IFRS 3 Recognition of restructurings or exit activities

IFRS 3 Recognition of restructurings or exit activities – Liabilities related to restructurings or exit activities of the acquiree should only be recognized at the acquisition date if they are preexisting liabilities of the acquiree and were not incurred for the benefit of the acquirer.

Absent these conditions, including a plan for restructuring or exit activities in the purchase agreement does not create an obligation for accounting purposes to be assumed by the acquirer at the acquisition date.

Liabilities and the related expense for restructurings or exit activities that are not preexisting liabilities of the acquiree should be recognized through earnings [profit or loss] in the postcombination period when all applicable criteria of IAS 37 have been met.

Liabilities related to restructuring or exit activities that were recorded by the acquiree after negotiations to sell the company began should be assessed to determine whether such restructurings or exit activities were done in contemplation of the acquisition for the benefit of the acquirer. If the restructuring activities was done for the benefit of the acquirer, the acquirer should account for the restructuring activities as a separate transaction. Refer to IFRS 3 B50 for more guidance on separate transactions.

The following examples illustrate the recognition and measurement of liabilities related to restructuring or exit activities.IFRS 3 Recognition of restructurings or exit activities

EXAMPLE – Restructuring efforts of the acquiree vs. restructuring efforts of the acquirer

On the acquisition date, an acquiree has an existing liability/obligation related to a restructuring that was initiated one year before the business combination was contemplated.

In addition, in connection with the acquisition, the acquirer identified several operating locations to close and selected employees of the acquiree to terminate to realise certain anticipated synergies from combining operations in the postcombination period. Six months after the acquisition date, the obligation for this restructuring action is recognized, as the recognition criteria under IAS 37 are met. IFRS 3 Recognition of restructurings or exit activities IFRS 3 Recognition of restructurings or exit activities

How should the acquirer account for the two restructurings? IFRS 3 Recognition of restructurings or exit activities

Analysis IFRS 3 Recognition of restructurings or exit activities

The acquirer would account for the two restructurings as follows:

  • Restructuring initiated by the acquiree: The acquirer would recognize the previously recorded restructuring liability at fair value as part of the business combination, since it is an obligation of the acquiree at the acquisition date. IFRS 3 Recognition of restructurings or exit activities IFRS 3 Recognition of restructurings or exit activities
  • Restructuring initiated by the acquirer: The acquirer would recognize the effect of the restructuring in earnings [profit or loss] in the postcombination period, rather than as part of the business combination. Since the restructuring is not an obligation at the acquisition date, the restructuring does not meet the definition of a liability and is not a liability assumed in the business combination. IFRS 3 Recognition of restructurings or exit activities IFRS 3 Recognition of restructurings or exit activities

EXAMPLE – Seller’s reimbursement of acquirer’s postcombination restructuring costs

The sale and purchase agreement for a business combination contains a provision for the seller to reimburse the acquirer for certain qualifying costs of restructuring the acquiree during the postcombination period. Although it is probable that qualifying restructuring costs will be incurred by the acquirer, there is no liability for restructuring that meets the recognition criteria at the combination date. IFRS 3 Recognition of restructurings or exit activities IFRS 3 Recognition of restructurings or exit activities

How should the reimbursement right be recorded? IFRS 3 Recognition of restructurings or exit activities

Analysis IFRS 3 Recognition of restructurings or exit activities IFRS 3 Recognition of restructurings or exit activities

The reimbursement right is a separate arrangement and not part of the business combination because the restructuring action was initiated by the acquirer for the future economic benefit of the combined entity. The purchase price for the business must be allocated (on a reasonable basis such as relative fair value) to the amount paid for the acquiree and the amount paid for the reimbursement right.

