comparative information for 2018 only. It chooses not to restate previous business combinations under IFRSs.
On 1 July 2017, Entity E acquired 100 per cent of Entity F. Under its previous GAAP, Entity E recognised
an (undiscounted) restructuring provision of ¥100 million that would not have qualified as an identifiable
liability under IFRSs. The recognition of this restructuring provision increased goodwill by ¥100 million. At
1 January 2018 (date of transition to IFRSs), Entity E:
(a) had paid restructuring costs of ¥60 million; and
(b) estimated that it would pay further costs of ¥40 million in 2018 and that the effects of discounting were
immaterial. At 1 January 2018, those further costs did not qualify for recognition as a provision under IAS 37.
Application of requirements
In its opening IFRS statement of financial position, Entity E:
(a) Does not recognise a restructuring provision. This is because the recognition criteria to be applied under
Appendix C of IFRS 1 are those that generally apply to the specific asset or liability in accordance with
the relevant IFRS (in this case IAS 37) rather than the recognition criteria set out under IFRS 3.
(b) Does not adjust the amount assigned to goodwill. However, Entity E tests the goodwill for impairment
under IAS 36 and recognises any resulting impairment loss.
5.2.4.C
Previous GAAP carrying amount as deemed cost
For assets and liabilities that are accounted for on a cost basis under IFRSs, the carrying
amount in accordance with previous GAAP of assets acquired and liabilities assumed in
that business combination is their deemed cost immediately after the business
combination. This deemed cost is the basis for cost-based depreciation or amortisation
from the date of the business combination. [IFRS 1.C4(e)].
The standard does not specifically define ‘immediately after the business combination’,
but it is commonly understood that this takes account of the final determination of the
purchase price allocation and final completion of purchase accounting. In other words,
a first-time adopter would not use the provisionally determined fair values of assets
acquired and liabilities assumed in applying the business combinations exemption.
Example 5.16: Provisionally determined fair values
Entity B acquired Entity C in August 2017 and made a provisional assessment of Entity C’s identifiable net
assets in its 31 December 2017 consolidated financial statements under its previous GAAP. In its
31 December 2018 consolidated financial statements – its last financial statements under previous GAAP –
Entity B completed the initial accounting for the business combination and adjusted the provisional values of
the identifiable net assets and the corresponding goodwill. Upon first-time adoption of IFRSs, Entity B elects
not to restate past business combinations.
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In preparing its opening IFRS statement of financial position as of 1 January 2018, Entity B should use the
adjusted carrying amounts of the identifiable net assets as determined in its 2018 financial statements rather
than the provisional carrying amounts of the identifiable net assets and goodwill at 31 December 2017.
IFRS 1 is silent as to whether the relevant carrying amounts of the identifiable net assets and
goodwill are those that appeared in the financial statements drawn up immediately before
the transition date or any restated balance appearing in a later set of previous GAAP accounts.
Since the adjustments that were made under previous GAAP effectively resulted in a
restatement of the balances at the transition date in a manner that is consistent with the
approach permitted by IFRSs, it is in our opinion appropriate to reflect those adjustments in
the opening IFRS statement of financial position. Since the adjustments are effectively made
as at the transition date, it is also appropriate to use the window period permitted by previous
GAAP provided that this does not extend into the first IFRS reporting period. This is because
any restatements in that period can only be made in accordance with IFRS 3. In effect, the
phrase ‘immediately after the business combination’ in paragraph C4(e) of IFRS 1 should be
interpreted as including a window period allowed by the previous GAAP that ends at the
earlier of the end of the window period and the beginning of the first IFRS reporting period.
Although the use of cost-based measurements under previous GAAP might be considered
inconsistent with the requirements of IFRSs for assets and liabilities that were not acquired
in a business combination, the IASB did not identify any situations in a business combination
in which it would not be acceptable to bring forward cost-based measurements made under
previous GAAP. [IFRS 1.BC36]. For example, assume an entity that adopts IFRSs with a transition
date of 1 January 2018 and, as required, applies IFRS 3 to business combinations occurring on
or after 1 January 2018. Under the entity’s previous GAAP, it acquired a business in 2012 and
the purchase accounting resulted in negative goodwill. At that time, the negative goodwill
was eliminated by reducing the amounts assigned to long-lived assets (PP&E and intangible
assets) on a pro rata basis. In this situation, the negative goodwill adjustment to PP&E and
intangible assets is ‘grandfathered’ and is not adjusted in the opening IFRS statement of
financial position. The negative goodwill adjustment to PP&E and intangible assets was part
of the original purchase accounting and is not a subsequent measurement difference between
completing the purchase price allocation and 1 January 2018 and therefore the adjustment
forms part of the deemed cost of PP&E and intangible assets.
