IFRS 3 replaces IAS 22. IAS 22 had been criticised because it allowed 2
methods of accounting for a business combination: the pooling of interest
(merger method) and purchase method (acquisition method). Having two
methods meant that comparability was lost and transactions were being
deliberately structured to facilitate a particular accounting method. Pooling of
interest has been banned in Australia, Canada and the US and the IASB felt that
it would be advantageous to converge their standards with these standard
setters. IAS 22 also included a benchmark and allowable option and allowing
two different methods was not seen as appropriate. IFRS 3 deals with:
• the method of accounting for business combinations
• the initial measurement of the assets and liabilities acquired
• post acquisition restructuring
• the treatment of negative goodwill
• the treatment of goodwill on acquisition and intangible assets acquired.
Main features:
• purchase method only to be applied (merger method banned);
• an acquirer is to be identified;
• apply fair value to the acquired company including costs of acquisition;
• recognise separately the assets and liabilities of the acquired company,
even whey the assets or liabilities were not previously recognised in the
acquired company accounts:
o tangible assets at fair value;
o liabilities at their fair value; and
o intangible assets and contingent liabilities when their fair value can
be measured reliably;
• Goodwill on acquisition is the excess of the amount paid over the fair
value of the assets acquired;
• Goodwill should not be amortised, but tested for impairment in
accordance with IAS 36;
• Negative goodwill is to be recognised in the profit and loss account
immediately but requires that the assets and liabilities be reassessed prior
to recognising negative goodwill; and
• Requires substantial disclosures including disclosure on the changes to
the carrying value of goodwill. [source:
http://www.iasplus.com]
Sayed Farrukh Ahmed
Assistant Professor
Faculty of Business & Economics
Daffodil International University