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The reimbursement right should be recognized as an asset on the acquisition date with cash receipts from the seller recognized as settlements. The acquirer should expense postcombination restructuring costs in its postcombination consolidated financial statements. IFRS 3 Recognition of restructurings or exit activities IFRS 3 Recognition of restructurings or exit activities

Background – Basis for conclusion Liabilities associated with restructuring or exit activities of the acquiree under IFRS 3

BC132 The revised standards explain that an acquirer recognises liabilities for restructuring or exit activities acquired in a business combination only if they meet the definition of a liability at the acquisition date (paragraph 11 of the revised IFRS 3). Costs associated with restructuring or exiting an acquiree’s activities that are not liabilities at that date are recognised as post-combination activities or transactions of the combined entity when the costs are incurred. In considering acquired restructuring or exit activities the FASB and the IASB began at different points because the requirements of SFAS 141 and IFRS 3 on the issue differed.Effective

BC133 In applying SFAS 141, acquirers looked to EITF Issue No. 95-3 Recognition of Liabilities in Connection with a Purchase Business Combination for guidance on recognising liabilities associated with restructuring or exit activities of an acquirer. EITF Issue 95-3 provided that the costs of an acquirer’s plan (a) to exit an activity of an acquired company, (b) to involuntarily terminate the employment of employees of an acquired company or (c) to relocate employees of an acquired company should be recognised as liabilities assumed in a purchase business combination if specified conditions were met.

Those conditions did not require the existence of a present obligation to another party. In developing the 2005 Exposure Draft, the FASB concluded, as it did in FASB Statement No. 146 Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146), that only present obligations to others are liabilities under the definition in the FASB’s Concepts Statement 6.

An exit or disposal plan, by itself, does not create a present obligation to others for costs an entity expects to incur under the plan. Thus, an entity’s commitment to an exit or disposal plan, by itself, is not a sufficient condition for recognition of a liability. Consistently with that conclusion, SFAS 141(R) nullifies the guidance in EITF Issue 95-3, which was not consistent with SFAS 146.

BC134 Before the IASB issued IFRS 3, IAS 22, like EITF Issue 95-3, required the acquirer to recognise as part of allocating the cost of a combination a provision for terminating or reducing the activities of the acquiree (a restructuring provision) that was not a liability of the acquiree at the acquisition date, provided that the acquirer had satisfied specified criteria. The criteria in IAS 22 were similar to those in EITF Issue 95-3.

In developing ED 3 and IFRS 3, the IASB considered the view that a restructuring provision that was not a liability of the acquiree at the acquisition date should nonetheless be recognised by the acquirer as part of allocating the cost of the combination if the specified conditions were met. Those supporting this view, including some respondents to ED 3, argued that:

  1. the estimated cost of terminating or reducing the activities of the acquiree would have influenced the price paid by the acquirer for the acquiree and therefore should be taken into account in measuring goodwill.

  2. the acquirer is committed to the costs of terminating or reducing the activities of the acquiree because of the business combination. In other words, the combination is the past event that gives rise to a present obligation to terminate or reduce the activities of the acquiree.

BC135 In developing IFRS 3, the IASB rejected those arguments, noting that the price paid by the acquirer would also be influenced by future losses and other ‘unavoidable’ costs that relate to the future conduct of the business, such as costs of investing in new systems.

IFRS 3 did not provide for recognising those costs as liabilities because they do not represent liabilities of the acquiree at the acquisition date, although the expected future outflows may affect the value of existing recognised assets. The IASB concluded that it would be inconsistent to recognise ‘unavoidable’ restructuring costs that arise in a business combination but to prohibit recognition of a liability for other ‘unavoidable’ costs to be incurred as a result of the combination.

BC136 The IASB’s general criteria for identifying and recognising restructuring provisions are set out in IAS 37. IAS 37 states that a constructive obligation to restructure (and therefore a liability) arises only when the entity has developed a detailed formal plan for the restructuring and either raised a valid expectation in those affected that it will carry out the restructuring by publicly announcing details of the plan or begun implementing the plan.

IAS 37 requires such a liability to be recognised when it becomes probable that an outflow of resources embodying economic benefits will be required to settle the obligation and the amount of the obligation can be reliably estimated.Private sector participation in public infrastructure

BC137 IFRS 3 reflected the IASB’s conclusion that if the criteria in paragraph 31 of IAS 22 for the recognition of a restructuring provision were carried forward, similar items would be accounted for differently. The timing of the recognition of restructuring provisions would differ, depending on whether a plan to restructure arises in connection with, or in the absence of, a business combination.