By contrast, under previous GAAP, the entity may have recognised amortisation of
intangible assets from the date of acquisition. If this amortisation is not in compliance
with IAS 38, it is not ‘grandfathered’ under the business combination exemption and
therefore should be reversed on transition (note that the adjusted carrying amount
should be tested for impairment if there are impairment indicators pursuant to the
requirements of IAS 36 at the date of transition; see 7.12 below).
Example 5.17: Items measured on a cost basis
Entity A applies the business combination exemption under IFRS 1. In a business combination Entity A
acquired property, plant and equipment, inventory and accounts receivable. Under its previous GAAP,
Entity A initially measured these assets at cost (i.e. their fair value at the date originally acquired).
Upon adoption of IFRSs, Entity A determines that its accounting policy for these assets under its previous
GAAP complied with the requirements of IFRSs. Therefore, property, plant and equipment, inventory and
accounts receivable are not adjusted but recognised in the opening IFRS statement of financial position at the
carrying amount under the previous GAAP.
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5.2.4.D
In-process research and development
IFRS 1 makes it clear that in-process research and development (IPR&D) that was
included within goodwill under an entity’s previous GAAP should not be recognised
separately upon transition to IFRSs unless it qualifies for recognition under IAS 38 in
the financial statements
of the acquiree. [IFRS 1.C4(h)(i)]. However, IFRS 1 is silent on the
treatment of IPR&D that was identified separately by an entity under the business
combinations accounting standard of its previous GAAP, but which was immediately
written off to profit or loss.
There are two possible scenarios. If previous GAAP requires IPR&D to be written off as
an integral part of the business combination accounting under that GAAP then the
carrying amount of IPR&D ‘immediately after the business combination’ would be zero.
While we understand that there may be different views, it is our view that IFRS 1 does
not allow reinstatement of the amount of IPR&D that was previously written off under
this scenario.
However, if that write-off is not an integral part of the business combination
accounting (e.g. the previous GAAP merely requires accelerated amortisation) then
the carrying amount ‘immediately after the business combination’ would be the
amount allocated to IPR&D by the business combinations standard under previous
GAAP. In our view, reinstatement of the amount of IPR&D that was written off under
this scenario is appropriate.
The above distinction may be largely irrelevant if the business combination takes place
several years before the transition to IFRSs because, in practice, the IPR&D may have
been amortised fully or may be impaired before the date of transition.
5.2.4.E
Subsequent measurement under IFRSs not based on cost
IFRSs require subsequent measurement of some assets and liabilities on a basis other
than original cost, such as fair value for certain financial instruments or on specific
measurement bases for share-based payments (IFRS 2) and employee benefits (IAS 19).
Even if a first-time adopter does not apply IFRS 3 retrospectively to a business
combination, such assets and liabilities must be measured on that other basis in its
opening IFRS statement of financial position. Any change in the carrying amount of
those assets and liabilities should be accounted for as an adjustment of retained earnings,
or other appropriate category of equity, rather than as an adjustment of goodwill.
[IFRS 1.C4(d)].
Example 5.18: Items not measured at original cost
Entity A acquired in a business combination a trading portfolio of equity securities and a number of
investment properties. Under its previous GAAP, Entity A initially measured these assets at historical cost
(i.e. their fair value at the date of original acquisition).
Upon adoption of IFRSs, Entity A measures the trading portfolio of equity securities and the investment
properties at fair value in its opening IFRS statement of financial position. The resulting adjustment to these
assets at the date of transition is reflected in retained earnings.
5.2.4.F Example
of
recognition
and measurement requirements
The following example, which is based on one within the implementation guidance in
IFRS 1, illustrates many of the requirements discussed above. [IFRS 1.IG Example 2].
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Example 5.19: Business combination example
Background
Entity A’s first IFRS financial statements are for a reporting period that ends on 31 December 2019 and
include comparative information for 2018 only. On 1 July 2015, Entity A acquired 100 per cent of Entity B.
