business combinations exemption. Instead, Entity A should account for such transaction as an asset
acquisition. Entity A may consider applying other applicable optional exemptions under IFRS 1.
If in the example above the entity had accounted for the transaction as an asset
acquisition rather than a business combination under previous GAAP, it would need to
determine whether the transaction meets the definition of a business combination in
IFRS 3 in order to qualify for use of the exemption.
5.2.2
Option to restate business combinations retrospectively
A first-time adopter must account for business combinations occurring after its date
of transition under IFRS 3, i.e. any business combinations during the comparative
periods need to be restated in accordance with IFRSs while it may elect not to apply
IFRS 3 retrospectively to business combinations occurring before the date of
transition. However, if a first-time adopter does restate a business combination
occurring prior to its date of transition to comply with IFRS 3 it must also restate
any subsequent business combinations under IFRS 3 and apply IFRS 10 from that
date onwards. [IFRS 1.C1]. In other words, as shown on the time line below, a first-time
adopter is allowed to choose any date in the past from which it wants to account for
all business combinations under IFRS 3 without having to restate business
combinations that occurred prior to such date. It must be noted that a first-time
adopter availing itself of this option is required to apply the version of IFRS 3
effective at the end of its first IFRS reporting period to any retrospectively restated
business combinations.
Optional restatement
Mandatory application
under IFRS 3
of IFRS 3
1/1/2018
31/12/2018
31/12/2019
Date of transition to IFRS
Reporting date
Opening IFRS statement of financial position
Even if a first-time adopter elects not to restate certain business combinations, it may
still need to restate the carrying amounts of the acquired assets and assumed liabilities,
as described at 5.2.4 below.
Although there is no restriction that prevents retrospective application by a first-time
adopter of IFRS 3 to all past business combinations, in our opinion, a first-time adopter
should not restate business combinations under IFRS 3 that occurred before the date of
transition when this would require use of hindsight.
First-time
adoption
251
Extracts 5.3 below and 5.12 at 6.3 below illustrate the typical disclosure made by entities
that opted not to restate business combinations that occurred before their date of
transition to IFRSs, while Extract 5.4 below illustrates disclosures by an entity that chose
to restate certain business combinations that occurred prior to its date of transition.
Extract 5.3: Husky Energy Inc. (2011)
Notes to the Consolidated Financial Statements[extract]
Note 26 First-Time Adoption of International Financial Reporting Standards [extract]
Key First-Time Adoption Exemptions Applied [extract]
IFRS 1, “First-Time Adoption of International Financial Reporting Standards,” allows first-time adopters certain
exemptions from retrospective application of certain IFRSs.
The Company applied the following exemptions: [extract]
[...]
•
IFRS 3, “Business Combinations,” was not applied to acquisitions of subsidiaries or interests in joint
ventures that occurred before January 1, 2010.
[...]
i) IFRS
3
Adjustments – Business Combinations [extract]
Given that the Company elected to apply the IFRS 1 exemption which permits no adjustments to amounts recorded for
acquisitions that occurred prior to January 1, 2010, no retrospective adjustments were required. The Company acquired
the remaining interest in the Lloydminster Upgrader from the Government of Alberta in 1995 and is required to make
payments to Natural Resources Canada and Alberta Department of Energy from 1995 to 2014 based on average
differentials between heavy crude oil feedstock and the price of synthetic crude oil sales. Under IFRS, the Company is
required to recognize this contingent consideration at its fair value as part of the acquisition and record a corresponding liability. Under Canadian GAAP, any contingent consideration was not required to be recognized unless amounts were
resolved and payable on the date of acquisition. On transition to IFRS, Husky recognized a liability of $85 million,
based on the fair value of remaining upside interest payments, with an adjustment to opening retained earnings. For the
year ended December 31, 2010, the Company recognized pre-tax accretion of $9 million in finance expenses under
IFRS. Changes in forecast differentials used to determine the fair value of the remaining upside interest payments
resulted in the recognition of a pre-tax gain of $41 million for the year ended December 31, 2010.
Extract 5.4: The Toronto-Dominion Bank (2011)
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES [extract]
Note 34
TRANSITION TO IFRS [extract]
DESCRIPTION OF SIGNIFICANT MEASUREMENT AND PRESENTATION DIFFERENCES BETWEEN
CANADIAN GAAP AND IFRS [extract]
(d)
Business Combinations: Elective Exemption [extract]
As permitted under IFRS transition rules, the Bank has applied IFRS 3, Business Combinations (IFRS 3) to all
business combinations occurring on or after January 1, 2007. Certain differences exist between IFRS and Canadian
GAAP in the determination of the purchase price allocation. The most significant differences are described below.
