
as reported in ANT47/2008
Q: An entity agrees to pay a third party adviser a fee for services relating to a business combination. If that fee is contingent on the acquiree achieving a specific profit hurdle can this fee be accounting for as contingent consideration arising on the business combination, allowing any reassessment to be accounted for as an adjustment to the cost of the business combination and therefore adjusted against goodwill?
A: No. The contingent consideration requirements of AASB 3 Business Combinations only apply, as mentioned in paragraph 32 of the current AASB 3, ‘when a business combination agreement provides for an adjustment to the cost of the combination…’ By its nature a business combination agreement is an agreement between the vendor and the purchaser and does not include agreements with third parties unconnected to the vendor.
Therefore the payment to the adviser is not contingent consideration as it is not part of the agreement between the vendor and the purchaser. It arises from a separate agreement with the third party adviser. While the payment to the adviser is part of the cost of the combination because it is a cost directly attributable to the business combination (para 24(b) of the current AASB 3) it must be measured (through estimation techniques) as at the combination date. Any subsequent remeasurement cannot be adjusted against the cost of combination except where it is an adjustment to the initial accounting within the twelve month window (as envisaged by paragraph 62 of the current AASB 3). However, as indicated by paragraph 62, an adjustment to the initial accounting must reflect conditions as they existed at the date of the combination and does not take into account subsequent events.
Contingent consideration relating to future services
as reported in ANT43/2008
Q: Consider circumstances where the acquiree’s former shareholders become or continue to be key employees of the acquiree subsequent to the acquisition (and these employees have positions that may affect the financial results of the acquiree). The business combination agreements provide for an adjustment to the cost of the combination contingent on future profit levels. Must an acquirer identify contingent consideration that is, in substance, compensation for future services, and account for this separately from the cost of the combinations – under current AASB 3 Business Combinations and the revised AASB 3 that is effective from 1 July 2009?
A: Yes. The Framework for the Preparation and Presentation of Financial Statements states that in order for the information to represent faithfully the transactions, they should be accounted for in accordance with their substance, rather than their legal form, which may not be consistent with the substance and economic reality. Therefore, where a vendor is also a continuing employee it is necessary to determine whether payments made to them are in their capacity as vendor or as employee.
Until the revised AASB 3 was issued in March 2008 there was no specific guidance in IFRS to evaluate the substance of this type of transaction. However US GAAP, EITF 95-8 Accounting for Contingent Consideration Paid to Shareholders for an Acquired Enterprise in a Purchase Business Combination, was often referred to as it did not conflict with the IFRS Framework in this regard.
Paragraphs 51 and 52 of the revised AASB 3 Business Combinations specifically address these types of arrangements. The new standard was issued in March 2008 and while it is not mandatory until financial years beginning on or after 1 July 2009 it should be referred to as guidance even prior to the standard being formally adopted by the entity.
The revised standard requires an acquirer to evaluate the substance of the arrangements entered into by the parties, before, or at the time of, the combination. In this evaluation the nature and extent of pre-existing relationships are considered. Considerable application guidance has been included which indicates that, when there is a payment of ‘earn-out’ or other amounts conditional on continued employment by the acquirer, the payments are treated as compensation for future services rather than as consideration. Consequently it is critical for businesses to consider the accounting prior to the finalisation of acquisition agreements in order to avoid unintended ‘surprises’.
Business Combinations and shelf companies
as reported in ANT18/2008
Q: My client has just acquired a shelf company. Does this constitute a business combination under AASB 3, and am I required to do all the AASB 3 disclosures in paragraph 66 onwards?
A: I think that there may be some confusion here between AASB 3 Business Combinations, and AASB 127 Consolidated and Separate Financial Statements.
AASB 3 applies to reporting entities that undertake material business combinations. In considering the application of AASB 3 to this transaction there are two main factors to consider. These are:- Does the transaction actually constitute a business combination? and
- Is the entity material?
Normally, a shelf company is unlikely to be material and therefore paragraph Aus1.4 of AASB 3 would indicate that the standard does not apply. If it is material, the question then arises as to whether it meets AASB 3’s definition of a business, that is:
"An integrated set of activities and assets conducted and managed for the purpose of providing:
(a) A return to investors; or
(b) Lower costs or other economic benefits directly and proportionately to policyholders or participants.