Under its previous GAAP, Entity A:
(a) classified the business combination as an acquisition by Entity A;
(b) measured the assets acquired and liabilities assumed at the following amounts under previous GAAP at
1 January 2018 (date of transition to IFRSs):
(i) identifiable assets less liabilities for which IFRSs require cost-based measurement at a date after
the business combination: €200 (with a tax base of €150 and an applicable tax rate of 30 per cent);
(ii) pension liability (for which the present value of the defined benefit obligation measured under
IAS 19 is €130 and the fair value of plan assets is €100): €nil (because Entity A used a pay-as-
you-go cash method of accounting for pensions under its previous GAAP). The tax base of the
pension liability is also €nil;
(iii) goodwill: €180;
(c) did not, at the date of acquisition, recognise deferred tax arising from temporary differences associated
with the identifiable assets acquired and liabilities assumed;
In its opening (consolidated) IFRS statement of financial position, Entity A:
(a) classifies the business combination as an acquisition by Entity A even if the business combination would
have qualified under IFRS 3 as a reverse acquisition by Entity B; [IFRS 1.C4(a)]
(b) does not adjust the accumulated amortisation of goodwill. Entity A tests the goodwill for impairment under
IAS 36 and recognises any resulting impairment loss, based on conditions that existed at the date of transition
to IFRSs. If no impairment exists, the carrying amount of the goodwill remains at €180; [IFRS 1.C4(g)]
(c) for those net identifiable assets acquired for which IFRSs require cost-based measurement at a date after
the business combination, treats their carrying amount under previous GAAP immediately after the
business combination as their deemed cost at that date; [IFRS 1.C4(e)]
(d) does not restate the accumulated depreciation and amortisation of the net identifiable assets in (c) above,
unless the depreciation methods and rates under previous GAAP result in amounts that differ materially
from those required under IFRSs (for example, if they were adopted solely for tax purposes and do not
reflect a reasonable estimate of the asset’s useful life under IFRSs). If no such restatement is made, the
carrying amount of those assets in the opening IFRS statement of financial position equals their carrying
amount under previous GAAP at the date of transition to IFRSs (€200); [IFRS 1.IG7]
(e) if there is any indication that identifiable assets are impaired, tests those assets for impairment, under
IAS 36, based on conditions that existed at the date of transition to IFRSs (see 7.12 below);
(f) recognises the pension liability, and measures it, at the present value of the defined benefit obligation
(€130) less the fair value of the plan assets (€100), giving a carrying amount of €30, with a corresponding
debit of €30 to retained earnings. [IFRS 1.C4(d)]. However, if Entity B had already adopted IFRSs in an
earlier period, Entity A would measure the pension liability at the same amount as in Entity B’s
individual financial statements; [IFRS 1.D17, IG Example 9]
(g) recognises a net deferred tax liability of €6 (€20 at 30 per cent) arising from:
(i) the taxable temporary difference of €50 (€200 less €150) associated with the identifiable assets
acquired and non-pension liabilities assumed; less
(ii) the deductible temporary difference of €30 (€30 less €nil) associated with the pension liability.
Entity A recognises the resulting increase in the deferred tax liability as a deduction from retained
earnings. [IFRS 1.C4(k)]. If a taxable temporary difference arises from the initial recognition of the
goodwill, Entity A does not recognise the resulting deferred tax liability. [IAS 12.15(a)].
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5.2.5
Restatement of goodwill
Under the business combinations e
xemption, a first-time adopter takes the carrying
amount of goodwill under its previous GAAP at the date of transition to IFRSs as a
starting point and only adjusts it as follows: [IFRS 1.C4(g)]
(a) goodwill is increased by the carrying amount of any intangible asset acquired in a
business combination under its previous GAAP (less any related deferred tax and
non-controlling interests), that does not meet the recognition criteria under IFRSs.
The first-time adopter accounts for the change in classification prospectively and
does not, for example, reverse the cumulative amortisation on the item that it
recognised as an intangible asset under its previous GAAP;
(b) goodwill is decreased if a first-time adopter is required to recognise an intangible
asset under IFRS that was subsumed in goodwill under its previous GAAP. It adjusts
deferred tax and non-controlling interests accordingly; and
(c) goodwill must be tested for impairment at the date of transition to IFRSs in
accordance with IAS 36 regardless of whether there is any indication that the
goodwill may be impaired (see Chapter 20); any resulting impairment loss is
recognised in retained earnings unless IAS 36 requires it to be recognised in a
revaluation surplus (see Chapter 20). The impairment test must be based on
conditions at the date of transition to IFRSs.
Application of the above guidance may sometimes be more complicated than expected
as is illustrated in the example below.
Example 5.20: Recognition and derecognition of acquired intangible assets
Before its date of transition to IFRSs, Entity A acquired an online retailer, Entity B. Under its previous GAAP,
Entity A recognised an intangible asset of ¥1,200 related to ‘deferred marketing costs’, which does not meet
the recognition criteria under IFRSs. Entity A also acquired customer relationships with a fair value of ¥900
that do meet the recognition criteria under IFRS 3, but which it did not recognise as an intangible asset under
its previous GAAP.
Upon adoption of IFRSs, Entity A is required to derecognise the ‘deferred marketing costs’ intangible asset
and increase the carrying amount of goodwill for a corresponding amount. Nevertheless, the customer
relationship intangible asset that is subsumed in goodwill cannot be recognised as its carrying amount in the
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 52
