It can be seen that goodwill is effectively adjusted for the change in the value of the non-controlling interest which represents the goodwill attributable to the NCI.
This choice of method of accounting for NCI only makes a difference in an acquisition where less than 100% of the acquired business is purchased. The full goodwill method will increase reported net assets on the balance sheet which means that any future impairment of goodwill will be greater. Although measuring non-controlling interest at fair value may prove difficult, goodwill impairment testing may be easier under full goodwill, as there is no need to gross-up goodwill for partially owned subsidiaries.
Fair valuing assets and liabilities
The revised IFRS 3 has introduced some changes to the assets and liabilities recognised in the acquisition balance sheet. The existing requirement to recognise all of the identifiable assets and liabilities of the acquiree is retained.
Most assets are recognised at fair value, with exceptions for certain items such as deferred tax and pension obligations. The IASB has provided additional clarity that may well result in more intangible assets being recognised. Acquirers are required to recognise brands, licences and customer relationships, and other intangible assets.
There is very little change to current guidance under IFRS as regards contingencies. Contingent assets are not recognised, and contingent liabilities are measured at fair value. After the date of the business combination, contingent liabilities are re-measured at the higher of the original amount and the amount under the relevant standard.
There are other ongoing projects on standards that are linked to business combinations (for example, on provisions (IAS 37) and on deferred tax (IAS 12)), that may affect either recognition or measurement at the acquisition date or the subsequent accounting.
The acquirer can seldom recognise a reorganisation provision at the date of the business combination. There is no change from the previous guidance in the new standard: the ability of an acquirer to recognise a liability for terminating or reducing the activities of the acquiree is severely restricted.
A restructuring provision can be recognised in a business combination only when the acquiree has, at the acquisition date, an existing liability, for which there are detailed conditions in IAS 37, but these conditions are unlikely to exist at the acquisition date in most business combinations.
An acquirer has a maximum period of 12 months to finalise the acquisition accounting. The adjustment period ends when the acquirer has gathered all the necessary information, subject to the one year maximum. There is no exemption from the 12-month rule for deferred tax assets or changes in the amount of contingent consideration. The revised standard will only allow adjustments against goodwill within this one-year period.
The financial statements will require some new disclosures, which will inevitably make financial statements longer. Examples are: where non-controlling interest is measured at fair value, the valuation methods used for determining that value, and in a step acquisition, disclosure of the fair value of any previously held equity interest in the acquiree and the amount of gain or loss recognised in the income statement resulting from re-measurement.
IAS 27 Revised, Consolidated and Separate Financial Statements
The revised standard moves IFRS to the use of the economic entity model. Current practice is the parent company approach. The economic entity approach treats all providers of equity capital as shareholders of the entity, even when they are not shareholders in the parent company. The parent company approach sees the financial statements from the perspective of the parent company shareholders.
For example, disposal of a partial interest in a subsidiary in which the parent company retains control, does not result in a gain or loss but in an increase or decrease in equity under the economic entity approach. Purchase of some or all of the non-controlling interest is treated as a treasury transaction and accounted for in equity.
A partial disposal of an interest in a subsidiary in which the parent company loses control but retains an interest as an associate creates the recognition of gain or loss on the entire interest. A gain or loss is recognised on the part that has been disposed of and a further holding gain is recognised on the interest retained, being the difference between the fair value of the interest and the book value of the interest.
The gains are recognised in the statement of comprehensive income (income statement). Amendments to IAS 28, Investments in Associates and IAS 31, Interests in Joint Ventures extend this treatment to associates and joint ventures.
On 1 January 2008, A acquired a 50% interest in B for $60m. A already held a 20% interest which had been acquired for $20m but which was valued at $24m at 1 January 2008. The fair value of the non-controlling interest at 1 January 2008 was $40m and the fair value of the identifiable net assets of B was $110m. The goodwill calculation would be as follows using the full goodwill method: