IFRS 3 and the revised IAS 27

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The new approach to business combination introduced by the revised IFRS 3 and the revised IAS 27

An overview on the major new accounting requirements introduced by the revised IFRS 3 and revised IAS 27 on the path to convergence with US GAAP

1. Introduction

On 10 January 2008 the International Accounting Standards Board (IASB) published revised IFRS 3 Business Combinations and the related revision to IAS 27 Consolidated and Separate Financial Statements.

These new standards will be applicable to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2009. Earlier application is permitted but only back to an annual reporting period that begins on or after 30 June 2007.

The revised standards represent the core of the Business Combinations Phase II project, which arose from and focuses on the convergence between IFRS and US GAAP.

In fact, the revised IFRS 3 and revised IAS 27 are the output of one of the various joint projects undertaken by the IASB and FASB (Financial Accounting Standards Board) which has also resulted in the release in December 2007 of revised FASB Statement No. 141 Business Combinations (SFAS 141) and FASB Statement No. 160 Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51.

The revised IFRS 3 has introduced the option to account for the goodwill using the “full goodwill approach”. This option allows entities to show the full extent of the assets controlled by the group but on the other hand exposes the group to the risk of greater impairment losses.

More intangible assets are expected to be recognised. This, combined with other new requirements of the revised IFRS 3 and IAS 27, are likely to result in post-combination results to decrease or become more volatile, both in the year of acquisition and subsequently.

It is therefore fundamental for IFRS preparers to have a clear understanding of all the new accounting requirements introduced by the revised standards in order to avoid unexpected accounting surprises.

Please download the full article by clicking on the image below. Further chapter headings include 2. The Consolidation Theories; 3. An overview of major changes; 4. A worked example and 5. Remaining differences between revised IFRS 3 and FASB 141R.