Mergers and acquisitions (M&A) have been on the rise the last couple of years, giving the M&A frenzy in 2007 a run for its money. In fact, according to this article published by Bloomberg, October 2016 set a new record for merger and acquisitions, with approximately $489 billion in deals occurring. The previous record was set in April 2007 with approximately $471 billion in deals. But what does all of this mean for us as accountants? It means that accounting for business combinations under ASC 805 and IFRS 3 is back in the spotlight and the number of business combinations don’t seem to slowing down! We need to make sure that we are knowledgeable about the standards so that regulators don’t come knocking on our doors! ASC 805 and IFRS 3 are (almost) converged; however, there are some differences between the two standards that may cause accounting differences. In this post, we are going to discuss what I consider to be the five biggest differences between ASC 805 and IFRS 3, including:
If operating leases are acquired in a business combination and the acquiree is also the lessee, the accounting under ASC 805 and IFRS 3 is essentially the same. However, if the acquiree is the lessor, the accounting under the two standards differ. Let’s look at the differences through an example.
Under U.S. GAAP, 007 Corporation should separately account for the asset that is subject to the lease and any intangible asset (favorable market terms) or liability (unfavorable market terms). As such, at the date of acquisition, 007 Corporation would book the following journal entries:
Under IFRS, the intangible asset or liability from the favorable or unfavorable market terms, is incorporated into the fair value of the asset subject to the lease and is not presented as a separate asset or liability on the balance sheet. At the date of acquisition, 007 Corporation would book the following journal entries:
Under ASC 805, both contingent assets and liabilities are recognized at the acquisition at fair value, if fair value can be determined before the end of the measurement period (i.e. whether or not the contingency is probable, possible, or remote under ASC 450). Under IFRS 3, contingent liabilities are recognized at the acquisition date fair value if there is a present obligation arising from past events (i.e. obligation is “probable” under IAS 37). However, unlike U.S. GAAP, contingent assets are never recognized under IFRS.
If an entity acquires a controlling portion of a business but there is a non-controlling interest present, how the non-controlling interest is measured may differ under ASC 805 and IFRS 3. U.S. GAAP requires a non-controlling interest to be measured at fair value at the acquisition date. Unlike U.S. GAAP, IFRS gives the acquirer the option to either: 1) measure the non-controlling interest at fair value at the date of acquisition; or 2) measure the non-controlling interest at its proportion of the fair value of the identifiable net assets of the acquired entity. Let’s take a look at an example to see how the accounting of the non-controlling interest may differ.
As we discussed above, under IFRS 3, 007 Corporation has two options for measuring the non-controlling interest. If 007 Corporation decides to account for the non-controlling interest at fair value, the accounting under IFRS and U.S. GAAP will be the same. However, if 007 Corporation decides to not account for the non-controlling interest at fair value, the accounting will differ. The table below shows the amounts that would be recorded if the non-controlling interest is measured at fair value and the amounts if it is not.
As we know, under ASC 805 and IFRS 3, when an entity is acquired, the assets and liabilities are generally required to be recorded by the acquirer at fair value. But what happens if the acquiree continues to maintain and report separate financial statements; should the acquiree’s assets and liabilities also be recorded at its current fair value or should it maintain is previous measurement basis prior to the acquisition?
U.S. GAAP provides an irrevocable “option” for the acquiree to reflect the new basis of accounting (as a result of purchase accounting) in its separate financial statements This is referred to as “pushdown” accounting as the acquirer’s new basis of accounting for their acquisition is “pushed down” to the separate financial statements of the acquiree. ASC Subtopic 805-50 provides guidance on when this option can be elected and exactly “how” pushdown accounting should be performed.
Unlike U.S. GAAP, IFRS is silent and has no guidance when it comes to pushdown accounting and therefore this approach is generally not performed at the acquiree separate financial statement level.
The measurement period is the period during which adjustments can be made to amounts originally recorded as the result of an acquisition at the acquisition date. Amounts may change as the result of new information that is obtained about facts and circumstances that existed at the acquisition date, or due to the acquisition accounting not being completed as of the fiscal year end of the acquirer.
Prior to ASU 2015-16, both ASC 805 and IFRS 3 required measurement period adjustment to be made retrospectively by “recasting” prior periods. However, as the result of ASU 2015-16, under U.S. GAAP, measurement period adjustments are no longer required to be made retrospectively but instead, adjustments are made prospectively by adjusting amounts in the period in which the adjustment is determined. IFRS still requires adjustments to be made retrospectively.
Although the accounting under ASC 805 and IFRS 3 may be very similar in most respects, we just discussed some considerable differences between the two standards. If you need help with accounting for business combinations under ASC 805 or IFRS 3, we can help! Check out our blog post series or contact us today!
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