The International Accounting Standards Board and the U.S. Financial Accounting Standards Board each issued proposals that aim to improve and align the accounting for business combinations.
The proposals include a draft standard that the two boards developed in their first major joint project. The objective of the project is to develop a single high-quality standard for accounting for business combinations that could be used for both domestic and cross-border financial reporting.
The proposed standard would replace the existing requirements of the IASB's IFRS 3 Business Combinations and the FASB's Statement No. 141, Business Combinations.
“By focusing on fundamental principles and avoiding exceptions the proposals aim to eliminate many of the inconsistencies in the existing guidance for accounting for business combinations,” said IASB Chairman David Tweedie.
The proposals in the exposure drafts retain the fundamental requirement of IFRS 3 and Statement 141 to account for all business combinations using a single method — where one party is always identified as acquiring the other. The principal changes being proposed include a requirement to measure the business acquired at fair value and to recognize the goodwill attributable to any noncontrolling interests (previously referred to as minority interests) rather than just the portion attributable to the acquirer. The proposals would also result in fewer exceptions to the principle of measuring assets acquired and liabilities assumed in a business combination at fair value. Additionally, the proposals would result in payments to third parties for consulting, legal, audit, and similar services associated with an acquisition being recognized generally as expenses when incurred rather than capitalized as part of the business combination.
“A common standard on the very important area of accounting for business combinations will help users and preparers by improving the comparability of financial information reported by companies around the world that issue financial statements in accordance with either International Financial Reporting Standards or U.S. GAAP,” said FASB Chairman Bob Herz.
The IASB and the FASB also published exposure drafts that propose that noncontrolling interests be classified as equity within the consolidated financial statements and that acquisitions of noncontrolling interests be accounted for as equity transactions.
The comment period for the exposure drafts ends October 28, 2005. The FASB and the IASB plan to hold public roundtable meetings to gather additional input on the proposals.
The exposure drafts are available on the FASB's Web site at www.fasb.org and the IASB's Web site at www.iasb.org.