"A business generally consists of inputs, processes applied to those inputs and resulting outputs that are, or will be, used to generate revenues. If goodwill is present in a transferred set of activities and assets, the transferred set shall be presumed to be a business."
Again, a shelf company is unlikely to satisfy this definition due to its lack of activity.
While the initial acquisition of the shelf company is therefore unlikely to trigger the application of AASB 3, once acquired it does represent a subsidiary to which AASB 127 Consolidated and Separate Financial Statements must be applied. This is the standard that applies to the presentation of financial statements of a group under the control of a parent entity. On initial acquisition, materiality may be a relevant factor to consider and so consolidation of the shelf company may be able to be avoided until the shelf company's operations become material to the group.
Business Combinations: Valuation of assets
as reported in ANT09/2007
Q: Subsequent to the acquisition of company B by company A, A has incurred costs from external organizations in having valuations of B performed to determine the fair value of the assets (particularly intangible assets) acquired.
A's management argue that the costs would not have been incurred if the business combination had not occurred and that they are therefore directly attributable to the combination. Can A capitalize these valuation costs as part of the cost of acquisition?
A: AASB 3 includes within the cost of the business combinations any costs that are 'directly attributable to the combination such as professional fees paid to accountants, legal advisers, valuers and other consultants to effect the combinations' (para 29).
Valuation costs incurred prior to the acquisition date may qualify to be capitalised as part of the cost of the combination. However, costs incurred post-acquisition to determine the fair value of the assets acquired have not been incurred to effect the combination and must be expensed. This would also apply to other types of valuation costs (e.g. for tangible fixed assets and pension liabilities).
(Thanks to the UK's Accountancy magazine for this one.)
Fair Value Adjustments under Business Combinations
as reported in ANT31/2005
Q: Under AASB 3 Business Combinations, am I able to "push-down" fair value adjustments made in relation to acquisition accounting of a newly acquired subsidiary, or do the balances have o remain as a consolidation adjustment?
A: While AASB 3 does not specifically discuss "pushing down" fair value adjustments arising from acquisition and consolidation accounting to subsidiaries, there is nothing specific in AASB 3 to preclude it. If the subsidiary were not a reporting entity, there would be no specific accounting or reporting restrictions over "pushing down" any fair value adjustments made in relation to acquisition accounting a subsidiary. However, if the subsidiary is a reporting entity, there may be some limitations.
For example, if the subsidiary recognised an intangible asset arising from development that was measured by the subsidiary in accordance with AASB 138 Intangible Assets and the parent entity's interest in the fair value of the identifiable assets, liabilities and contingent liabilities exceeded the cost of the business combination, then the parent entity may not be able to "push down" any such re-measurement of the subsidiary's intangible asset if that caused the intangible asset to be valued in the subsidiary's accounts at an amount inconsistent with the requirements of the Standard.
Goodwill Amortisation
as reported in ANT46/2005
Q: I understand that under the new 2005 standards goodwill is no longer amortised. Does this mean the balance can be carried unreviewed, indefinitely?
A: No. Paragraph 54 of the new AASB 3 Business Combinations requires that once goodwill has been initially recognised, it must be carried at cost less any accumulated impairment losses. Paragraph 55 then says it shall not be amortised but must be subject to a yearly (or if necessary more frequent) review for impairment in accordance with the requirements of AASB 136 Impairment of Assets.
AASB 136 sets out specific rules in paragraphs 80 and following for how this impairment assessment is to be carried out, requiring allocation of the goodwill to the appropriate cash-generating unit.
Transitional Provisions for Goodwill
as reported in ANT21/2005
Q: When initially adopting AASB 3 Business Combinations, do I have to apply it retrospectively and recalculate the goodwill for acquisitions made before the transition date?
A: No. Recall that the transition date is the beginning of the period for the comparatives, i.e. 1 July 2004 for an entity doing 30 June 2006 financials under the new standard. AASB 1 includes at paragraph 13 a specific exemption in relation to the Business Combination standard AASB 3 which allows entities to choose between retrospectively applying AASB 3 or using the provisions of AASB 1 First-time Adoption of International Financial Reporting Standards Appendix B to apply to these types of business combinations. Paragraph B2 of Appendix 1 goes into detail about the consequences of choosing to use this exemption, and specifically refers to the appropriate adjustments necessary for goodwill in paragraph B2 (g). |
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