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HKFRSs news
Revised standards on business combinations and preparation of consolidated financial statements
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In January 2008 the IASB issued revised version of IFRS 3 "Business Combinations" (IFRS 3R) and IAS 27 'Consolidated and Separate Financial Statements' (IAS 27R), marking the completion of the second stage of its business combinations project. In March 2008, the HKICPA followed the IASB and issued revised version of HKFRS 3 (HKFRS 3R) and HKAS 27 (HKAS 27R), which are word-for-word adoption of IFRS 3R and IAS 27R.
IFRS 3R is significant in that it is the first major new Standard to have been produced jointly with the US Financial Accounting Standards Board (FASB). Indeed, in publishing equivalent standards to IFRS 3R and IAS 27, the FASB has made fundamental changes to the way in which business combinations are accounted for in the US. The two Boards did however reach different conclusions in a few areas with the result that IFRS 3R and the equivalent new US Standard (SFAS 141 (Revised 2007)) are not identical. As HKFRS 3R is equivalent in content to IFRS 3R, this means that HKFRSs preparers which are also subject to US filing have to be aware of the differences.
The revised Standards, which are effective for combinations in accounting periods beginning on or after
1 July 2009, make significant changes to the accounting for business combinations and also address a number of gaps in the old Standards. The most notable changes are to the accounting for step and partial acquisitions and the treatment of acquisition costs and non-controlling interests. The text box above summarises these changes.
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Step and partial acquisitions
Goodwill in a business combination is determined only at the acquisition date (the date when control is obtained) under HKFRS 3R.
This means that it is no longer necessary to "fair value" every asset and liability at each step in an acquisition that is achieved in stages to calculate goodwill. Goodwill is now determined once based on conditions at the acquisition date ¡V the date control is obtained.
Related changes to HKAS 27 affect part disposals of shares in a subsidiary and purchases of shares held by non-controlling interests (previously called minority interests). These will now be accounted for as equity transactions. No income statement gain or loss will be recorded and no adjustment will be made to goodwill on such a transaction.
Acquisition costs
Acquisition costs, such as lawyers' fees, will no longer be capable of being capitalised but must be expensed in the income statement. The intention behind the change is to increase transparency and comparability but entities will have to note the impact of the change on their reported results.
Non-controlling interests
Non-controlling interests (previously called minority interests) in the acquiree can be measured either at (i) fair value; or (ii) the proportionate interest in the identifiable net assets. If fair value is used, the effect is that 100% of the goodwill of the acquiree is recognised even if the parent's interest in the acquiree is less than 100% (this is sometimes referred to as the "full goodwill" method).
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