IFRS vs US GAAP Business combinations – IFRS and US GAAP are largely converged in this area. The business combinations standards under US GAAP and IFRS are close in principles and language. However, some differences remain between US GAAP and IFRS pertaining to (1) the definition of control, (2) recognition of certain assets and liabilities based on the reliably measurable criterion, (3) accounting for contingencies, and (4) accounting for non-controlling interests. Significant differences also continue to exist in subsequent accounting. Different requirements for impairment testing and accounting for deferred taxes (e.g., the recognition of a valuation allowance) are among the most significant.
New definitions of a business were also issued under both US GAAP and IFRS. While the new definitions are similar, differences exist. Additionally, the US GAAP definition is mandatorily effective before the IFRS definition.
Standards Reference
Definition of a business
Determining whether the acquisition method applies to a transaction begins with understanding whether the transaction involves the acquisition of one or more businesses and whether it is a business combination within the scope of the business combinations guidance.
New definitions of a business were issued under US GAAP and IFRS in 2017 and 2018, respectively. The definition of a business affects whether an acquisition is within the scope of the business combination standards.
The new definitions are expected to result in fewer acquisitions being considered business combinations across most industries, particularly real estate and pharmaceuticals. Under existing guidance, the definitions of a business were largely aligned; however, some believe more acquisitions were considered business combinations under US GAAP, in practice.
The new definitions are similar and expected to reduce differences; however, there are some notable differences.
Additionally, the new US GAAP definition was effective for calendar year-end public companies in 2018 and for all other calendar year-end companies in 2019. The new IFRS definition is not effective for acquisitions occurring prior to January 1, 2020, but can be early adopted.
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Under the new definition, if substantially all of the fair value of gross assets acquired is concentrated in a single identifiable asset (or a group of similar identifiable assets), the assets acquired would not represent a business. This provision introduces gating criteria that, if met, would eliminate the need for further assessment (the screen test). Under the new definition, a business includes, at a minimum, an input and a substantive process that together contribute to the ability to create outputs. The revised definition provides a framework to evaluate when an input and substantive process is present (including for early stage companies that have not generated outputs), and removes the current requirement to assess if a market participant could replace any missing elements. The amendment narrows the definition of outputs to be consistent with ASC 606, Revenue from Contracts with Customers. Under the revised definition, an output is the result of inputs and processes that provide goods or services to customers, other revenue, or investment income, such as dividends and interest. Under US GAAP, the presence of more than an insignificant amount of goodwill is an indicator that a substantive process has been acquired. However, the presence of economic goodwill is not determinative as to whether the acquired activities constitute a business. |
With the exception of the difference in effective dates, the new IFRS definition of a business is largely converged with the revised definition under US GAAP. The most significant difference is that the IFRS equivalent to the mandatory US GAAP screen test (i.e., the concentration test) is optional under IFRS. An entity can chose to apply or bypass the concentration test on an acquisition by acquisition basis under IFRS. This can be significant as there are many differences between recording an asset acquisition and a business combination. See Determining the overall appropriate classification model (in IFRS vs US GAAP Assets—financial assets). Additionally, under the new IFRS definition:
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Definition of control
The business combinations guidance states that for a business combination to occur, an acquirer must obtain control over a business. US GAAP and IFRS define control differently. Consequently, the same transaction may be accounted for as a business combination under US GAAP, but not under IFRS, or vice versa. The table below highlights various considerations in determining control under US GAAP and IFRS.
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Consolidation decisions are evaluated first under the variable interest entity model.
All other entities are evaluated under the voting interest model. See IFRS vs US GAAP Consolidation for further information on the concept of control and the consolidation model under US GAAP. |
An investor has control over an investee when all of the following elements are present:
See IFRS vs US GAAP Consolidation for further information on the concept of control and the consolidation model under IFRS. |
Acquired contingencies
There are significant differences related to the recognition of contingent liabilities and contingent assets.
