IAS 22: Business Combinations

The International Accounting Standard 22, Business Combinations, became effective for annual financial statements for periods beginning on or after 1 January 1995.

In October 1996, certain paragraphs were revised to be consistent with IAS 12: Income Taxes. The revisions became operative for annual financial statements covering periods beginning on or after 1 January 1998.

In July 1998, various paragraphs of IAS 22 were revised to be consistent with IAS 36: Impairment of Assets, IAS 37: Provisions, Contingent Liabilities and Contingent Assets, and IAS 38: Intangible Assets, and the treatment of negative goodwill was also revised. The revised Standard (IAS 22 (revised 1998)) became operative for annual financial statements covering periods beginning on or after 1 July 1999.

In 1999, various paragraphs were amended to be consistent with IAS 10: Events After the Balance Sheet Date. The amended text became effective for annual financial statements covering periods beginning on or after 1 January 2000.

The following SIC Interpretations relate to IAS 22:

• SIC 9: Business Combinations - Classification either as Acquisitions or Unitings of Interests and
• SIC 22: Business Combinations - Subsequent Adjustment of Fair Values and Goodwill Initially Reported.

Summary of IAS 22

Two types of business combinations

• Acquisitions: All business combinations are presumed to be acquisitions, and accounted for using the purchase method, except in very limited circumstances, designated a uniting of interests and
• Uniting of interests: A uniting of interests is an unusual business combination in which an acquirer cannot be identified. Such combinations must be accounted for by the pooling of interests method.

Not permissable in the US for current business combinations.

Acquisition (Purchase Method of Accounting)

• Definition: A business combination in which one of the enterprises (the acquirer) obtains control over the net assets and operations of another enterprises (the acquiree) in exchange for the transfer of assets, incurrence of a liability, or issue of equity.
• For an acquisition, assets and liabilities should be recognised if it is probable that an economic benefit will flow and if there is a reliable measure of cost or fair value.
• Assets and liabilities of the acquired company are included in the consolidated financial statements at fair value (acquirer's purchase price).
• The difference between the cost of the purchase and the fair value of the net assets is recognised as goodwill.
  • there is a rebuttable presumption that goodwill has a maximum useful life of 20 years. Consistent with the amortisation requirements for intangible assets in IAS 38, Intangible Assets, if there is persuasive evidence that the useful life of goodwill will exceed 20 years, an enterprise should amortise the goodwill over its estimated useful life and:
    • test goodwill for impairment at least annually in accordance with IAS 36, Impairment of Assets and
    • disclose the reasons why the presumption that the useful life of goodwill will not exceed 20 years from initial recognition is rebutted and also the factor(s) that played a significant role in determining the useful life of goodwill.
  • The Standard does not permit an enterprise to assign an infinite useful life to goodwill.
  • If goodwill is written down for impairment, the writedown is not reversed.
• The benchmark treatment is not to apply fair valuation to the minority's proportion of net assets the allowed alternative is to fair value the whole of the net assets.
• Fair values are calculated by reference to intended use by the acquirer.
• a provision for restructuring costs may only be recognised at the date of acquisition where the restructuring is an integral part of the acquirer's plan for the acquisition and, among other things, the main features of the restructuring plan were announced at, or before, the date of acquisition so that those affected have a valid expectation that the acquirer will implement the plan. Recognition criteria for such a provision are based on those in IAS 37, Provisions, Contingent Liabilities and Contingent Assets, except that IAS 22 requires a detailed formal plan to be in place no later than three months after the date of acquisition or the date when the annual financial statements are approved if sooner (IAS 37 requires the detailed formal plan to be in place at the balance sheet date). This difference from IAS 37 acknowledges that an acquirer may not have enough information to develop a detailed formal plan by the date of acquisition. It does not undermine the principle that no restructuring provision should be recognised if there is no obligation immediately following the acquisition. IAS 22 also places strict limits on the costs to be included in a restructuring provision. For example, such provisions are limited to costs of restructuring the operations of the acquiree, not those of the acquirer.
• negative goodwill should always be measured and initially recognised as the full difference between the acquirer's interest in the fair values of the identifiable assets and liabilities acquired less the cost of acquisition.
• IAS 22 requires negative goodwill to be presented as a deduction from (positive) goodwill. It should then be recognised as income as follows:
  • to the extent that negative goodwill relates to expectations of future losses and expenses that are identified in the acquirer's plan for the acquisition and that can be measured reliably, negative goodwill should be recognised as income when the identified future losses and expenses occur and
  • to the extent that it does not relate to future losses and expenses, negative goodwill not exceeding the fair values of the non-monetary assets acquired should be recognised as income over the remaining average useful life of the depreciable/amortisable non-monetary assets acquired. Negative goodwill in excess of the fair values of the non-monetary assets acquired should be recognised as income immediately.

Uniting of Interests (Pooling of Interests Method of Accounting)

• Definition: A business combination in which the shareholders of the combining enterprises combine control over the whole of their net assets and operations, to achieve a continuing mutual sharing in the risks and benefits attaching to the combined entity such that neither party can be identified as the acquirer. Criteria:
  • the substantial majority of voting common shares of the combining enterprises are exchanged or pooled
  • the fair value of one enterprise is not significantly different from that of the other enterprise
  • the shareholders of each enterprise maintain substantially the same voting rights and interests in the combined entity, relative to each other, after the combination as before.
• Carrying amounts on the books of the combining companies are carried forward.
• No goodwill is recognised.
• Prior financial statements are restated as if the two companies had always been combined.