This article was first published in the November 2012 International edition of Accounting and Business magazine.
Entity A purchased 80% of entity B in 20x0. Under the share purchase agreement, entity A also has an option to acquire the residual 20% shareholding in 20x2 at fair value of entity B. How should entity A account for the option in 20x0 and the subsequent acquisition of the non-controlling interest?
Entity A has a call option over the remaining 20% at the date of acquisition; it should therefore assess whether the risks and rewards in relation to this non-controlling interest in entity B have, in substance, also transferred to the group. If that is the case, entity A should account for the entire 100% as an acquisition.
Options priced at fair value usually result in transfer of risks and rewards to the holder at the point of exercise only. There are no other relevant circumstances to consider in this case. As a result, the risks and rewards associated with the non-controlling shareholding are not deemed to be transferred to the group on acquisition of entity B, and entity A should account for the 20% as a non-controlling interest in its consolidated financial statements.
The call option does not meet the definition of a financial liability under IAS 32, Financial Instruments: Presentation, as it is within the control of the entity A. Although there is minimal initial investment and the contract will be settled at a future date, the value of the option does not change in response to an underlying financial variable; it does not therefore qualify as a derivative under IAS 39, Financial Instruments: Recognition and Measurement, para 9.
In 20x2, if the option exercised, any difference between the consideration – that is, the fair value of the shares paid – and the carrying amount of the non-controlling interest is adjusted to entity A’s equity under IAS 27, Consolidated and Separate Financial Statements, para 31. The resulting cash outflow should be classified as a financing activity, as it represents a transaction with equity owners under IAS 7, Statement of Cashflows, para 42B.
XYZ Ltd buys an insurance policy to reimburse payments of a portion of its defined benefit pension obligation. Reimbursement under the insurance policy will exactly match the amount and timing of the benefits payable under the plan. The cost to the company of the insurance policy is greater than the present value of the defined benefit obligation it will reimburse. The policy does not meet the definition of a qualifying insurance policy and therefore cannot be treated as a plan asset. However, the criteria for recognising the reimbursement right as an asset have been satisfied. How should the cost of the insurance policy and the difference in value from the related obligation be accounted for?
As a reimbursement right, the insurance policy is recognised as a separate asset, rather than being deducted from the pension obligation to which it relates. In all other respects, this asset and any related income should be accounted for in the same way as plan assets (in accordance with IAS 19, Employee Benefits, para 104C and D). However, because the right to reimbursement exactly matches payments of a portion of the defined benefit obligation, the fair value of the reimbursement right is deemed to be the present value of that portion of the defined benefit obligation. Any difference between the cost of the insurance policy and the present value of the defined benefit obligation it is designed to reimburse should therefore be treated as an actuarial loss. This is independent of whether the insurance policy is purchased by the pension fund or by XYZ Ltd itself, because the policy meets the definition of a reimbursement right.
IFRS and us gaap
IFRS and US GAAP: Similarities and differences includes insight on recent and proposed guidance; detailed analysis of differences including an assessment of the impact; and a report on the US GAAP codification project.
This month’s solutions were compiled by Imre Guba, Michelle Millar and Iain Selfridge of PwC’s Accounting Consulting Services