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Acquired assets and liabilities subject to contingencies are recognized at fair value if fair value can be determined during the measurement period. If fair value cannot be determined, companies should typically account for the acquired contingencies using existing guidance. If recognized at fair value on acquisition, an acquirer should develop a systematic and rational basis for subsequently measuring and accounting for assets and liabilities arising from contingencies depending on their nature. |
The acquiree’s contingent liabilities are recognized at the acquisition date provided their fair values can be measured reliably. The contingent liability is measured subsequently at the higher of the amount initially recognized less, if appropriate, cumulative amortization recognized under the revenue guidance (IFRS 15) or the best estimate of the amount required to settle the present obligation at the end of the reporting period (under the provisions guidance—IAS 37). Contingent assets are not recognized. |
Assignment/allocation and impairment of goodwill
The definition of the levels at which goodwill is assigned/allocated and tested for impairment varies between the two frameworks. Specifically, in determining the unit of account for goodwill impairment testing, US GAAP uses a segment reporting framework while IFRS focuses on the lowest level of identifiable cash inflows (cash generating unit) or groups of cash generating units at which goodwill is monitored.
Additional differences in the impairment testing methodologies could create further variability in the timing and extent of recognized impairment losses.
In January 2017, the FASB issued ASU 2017-04 to simplify the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test. The change makes US GAAP more similar to IFRS because IFRS also has a single step for goodwill impairment. However, other differences remain. ASU 2017-04 is effective in 2020 for calendar year-end public companies.
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Goodwill is assigned to an entity’s reporting units, defined as the same as, or one level below, an operating segment. The determination of reporting units is based on a segment reporting structure. Goodwill is tested for impairment at least on an annual basis and between annual tests if an event occurs or circumstances change that may indicate an impairment. When performing the goodwill impairment test, an entity may first assess qualitative factors to determine whether the quantitative goodwill impairment test is necessary. If the entity determines, based on the qualitative assessment, that it is more likely than not that the fair value of a reporting unit is below its carrying amount, the impairment test is performed. An entity can bypass the qualitative assessment for any reporting unit in any period and proceed directly to the quantitative assessment. |
Goodwill is allocated to a cash-generating unit (CGU) or group of CGUs (not larger than an operating segment) based on how goodwill is monitored for internal management purposes. A CGU is the smallest identifiable group of assets that generates cash inflows largely independently of other assets or groups of assets. Goodwill is tested for impairment at least on an annual basis and between annual tests if an event occurs or circumstances change that may indicate an impairment. Goodwill impairment testing is performed using a one-step approach: The recoverable amount of the CGU or group of CGUs (i.e., the higher of its fair value less costs of disposal and its value in use) is compared with its carrying amount. Any impairment loss is recognized as the excess of the carrying amount over the recoverable amount. |
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Prior to adoption of ASU 2017-04, goodwill is tested for impairment using a two-step test:
Any loss recognized is not permitted to exceed the carrying amount of goodwill. The impairment charge is included in operating income. For reporting units with zero or negative carrying amounts, an entity must first perform a qualitative assessment to determine whether it is more likely than not that a goodwill impairment exists. An entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that goodwill impairment exists. Upon adoption of ASU 2017-04, Step 2 of the goodwill impairment test, which requires a calculation of the implied fair value of goodwill by determining the fair value of identifiable assets and liabilities in the reporting unit, will be removed. As a result, goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The same one-step impairment test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. Entities will be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts. Private companies have the option to amortize goodwill on a straight-line basis over a period of up to ten years, and apply a trigger-based, single-step impairment test at either the entity level or the reporting unit level at the company’s election. |
The impairment loss is allocated first to goodwill and then on a pro rata basis to the other assets of the CGU or group of CGUs to the extent that the impairment loss exceeds the carrying value of goodwill.
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Indefinite lived intangible asset impairment
The levels at which impairment testing is performed for indefinite lived intangible assets is different under US GAAP and IFRS, which may lead to different impairment conclusions.
