IASB Proposes New Merger Rules

Accounting for business combinations mirrors rules set by FASB.
Stephen TaubDecember 6, 2002

The International Accounting Standards Board (IASB) proposed new rules regarding mergers, some of which have already been adopted by the Financial Accounting Standards Board (FASB).

The IASB had announced in July 2001 that it would undertake a project on mergers as part of its initial agenda, with the goal to improve the quality of, and seek international convergence on, the accounting for business combinations.

“Accounting for business combinations diverges substantially across jurisdictions,” said Sir David Tweedie, IASB chairman, in a statement. “These proposals mark a significant step toward achieving high quality standards in business combination accounting, and in ultimately achieving international convergence in this area.”

The key items of the IASB’s proposals:

  • All business combinations would be accounted for using the purchase method. The pooling-of-interests method would be prohibited.
  • Costs expected to be incurred as a result of a business combination to restructure the acquired entity’s (or acquirer’s) activities would be treated as postcombination expenses, unless the acquired entity has a preexisting liability for restructuring its activities.
  • Acquired intangible items would be recognized as assets separately from goodwill if they meet the definition of an asset, and are either separable or arise from contractual or other legal rights.
  • Identifiable assets acquired, and liabilities and contingent liabilities assumed, would be initially measured at fair value.
  • There would be no amortization of goodwill or intangible assets with indefinite useful lives. Instead they would be tested for impairment annually, or more frequently if events or changes in circumstances indicate a possible impairment.

The IASB said it still has a few matters to address to eliminate remaining differences between international and national standards on business combinations. That list includes issues related to applying the purchase method of accounting. The IASB is currently engaged in a joint project with FASB to harmonize that treatment.

In addition, the IASB indicated it is looking at accounting for formations of joint ventures and business combinations involving entities under common control, as well as possible applications for “fresh start” accounting.

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