The assets acquired and liabilities assumed in the business combination should be recorded at fair values. If the acquirer obtained a 100% interest in the acquired entity, this process is straightforward. If the cost exceeds the fair value of the net identifiable assets acquired, the excess is deemed to be goodwill, which should be capitalized as an intangible asset and tested periodically for impairment.
Determining Fair Values
Accounting for acquisitions requires a determination of the fair value for each of the acquired company’s identifiable tangible and intangible assets and for each of its liabilities at the date of combination (except for assets which are to be resold and which are to be accounted for at fair value less costs to sell under IFRS 5).
IFRS 3 provides illustrative examples of how to treat certain assets, particularly intangibles, but provides no general guidance on determining fair value. The Phase II revisions to IFRS 3, promised by iASB, are expected to provide more detailed guidance on this topic. A separate project on fair value measurements is likely to result in the issuance of a new IFRS on this topic, very likely to be heavily based on the recent US GAAP standard, FAS 157.
The list below in drawn from Appendix B of IFRS 3 :
1. Financial instruments traded in an active market – Current market values.
2. Financial instruments not traded in an active market – Estimated fair values, determined on a basis consistent with relevant price-earnings ratios, dividend yields, and expected growth rates of comparable securities of entities having similar characteristics.
3. Receivables – Present values of amounts to be received determined by using current interest rates, less allowances for uncollectible accounts.
4. Inventories
a) Finished goods and merchandise inventories – Estimated selling prices less the sum of the costs of disposal and a reasonable profit
b) Work in process inventories – Estimated selling prices of finished goods less the sum of the costs of completion, costs of disposal, and a reasonable profit
c) Raw material inventories – Current replacement costs.
5. Plant and equipment – At market value as determined by appraisal; in the absence of market values, use depreciated replacement cost. Land and building are to be valued at market value.
6. Identifiable intangible assets (such as patents and licenses) – Fair values determined primarily with reference to active market as per IAS 38; in the absence of market data, use the best available information, with discounted cash flows being useful only when information about cash flows which are directly attributable to the asset, and which are largely independent of cash flows from other assets, can be developed.
7. Net employee benefit assets or obligations for defined benefit plans – The actuarial present value of promised benefits, net of the fair value of related assets (Note that an asset can be recognized only to the extent that it would be available to the enterprise as refunds or reductions in future contributions).
8. Tax assets and liabilities – The amount of tax benefit arising from tax losses or the taxes payable in respect to net profit or loss. The amount to be recorded is net of the tax effect of restating other identifiable assets and liabilities at fair values.
9. Liabilities (such as notes and accounts payable, long-term debt, warranties, claims payable) – Present value of amounts to be paid determined at appropriate current interest rates, discounting is not required for short-term liabilities where the effect is immaterial.
10. Onerous contract obligations and other identifiable liabilities – At the present value of the amounts to be disbursed.
11. Contingent liabilities – The amount that a third party would charge to assume those liabilities. The amount must reflect expectations about cash flows rather than the single most likely outcome (Note that the subsequent measurement should fall under IAS 37 and In many cases would call for de-recognition. IFRS 3 provides an exception for such contingent liabilities, in that subsequent measurement is to be at the higher of the amount recognized under IFRS 3 or the amount mandated by IAS 37).
