About Business Combinations

The Business Combinations project became part of our initial agenda when the IASB was formed in 2001.

Accounting for business combinations had been identified previously as an area of significant divergence within and across jurisdictions. Extensive work on the topic had been undertaken in the previous decade by national standard-setters, notably the group of national standard-setters and our predecessor, IASC, known as the G4+1.

By the time the IASB was formed, the FASB had finalised SFAS 141 Business Combinations, which removed the merging of interests method and replaced amortisation of goodwill with a goodwill impairment test.

We received numerous requests from around Europe and Australia to make similar changes to the accounting for goodwill because entities applying IFRSs believed themselves to be at a disadvantage to those using US GAAP.

Project phases

We decided to split the project into two phases. Both started at about the same time:

1. short-term, addressing pooling of interests and goodwill impairment and amortisation in a replacement of IAS 22 Business Combinations
2. a broader look at business combination accounting. We worked with the FASB on this phase

Before the first phase had been completed we had already finished our analysis of:

• the initial measurement of identifiable assets acquired and liabilities assumed in a business combination
• the recognition of liabilities for terminating or reducing the activities of an acquiree
• and the accounting for bargain purchases.

We decided to incorporate the above decisions in the original IFRS 3, which was issued in March 2004, bringing the first phase of the project to a conclusion. The changes we incorporated in IFRS 3 moved IFRSs ahead of US GAAP.

As we explained in the basis for conclusions on the original IFRS 3, the second phase of the project would address the aspects of M&A activity for which there was no guidance. We were also examining the requirements that we had carried forward from IAS 22 into IFRS 3 without reconsideration.

The continuation of our work in the second phase of the project gave both boards the opportunity to address those parts of IFRS 3 and IAS 27 (and the US equivalents) that we knew required additional work. It also provided the FASB with the opportunity to catch up with the decisions already incorporated in IFRSs.