Accounting Standards

FRS 101
First-time Adoption of Financial Reporting Standards

Implementation Guidance

Business Combinations - "Date of Exchange" and Fair Value of Equity Instruments

Paragraph 11 of FRS 1, Presentation of Financial Statements, requires that financial statements should not be described as complying with Financial Reporting Standards unless they comply with all the requirements of each applicable Standard and each applicable Interpretation of the Financial Reporting Standard. INT FRSs are not intended to apply to immaterial items.

Reference: FRS 22, Business Combinations

1. An enterprise may issue its own equity instruments as purchase consideration in a business combination accounted for as an acquisition under FRS 22. FRS 22.21 requires that an acquisition be accounted for at its cost, and that equity instruments issued by the acquirer be measured at their fair value at the date of exchange.


2. If equity instruments issued as purchase consideration are quoted in a market and their market price at the date of exchange is not a reliable indicator of their fair value, FRS 22.24 indicates that price movements for a reasonable period before and after the announcement of the terms of the acquisition need to be considered.


3. The issues are:
   1. what is the "date of exchange" when determining the fair value of equity instruments issued as purchase consideration in an acquisition;
      
      
   2. when is it appropriate to consider other evidence and valuation methods in addition to a published price at the date of exchange of a quoted equity instrument; and
      
      
   3. what information should be disclosed when a published price of a quoted equity instrument has not been used as the instruments' fair value, and what information should be disclosed when an equity instrument does not have a published price.
   
   
4. FRS 22.65 requires the amount of an adjustment to the purchase consideration contingent on one or more future events to be included in the cost of an acquisition as at the date of acquisition if the adjustment is probable and the amount can be measured reliably. FRS 22.68 requires the cost of an acquisition to be adjusted when a contingency affecting the amount of the purchase consideration is resolved subsequent to the date of acquisition. Consequently, this Interpretation does not apply to equity instruments issued as adjustments to the purchase consideration contingent on one or more future events, unless the adjustments are probable and the amounts can be measured reliably as at the date of acquisition.

When an acquisition is achieved in one exchange transaction (i.e., not in stages), the "date of exchange" is the date of acquisition; that is, the date when the acquirer obtains control over the net assets and operations of the acquiree. When an acquisition is achieved in stages (e.g., successive share purchases), the fair value of the equity instruments issued as purchase consideration at each stage should be determined at the date that each individual investment is recognised in the financial statements of the acquirer.

When a published price of an equity instrument issued as purchase consideration exists at the date of exchange, but has not been used as the instruments' fair value, an enterprise should disclose:

1. that fact;
   
   
2. the reasons why the published price is not the fair value of the equity instruments;
   
   
3. the method and significant assumptions applied in determining the fair value; and
   
   
4. the aggregate amount of the difference between the published price and the amount determined to be the fair value of the equity instruments.