Business Combinations - IFRS Canadian GAAP Differences Series

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Accounting Treatment of a Business CombinationThe accounting for a business combination is where the key differences arise between current CanadianGAAP and the revised IFRS 3. The differences that will be discussed in the following analysis focus onthe measurement of a business combination, the consideration in a business combination and thetreatment of other acquisition costs. This section will conclude with a discussion on the impact on thenon-controlling interest (NCI) as a result of these other factors.Measurement of a Business CombinationCanadian GAAPUnder Canadian GAAP, when an acquirerpurchases less than 100% of an acquiree, theassets and liabilities are adjusted by a fairvalue increment only to the extent of theacquirer’s percentage ownership of theacquiree.Under Canadian GAAP, there are noexceptions to the measurement principle.Specific guidance is provided on assigningamounts to certain assets acquired andliabilities assumed. Measurement guidance isprovided on the following topics:Inventories; Plant and Equipment; Accrued benefit assets / liabilities fordefined benefit plans for employeefuture benefits; and Income Taxes.IFRSUnder IFRS, when an acquirer purchases lessthan 100% of an acquiree, the full fair value ofidentifiable assets acquired and liabilitiesassumed is recognized.Under IFRS there limited exceptions to themeasurement principle for specific types ofidentifiable assets and liabilities. Theseexceptions include: Contingent liabilities; Indemnification Assets; Reacquired Rights; Income Taxes–follow IAS 12 IncomeTaxes; Employee Benefits – follow IAS 19Employee Benefits; Share Based Payments – follow IFRS 2Share Based Payments; andAssets Held for Sale – follow IFRS 5 NoncurrentAssets Held for Sale andDiscontinued Operations.A contingent liability assumed in a businesscombination shall be recognized at the acquisitiondate, if it is a present obligation that arises frompast events and its fair value can be measuredreliably. This is contrary to the guidance in IAS 37– Provisions, Contingent Liabilities, andContingent Assets, since the acquirer recognizesa contingent liability assumed in a businesscombination at the acquisition date even if it is notprobable that an outflow of resources embodyingeconomic benefits will be required to settle theobligation.An indemnification asset is recognized as anasset and measured using the samemeasurement basis as the related contingentBDO Dunwoody LLP is a Member Firm of BDO International. BDO International is a world wide network ofpublic accounting firms, called BDO Member Firms, serving international clients. Each BDO Member Firm is anindependent legal entity in its own country.
liability subject to the need for a valuationallowance for uncollectible amounts. For anindemnification asset measured at fair value, theeffects of uncertainty about future cash flowsbecause of collectability considerations areincluded in the fair value measure and a separatevaluation allowance is not necessary. There is nospecific guidance in Canadian GAAP onindemnification assets.For reacquired rights, the acquirer shall measurethe value of a reacquired right recognized as anintangible asset on the basis of the remainingcontractual term of the related contract. CanadianGAAP provides limited guidance on reacquiredrights with the only guidance being specific thereacquisition of troubled franchises by thefranchisor.Under Canadian GAAP, the criteria to recognizeintangible assets apart from goodwill are thesame as IFRS.An intangible asset should be recognized apartfrom goodwill when:(a)(b)The asset results from contractual or otherlegal rights (regardless of whether thoserights are transferable or separable fromthe acquired enterprise or from other rightsand obligations); orThe asset is capable of being separated ordivided from the acquired enterprise andsold, transferred, licensed, rented, orexchanged (regardless of whether there isan intent to do so).Under IFRS, intangible assets are recognizedapart from goodwill when the intangible assetmeets either the separability criterion or thecontractual-legal criterion. An intangible assetthat meets the contractual-legal criterion even ifthe asset is not transferable or separable from theacquiree or from other rights and obligations. Thisis consistent with Canadian GAAP.If neither of these criterion are met, then theintangible asset should be included in theamount recognized as goodwill.Under Canadian GAAP goodwill is measured asthe difference between the cost of acquisition andthe acquirer’s interest in the net fair value of theassets acquired and liabilities assumed at thedate of acquisition.In the case of negative goodwill, the excess of thecost of acquisition is first deducted proportionatelyfrom the purchase price allocated to certain nonmonetaryassets until their carrying value hasbeen ‘grinded down’ to zero. Any remainingexcess is recognized as a gain in the incomestatement.Under IFRS, goodwill is measured as thedifference between:(a) The aggregate of:(b)- The acquisition-date fair value of theconsideration transferred;- The amount of any NCI;- In a business combination achieved instages, the acquisition-date fair valueof the acquirer's previously-heldequity interest in the acquiree; andThe net of the acquisition-date amounts ofthe identifiable assets acquired and theliabilities assumed.BDO Dunwoody LLP is a Member Firm of BDO International. BDO International is a world wide network ofpublic accounting firms, called BDO Member Firms, serving international clients. Each BDO Member Firm is anindependent legal entity in its own country.
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Business Combinations - IFRS Canadian GAAP Differences Series

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