Under Canadian GAAP, an investment in a subsidiary which is acquired through two or more purchases is commonly
referred to as a “step acquisition”. Each transaction is accounted for as a step-by-step purchase, and is recognized at the fair value of the net assets acquired at each step. Under IFRS, the accounting for step acquisitions differs depending on whether a change in control occurs. If a change in control occurs, the acquirer remeasures any previously held equity
investment at its acquisition-date fair value and recognizes any resulting gain or loss in the Consolidated Statement of
Income. Any transactions subsequent to obtaining control are recognized as equity transactions.
252 Chapter
5
Under Canadian GAAP, shares issued as consideration are measured at the market price over a reasonable time
period before and after the date the terms of the business combination are agreed upon and announced. Under IFRS,
shares issued as consideration are measured at their market price on the closing date of the acquisition.
Under Canadian GAAP, an acquirer’s restructuring costs to exit an activity or to involuntarily terminate or relocate
employees are recognized as a liability in the purchase price allocation. Under IFRS, these costs are generally
expensed as incurred and not included in the purchase price allocation.
Under Canadian GAAP, costs directly related to the acquisition (i.e. finder fees, advisory, legal, etc.) are included
in the purchase price allocation, while under IFRS these costs are expensed as incurred and not included in the
purchase price allocation.
Under Canadian GAAP, contingent consideration is recorded when the amo
unt can be reasonably estimated at the
date of acquisition and the outcome is determinable beyond reasonable doubt, while under IFRS contingent
consideration is recognized immediately in the purchase price equation at fair value and marked to market as events
and circumstances change in the Consolidated Statement of Income.
The impact of the differences between Canadian GAAP and IFRS to the Bank’s IFRS opening Consolidated Balance
Sheet is disclosed in the table below.
Business Combinations: Elective Exemption
(millions of Canadian dollars)
As at
Nov. 1, 2010
Increase/(decrease) in assets:
Available-for-sale securities
(1)
Goodwill
(2,147)
Loans – residential mortgages
22
Loans – consumer instalment and other personal
–
Loans – business and government
–
Intangibles
(289)
Land, buildings and equipment and other depreciable assets
2
Deferred tax assets
(12)
Other assets
104
(Increase)/decrease in liabilities:
Deferred tax liabilities
102
Other liabilities
37
Subordinated notes and debentures
2
Increase/(decrease) in equity
(2,180)
The total impact of business combination elections to the Bank’s IFRS opening equity was a decrease of
$2,180 million, comprised of a decrease to common shares of $926 million, a decrease to contributed surplus of
$85 million and a decrease to retained earnings of $1,169 million.
5.2.2.A
Associates and joint arrangements
The exemption for past business combinations applies also to past acquisitions of
investments in associates, interests in joint ventures and interests in joint operations (in
which the activity of the joint operation constitutes a business, as defined in IFRS 3).
The date selected for the first restatement of business combinations will also be applied
to the restatement of these other acquisitions. [IFRS 1.C5].
First-time
adoption
253
The application of the business combination exemptions in IFRS 1 has the following
consequences for that business combination (see 5.2.3 to 5.2.10 below).
5.2.3
Classification of business combinations
IFRS 3 mandates a business combination to be accounted for as an acquisition or
reverse acquisition. An entity’s previous GAAP may be based on a different definition
of, for example, a business combination, an acquisition, a merger and a reverse
acquisition. An important benefit of the business combinations exemption is that a first-
time adopter will not have to determine the classification of past business combinations
in accordance with IFRS. [IFRS 1.C4(a)]. For example, a business combination that was
accounted for as a merger or uniting of interests using the pooling-of-interests method
under an entity’s previous GAAP will not have to be reclassified and accounted for
under the acquisition method, nor will a restatement be required if the business
combination would have been classified under IFRS 3 as a reverse acquisition by the
acquiree. However, an entity may still elect to do so if it so wishes without using
hindsight (see 5.2.2 above).
5.2.4
Assets and liabilities to be recognised in the opening IFRS statement
of financial position
In its opening IFRS statement of financial position, a first-time adopter should recognise
all assets acquired and liabilities assumed in a past business combination, with the
exception of: [IFRS 1.C4(b)]
• certain financial assets and liabilities that were derecognised and that fall under the
derecognition exception (see 4.3 above); and
• assets (including goodwill) and liabilities that were not recognised in the acquirer’s
consolidated statement of financial position under its previous GAAP and that
would not qualify for recognition under IFRSs in the separate statement of
financial position of the acquiree (see 5.2.4.A and Example 5.14 below).
