An Executive Guide to IFRS: Content, Costs and Benefits to Business

Business combinations

IFRS 3 Business Combinations was, as its number suggests, one of the earliest standards issued by the IASB. It was an urgent priority whose object was to move IFRS into line with US GAAP. The FASB’s SFAS 141 (issued in 2001) had significantly changed business combinations in the US by removing the possibility of merger accounting, or pooling of interests, and also doing away with the requirement to amortize goodwill.

Under merger accounting, the combination is done by an exchange of shares, but the shares of the issuing company are measured at nominal value and not market value, and the underlying assets and liabilities are not revalued. This sort of accounting was widely done in the US (for example, in the merger of Daimler and Chrysler). No goodwill was recognized and the actual value given up by one company to combine with the other was not easy to see. The FASB decided to put an end to such practices, but allowed that goodwill should not be amortized. Although analysts typically add back goodwill amortization, companies did not like having to amortize it as was required by US GAAP.

The IASB, of course, had a formal convergence programme with the FASB (agreed in 2002) but in any event wanted similarly to put an end to abusive merger accounting, and moved quickly to issue IFRS 3 Business Combinations in 2003, which converged closely with SFAS 141, and was subsequently revised when the FASB revised that standard. Aside from the apparent abuses of the merger ...