The data required for Business Combinations will have a significant impact on a company’s overall data collection as it transitions from Canadian GAAP to IFRS.
If a company is required to go backwards in time, and account for business combinations at the time of the original transaction(s), the effort to collect information for previous historical periods maybe extremely difficult, or perhaps impossible depending on the state of the records. In this situation the company may want to take advantage of the IFRS-1 exemption which allows a company to elect not to restate those business combinations retrospectively. Therefore, the optional exemptions for retrospective application within IFRS-1 should be carefully reviewed.
On the other hand, a company may decide to restate the business combinations retrospectively if it has completed very few business combinations, has access to the required historical information, and believes there is value in providing retrospective information to its stakeholders. In this situation, the company will need to understand the differences between IFRS-3 and Canadian GAAP (CICA Section 1581). The key elements of IFRS-3 to consider are as follows:
• Accounts for business combinations using the acquisition method, which may result in transactions being recognized as a business combination under IFRS 3 that would not be recognized under Section 1581;
• Requires the acquisition date to be the date on which the acquirer obtains control over the acquired entity or business;
• Requires that shares issued as consideration be measured based on their fair value at the acquisition date;
• Does not require outputs to be part of an integrated set of activities or assets to qualify as a business;
• Requires that contingent consideration be recognized when it can be reliably measured;
• Requires acquisition-related costs, such as finders’ fees and legal fees, be expensed;
• Requires that any gain on a bargain purchase or negative goodwill be recognized immediately in net income; and
• Requires the acquirer to recognize the acquiree’s identifiable assets acquired, liabilities assumed and contingent liabilities, at their fair values at the acquisition date (rather than the acquirer’s share only). Any non-controlling interest in the acquiree is measured at the non-controlling interest’s portion of the net fair values of those items or of the fair value of the business.
Please note – the Canadian AcSB has approved but not yet issued Section 1582, which will be converged with IFRS 3, and be effective for years beginning on or after January 1, 2011, with early adoption permitted. Enterprises planning a business combination in 2010 are encouraged to adopt Section 1582 to minimize restatements on changeover to IFRS.
As previously indicated, the IFRS-1 exemption is available for companies wishing to avoid the complexities involved with retrospective application.
I hope this helps. This is one of a series of blogs that is meant to convey information relating to Canada’s transition from Canadian GAAP to IFRS.
For further information, please refer to the ongoing series of IFRS blogs on the Edelkoort Smethurst Schein CPA’s LLP web-site and please remember to contact your accounting professional for further guidance.