The IASB decided that such a difference would impair the usefulness of the information provided to users about an entity’s plans to restructure because both comparability and reliability would be diminished. Accordingly, IFRS 3 contained the same requirements as the revised IFRS 3 for recognising liabilities associated with restructuring or exit activities.

BC138 Few of the comments on the 2005 Exposure Draft from respondents who apply IFRSs in preparing their financial statements addressed its proposal on accounting for costs to restructure or exit activities of an acquiree (restructuring costs). Those who did so generally agreed with its proposal to carry forward the requirement of IFRS 3 for recognising liabilities associated with restructuring or exit activities of an acquiree.

but the provisions of the 2005 Exposure Draft on that issue represented a change to GAAP in the United States, and the FASB received several responses objecting to the proposed change. It also received some responses that agreed with them, generally for the same reasons that the boards proposed the provisions in the 2005 Exposure Draft.

BC139 Respondents who disagreed with the proposed accounting for liabilities associated with restructuring or exit activities of an acquiree generally cited one or more of the following reasons in support of their view:

  1. Acquirers factor restructuring costs into the amount they are willing to pay for the acquiree. Therefore, those costs should be included in accounting for the business combination.

  2. It is not clear why the boards decided that restructuring costs should not be recognised as liabilities assumed in the business combination when those costs are more likely to be incurred than some of the liabilities related to contingencies that the boards proposed to recognise as liabilities assumed in a combination.

  3. Capitalising restructuring costs as part of a business combination would be consistent with the accounting for other asset acquisitions in which the amount capitalised is equal to the amount paid to acquire and place the asset in service.

BC140 The boards were not persuaded by those views. They observed that the view described in paragraph BC139(a) is essentially the same as the view of some respondents to ED 3 discussed in paragraph BC134(a). In addition, the boards noted that the acquirer does not pay the acquiree or its owners for the anticipated costs to restructure or exit activities and the acquirer’s plans to do so do not give rise to an obligation and associated liability at the acquisition date.

The acquirer ordinarily incurs a liability associated with such costs after it gains control of the acquiree’s business.Money transportation

BC141 The boards also disagreed with the view that the accounting for costs to restructure or exit some of an acquiree’s activities is inconsistent with the requirements of the revised standards on contingencies. On the contrary, the two requirements are consistent with each other because both require recognition of a liability only if an obligation that meets the definition of a liability exists at the acquisition date.

BC142 The boards also observed that the requirements of the revised standards on restructuring costs are consistent with current practice in accounting for many similar costs expected to be incurred in conjunction with other acquisitions of assets. For example, one airline might acquire an aircraft from another airline.

The acquirer was likely to consider the costs of changing the logo on the aircraft and making any other intended changes to its configuration in deciding what it was willing to pay for the aircraft. Other airlines bidding for the aircraft might also have plans to change the aircraft if they were the successful bidders. The nature and extent of the changes each airline expected to make and the costs each would incur were likely to differ.

BC143 In accordance with both US GAAP and IFRSs, the airline would recognise none of those expected, post-acquisition costs at the date the aircraft is acquired. Instead, those costs are accounted for after control of the aircraft is obtained. If the costs add to the value of the aircraft and meet the related requirements of US GAAP or IFRSs, they will be recognised as assets (probably as an addition to the carrying amount of the aircraft). Otherwise, those additional costs are likely to be charged to expense when incurred.

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IFRS 3 Recognition of restructurings or exit activities

IFRS 3 Recognition of restructurings or exit activities IFRS 3 Recognition of restructurings or exit activities IFRS 3 Recognition of restructurings or exit activities IFRS 3 Recognition of restructurings or exit activities IFRS 3 Recognition of restructurings or exit activities IFRS 3 Recognition of restructurings or exit activities IFRS 3 Recognition of restructurings or exit activities

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