The entity must exclude items it recognised under its previous GAAP that do not qualify
for recognition as an asset or liability under IFRSs (see 5.2.4.A below).
5.2.4.A
Assets and liabilities to be excluded
If the first-time adopter recognised under its previous GAAP items that do not qualify
for recognition under IFRSs, these must be excluded from the opening IFRS statement
of financial position.
An intangible asset, acquired as part of a business combination, that does not qualify for
recognition as an asset under IAS 38 – Intangible Assets – should be derecognised, with
the related deferred tax and non-controlling interests, with an offsetting change to
goodwill, unless the entity previously deducted goodwill directly from equity under its
previous GAAP (see 5.2.5 below).
254 Chapter
5
All other changes resulting from derecognition of such assets and liabilities should be
accounted for as adjustments of retained earnings or another category of equity, if
appropriate. [IFRS 1.C4(c)]. For example:
• Any restructuring provisions recognised under previous GAAP and which remain
at the date of transition to IFRS will need to be assessed against the IFRS
recognition criteria. If the criteria are not met, then the provisions must be
reversed against retained earnings.
• If an entity has deferred transaction costs (for which the services were received)
relating to a business combination that has not been finalised under previous GAAP
at the date of transition to IFRS, these deferred transaction costs would need to be
recognised in retained earnings as they do not qualify for deferral under IFRSs.
• Assets and liabilities of a structured entity required to be consolidated under
previous GAAP but that does not qualify for consolidation under IFRS 10 must
be deconsolidated.
5.2.4.B Recognition
of
assets and liabilities
An asset acquired or a liability assumed in a past business combination may not have
been recognised under the entity’s previous GAAP. However, this does not mean that
such items have a deemed cost of zero in the opening IFRS statement of financial
position. Instead, the acquirer recognises and measures those items in its opening IFRS
statement of financial position on the basis that IFRSs would require in the statement of
financial position of the acquiree. [IFRS 1.C4(f)].
If the acquirer had not recognised an assumed contingent liability under its previous
GAAP that still exists at the date of transition to IFRSs, the acquirer should recognise
that contingent liability at that date unless IAS 37 would prohibit its recognition in the
financial statements of the acquiree. [IFRS 1.C4(f)].
The change resulting from the recognition of such assets and liabilities should be
accounted for as an adjustment of retained earnings or another category of equity, if
appropriate. However, if the change results from the recognition of an intangible asset
that wa
s previously subsumed within goodwill, it should be accounted for as an
adjustment of that goodwill (see 5.2.5 below). [IFRS 1.C4(b), C4(g)(i)].
Intangible assets acquired as part of a business combination that were not recognised
under a first-time adopter’s previous GAAP will rarely be recognised in the opening
IFRS statement of financial position because either: (1) they cannot be capitalised in the
acquiree’s own statement of financial position under IAS 38; or (2) capitalisation would
require the use of hindsight which is not permitted under IAS 38 (see 7.14 below).
Example 5.14: Items not recognised under previous GAAP
Entity A acquired Entity B but did not capitalise B’s finance leases and internally generated customer lists
under its previous GAAP.
Upon first-time adoption of IFRSs, Entity A recognises the finance leases in its opening IFRS statement of financial
position using the amounts that Entity B would recognise in its separate statement of financial position. The resulting
adjustment to the net assets at the date of transition is reflected in retained earnings; goodwill is not restated to reflect the net assets that would have been recognised at the date of acquisition (see 5.2.5 below). However, Entity A does
not recognise the customer lists in its opening IFRS statement of financial position, because Entity B is not permitted
First-time
adoption
255
to capitalise internally generated customer lists under IAS 38. Any value that might have been attributable to the
customer lists would remain subsumed in goodwill in A’s opening IFRS statement of financial position.
Entity C acquired Entity D but did not recognise D’s brand name as a separate intangible asset under its
previous GAAP.
Upon first-time adoption of IFRSs, Entity C will not recognise D’s brand name in its opening IFRS statement
of financial position because Entity D would not have been permitted under IAS 38 to recognise it as an asset
in its own separate statement of financial position. Again, any value that might have been attributable to the
brand name would remain subsumed in goodwill in C’s opening IFRS statement of financial position.
Example 5.15: Restructuring provision
Background
Entity E’s first IFRS financial statements are for a period that ends on 31 December 2019 and include
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 51
