This report explains the major changes which companies have to face with the revised IFRS 3 which was published in January 2008. One of them is the introduction of an option when it comes to the recognition of minority interest. The acquiring companies may chose between measuring it with its fair value or, as in the previous version of the standard, with its proportionate share of the net assets of the acquiree. Comparing the two treatments it becomes obvious that only the fair value measurement leads to the recognition of the part of goodwill which is attributable to the minority interest. This causes lower returns on capital employed and higher equity ratios for firms applying the fair value treatment.
Another important modification of the revised IFRS 3 is that acquisition related cost such as legal or adviser fees have to be expensed, which means a cut in profits in the year of the acquisition. Before, those costs have been capitalised with the investment.
When it comes to business combinations achieved in stages the revised standard demands that any previously held investment has to be re-measured at its fair value. Any differences to the carrying amount have to be realized as gains or losses. Goodwill is subsequently measured as the excess of the consideration transferred, the value of the re-measured investment and any minority interest over the identifiable net assets of the acquiree.
Table of Contents
1. Introduction
2. Major changes and implications
1. Treatment of minority interest and goodwill
2. Recognition of incidental acquisition costs
3. Accounting for pre-existing relationships
4. Business combinations accomplished in stages
5. Contingent considerations
6. Reacquired rights
3. Information sources used
4. Conclusion and outlook
5. References
Objectives and Topics
This report examines the significant modifications introduced by the revised IFRS 3 standard (2008) regarding business combinations. The primary research focus is to analyze how these changes, particularly concerning the treatment of minority interest, acquisition costs, and fair value measurements, impact a company's financial reporting, profit and loss statements, and overall capital structure.
- Full goodwill option and minority interest valuation
- Impact of expensing acquisition-related costs
- Accounting for business combinations achieved in stages
- Recognition and measurement of contingent considerations
- Valuation and amortization of reacquired rights
Excerpt from the Book
1. Treatment of minority interest and goodwill
One of the major issues that was expected to come with the revised standard was the full-goodwill method described in ED IFRS 3.49 (IASB, 2005a). According to the ED goodwill is supposed to be calculated “as the excess of the fair value of the acquiree, as a whole, over the net amount of the recognised identifiable assets acquired and liabilities assumed” (IASB, 2005a, p. 19). Paragraphs 19 and 20 of the ED state that in most cases the consideration transferred should be the best indicator for the fair value of the acquiree. Thus is even if less than 100 per cent of the acquiree are purchased, the value of the company as a whole is derived from the consideration transferred. However, if “no consideration is transferred on the acquisition date or the evidence indicates that the consideration transferred is not the best basis for measuring the acquisition-date fair value” (IASB, 2005a, p. 30) other valuation techniques, such as the use of comparable market data or the calculation of the present value of expected future income, may be used (IASB, 2005a, p. 59-61).
Summary of Chapters
1. Introduction: Outlines the development process of the revised IFRS 3, detailing the move toward convergence between US GAAP and IFRS standards.
2. Major changes and implications: Analyzes the specific technical modifications, including minority interest treatment, acquisition costs, staged combinations, and reacquired rights.
3. Information sources used: Discusses the framework and standard-setting process, acknowledging the role of comment letters and public feedback in shaping the IASB's decisions.
4. Conclusion and outlook: Summarizes the significant impact of the new standard on financial statements and suggests that future research should track the actual implementation rates among companies.
5. References: Provides a comprehensive list of academic articles, specialist books, and professional reporting standards consulted for this report.
Keywords
IFRS 3, Business Combinations, Goodwill, Minority Interest, Fair Value, Financial Statements, Acquisition Costs, Consolidation, Contingent Consideration, Reacquired Rights, Capital Structure, IASB, Accounting Standards, Volatility, Impairment
Frequently Asked Questions
What is the primary focus of this report?
The report focuses on the major changes introduced by the revised IFRS 3 (2008) regarding business combinations and the resulting implications for corporate financial reporting.
What are the central themes discussed in the text?
Key themes include the treatment of minority interests, the mandatory expensing of acquisition costs, the accounting for contingent considerations, and the revaluation of previously held investments.
What is the main objective of the revised standard?
The primary goal is to achieve greater international convergence in financial reporting between the IASB and the FASB, while providing more relevant information to investors.
Which scientific approach does the author use?
The report utilizes a comparative analysis of accounting standards, drawing on IASB exposure drafts, academic literature, and professional analysis of the standard-setting process.
What topics are covered in the main body?
The main body systematically reviews six major regulatory modifications, including the full-goodwill method, treatment of incidental costs, and new valuation requirements for intangible assets and contingent liabilities.
Which keywords best characterize this work?
The work is best characterized by terms such as IFRS 3, Goodwill, Fair Value, Minority Interest, and Consolidation.
How does the fair value option for minority interest affect the balance sheet?
Choosing the fair value option leads to a higher recognition of both minority interest and goodwill, which effectively increases the total balance sheet size compared to the proportionate share method.
Why are acquisition-related costs now expensed instead of capitalized?
The IASB argues that these costs are separate transactions with third parties and are consumed immediately, thus expensing them better reflects the underlying economic reality.
What impact does revaluing previously held investments have on profit?
In business combinations achieved in stages, this revaluation can lead to significant fluctuations in reported profits due to the immediate realization of gains or losses upon obtaining control.
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- David Wagener (Autor:in), 2008, IFRS 3 (2008) - major changes and implications, München, GRIN Verlag, https://www.grin.com/document/113428
