Accounting Standards

Business Combinations - Subsequent Adjustment of Fair Values and Goodwill Initially Reported

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. In initially accounting for a business combination, an acquirer may not have available all evidence to be able to identify and to estimate reliably the fair values of the assets and liabilities acquired or the identifiable assets and liabilities may not yet satisfy the criteria for recognition. This may be due to the complexity of the business acquired, the need to produce and report financial information on a timely basis, or for other reasons.


2. FRS 22.71 indicates that in accounting for a business acquisition, "identifiable assets and liabilities, which are acquired but do not satisfy the criteria…for separate recognition when the acquisition is initially accounted for, should be recognised subsequently as and when they satisfy the criteria. The carrying amounts of identifiable assets and liabilities acquired should be adjusted when, subsequent to acquisition, additional evidence becomes available to assist with the estimation of the amounts assigned to those identifiable assets and liabilities when the acquisition was initially accounted for. The amount assigned to goodwill or negative goodwill should also be adjusted, when necessary, to the extent that:
   1. the adjustment does not increase the carrying amount of goodwill above its recoverable amount, as defined in FRS 36, Impairment of Assets; and
      
      
   2. such adjustment is made by the end of the first annual accounting period commencing after acquisition (except for the recognition of an identifiable liability under paragraph 31, for which the time-frame in paragraph 31(c) applies); otherwise the adjustments to the identifiable assets and liabilities should be recognised as income or expense."



3. The issues are, in making adjustments in the limited circumstances described
   by FRS 22.71:

   1. whether an adjustment to the initial fair values of identifiable assets and liabilities acquired should include the effects of depreciation and other changes which would have resulted if the adjusted fair values had been applied from the date of acquisition;
      
      
   2. whether a related adjustment of goodwill or negative goodwill should include the effect of amortisation of the adjusted amount assigned to goodwill or negative goodwill from the date of acquisition; and
      
      
   3. how the adjustments to identifiable assets and liabilities acquired, and to goodwill or negative goodwill, should be presented.


4. This Interpretation does not apply to the following items as they are specifically addressed elsewhere in Financial Reporting Standards:
   1. deferred tax assets and liabilities recognised under FRS 12, paragraphs 64 through 66; and
      
      
   2. the reversal of provisions initially made for terminating or reducing the activities of the acquiree, FRS 22, paragraphs 75 and 76.

An adjustment to the carrying amount of identifiable assets and liabilities acquired, made in the limited circumstances described under FRS 22.71, should be calculated as if the adjusted fair values had been applied from the date of acquisition. As a result, the adjustment should include both the effect of the change to the fair values initially assigned and the effect of depreciation and other changes which would have resulted if the adjusted fair values had been applied from the date of acquisition.

Effective Date: INT FRS 22 comes into effect on 1 February 2003.

Appendix

This appendix is illustrative only and does not form part of the Interpretation. The purpose of the appendix is to illustrate the application of the Interpretation to assist in clarifying its meaning. The appendix does not address the deferred tax consequences of the adjustments indicated.