How IFRS 1 rules the accounting for Business Combinations ?

IFRS 1 First-time Adoption of International Financial Reporting Standards applies to an entity that presents its first IFRS financial statements. It specifies the requirement that an entity must follow when it first adopts IFRS as the basis for preparing its general-purpose financial statements. IFRS 1 refers to these entities as first-time adopter.

How IFRS 1 rules the financial statement presentation of business combination for an entity as the first-time adopter ?

A first-time adopter need not apply IFRS 3 Business Combinations retrospectively. Should it restate any business combination to comply with IFRS 3, then all later business combinations must also be restated.

A first-time adopter may elect not to apply IFRS 3 Business Combinations retrospectively to past business combinations (business combinations that occurred before the date of transition to IFRSs). However, if a first-time adopter restates any business combination to comply with IFRS 3, it shall restate all later business combinations and shall also apply IAS 27 (as amended in 2008) from that same date. For example, if a first-time adopter elects to restate a business combination that occurred on 30 June 20X6, it shall restate all business combinations that occurred between 30 June 20X6 and the date of transition to IFRSs, and it shall also apply IAS 27 (amended 2008) from 30 June 20X6 (IFRS 1 Appendix B par. B1).

Where a first-time adopter has accounted for a business combination as an acquisition and recognized an item as an intangible asset under IAS 38 Intangible Assets that item should be reclassified as goodwill.

The carrying amount of goodwill in the opening IFRS balance sheet should be its carrying value under previous GAAP adjusted for any intangible asset that does not meet the IAS definition and additional evidence that is now available with respect to any contingent purchase consideration. In addition, irrespective of whether there is any indication of impairment, IAS 36 Impairment of Assets should be applied to test the carrying value of goodwill at the date of transition.

Where previous GAAP required or permitted goodwill to be disclosed as a deduction from equity, it should not be recognized in the opening balance sheet, nor should the goodwill be transferred to the income statement on disposal of the subsidiary.

If under previous GAAP, the first-time adopter did not consolidate a subsidiary, but IFRS would require it to be consolidated the accounting treatment is as follows :

The carrying amounts of the subsidiary’s assets and liabilities should be adjusted to those required by IFRS. The deemed goodwill will equal the difference between the parent’s cost of investment in the subsidiary and its interest in those assets and liabilities.

An entity shall apply IFRS 1 if its first IFRS financial statements are for a period beginning on or after 1 January 2004.  Earlier application is encouraged  (IFRS 1 par. 47).