Friday, August 1, 2008

IFRS 3 vs FASB 141 Business Combinations, the new reporting standards

IAS 22 Business Combinations was issued by the International Accounting Standards Committee in October 1998. It was a revision of IAS 22 Business Combinations (issued in December 1993), which replaced IAS 22 Accounting for Business Combinations (issued in November 1983).

In April 2001 the International Accounting Standards Board (IASB) resolved that all Standards and Interpretations issued under previous Constitutions continued to be applicable unless and until they were amended or withdrawn.

In March 2004 the IASB issued IFRS 3 Business Combinations. It replaced IAS 22 and three interpretations : SIC-9 (Business Combinations - Classification either as Acquisitions or Unitings of Interests), SIC-22 (Business Combinations - Subsequent Adjustment of Fair Values and Goodwill Initially Reported), SIC-28 (Business Combinations - "Date of Exchange" and Fair Value of Equity Instruments).

IFRS 3 was amended by IFRS 5 Non-current Assets Held for Sale and Discontinued Operations (issued March 2004).

In January 2008, the IASB issued a revised IFRS 3.

The revised International Financial Reporting Standard (IFRS) 3 Business Combinations is part of a joint effort by the International Accounting Standards Board (IASB) and the US Financial Accounting Standard Board (FASB) to improve financial reporting while promoting the international convergence of accounting standards.

Each board decided to address the accounting for business combinations in two phases. The IASB and the FASB deliberated the first phase separately.

The FASB concluded its first phase in June 2001 by issuing FASB Statement No. 141 Business Combinations. The IASB concluded its first phase in March 2004 by issuing the previous version of IFRS 3 Business Combinations.

The boards' primary conclusion in the first phase was that virtually all business combinations are acquisitions. Accordingly, the boards decided to require the use of one method of accounting for business combinations - the acquisition method.

The second phase of the project addressed the guidance for applying the acquisition method.

The boards decided that a significant improvement could be made to financial reporting if they had similar standards for accounting for business combinations. Thus, they decided to conduct the second phase of the project as a a joint effort with the objective of reaching the same conclusions.

The boards concluded the second phase of the project by issuing IFRS No. 3 and FASB Statement No. 141 (revised 2007) Business Combinations and the related amendments to IAS 27 Consolidated and Separate Financial Statements and FASB Statement No. 160 Noncontrolling Interests in Consolidated Financial Statements.

The IFRS replaces IFRS 3 (as issued in 2004) and comes into effect for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2009. Earlier application is permitted, provided that IAS 27 (as amended in 2008) is applied at the same time.

(Source : IFRS 3 Business Combinations)

FASB Statement NO. 141 Business Combinations

As mentioned above, FASB and the IASB have been working together to promote international convergence of accounting standards.

In 2001, FASB's Statement of Financial Accounting Standards (SFAS) 141, Business Combinations, changed the method of accounting for business acquisitions by adopting the acquisition (purchase) method and eliminating the pooling of interests as an alternative.

In specific areas in accounting for business acquisitions, however, convergence was not achieved.

As a result, in December 2007 FASB issued a revised standard, SFAS 141 (R), Business Combinations, and SFAS 160, Noncontrolling Interests in Consolidated Financial Statements.

The new standards significantly affect how consolidated financial statements are prepared when a Noncontrolling interest is present.

The CPA Journal in its July 2008 publication, revealed out this issue. Click here for the full story : New Reporting Standards for Noncontrolling Interests.

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