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An indefinite lived asset is considered impaired when the asset’s carrying amount exceeds its fair value. The test is performed at the individual asset level. |
Impairment should be identified at the individual asset level, when possible. When the recoverable amount of the individual asset cannot be identified, the recoverable amount should be calculated for the CGU to which the asset belongs. |
Contingent consideration—seller accounting
Entities that sell a business that includes contingent consideration might encounter significant differences in the manner in which such contingent considerations are recorded.
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Under US GAAP, the seller should determine whether the arrangement meets the definition of a derivative. If the arrangement meets the definition of a derivative, the arrangement should be recorded at fair value. If the arrangement does not meet the definition of a derivative, the seller should make an accounting policy election to record the arrangement at either fair value at inception or at the settlement amount when the consideration is realized or is realizable, whichever is earlier. |
Under IFRS, a contract to receive contingent consideration that gives the seller the right to receive cash or other financial assets when the contingency is resolved meets the definition of a financial asset. When a contract for contingent consideration meets the definition of a financial asset, it is measured in accordance with IFRS 9, typically at fair value through profit or loss. |
Non-controlling interests
Non-controlling interests are measured at fair value under US GAAP whereas IFRS provides two valuation options, which could result in differences in the carrying values of non-controlling interests.
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Non-controlling interest is measured at fair value which includes the non-controlling interest’s share of goodwill.
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Entities have an option, on a transaction-by-transaction basis, to measure non-controlling interests at fair value or the non-controlling interests’ proportion of the fair value of the identifiable net assets (i.e., excluding goodwill.) This option applies only to instruments that represent present ownership interests and entitle their holders to a proportionate share of the net assets in the event of liquidation. All other components of non-controlling interest are measured at fair value unless another measurement basis is required by IFRS. The use of the fair value option results in full goodwill being recorded on both the controlling and non-controlling interest, consistent with US GAAP. |
Combinations involving entities under common control
Under US GAAP, there are specific rules for common-control transactions.
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Combinations of entities under common control are generally recorded at predecessor cost, reflecting the ultimate parent’s carrying amount of the assets and liabilities transferred. When an entity receives a business from an entity under common control, the transaction is reflected retrospectively. |
IFRS does not specifically address the accounting for a business combination under common control. In practice, entities develop and consistently apply an accounting policy. Entities generally apply the predecessor value method; however, entities can make an accounting policy election to apply acquisition accounting in certain circumstances. The accounting policy can be changed only when criteria for a change in an accounting policy are met in the applicable guidance in IAS 8 (i.e., it provides more reliable and more relevant information). Entities will also need to elect an accounting policy to record businesses obtained through common control transactions on either a retrospective or prospective basis. |
Identifying the acquirer
Different entities might be determined to be the acquirer when applying acquisition method accounting.
Impacted entities should refer to IFRS vs US GAAP Consolidation for a more detailed discussion of differences related to the consolidation models between the frameworks that might create significant differences in this area.
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The acquirer is determined by reference to ASC 810-10, under which generally the party that holds greater than 50% of the voting shares has control. In addition, control might exist when less than 50% of voting shares are held if the acquirer is the primary beneficiary of a variable interest entity in accordance with ASC 810. |
The acquirer is determined by reference to the consolidation guidance, under which generally the party that holds greater than 50% of the voting rights has control. In addition, control might exist when less than 50% of the voting rights are held, if the acquirer has the power to most significantly affect the variable returns of the entity in accordance with IFRS 10. |
Push-down accounting
The lack of push-down accounting under IFRS can lead to significant differences in instances where push down accounting was utilized under US GAAP.
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Companies have the option to apply push-down accounting in their separate financial statements upon a change-in-control event. The election is available to the acquired company, as well as to any direct or indirect subsidiaries of the acquired company. If an acquired company elects to apply push-down accounting, the acquired company should reflect the new basis of accounting established by the parent for the individual assets and liabilities of the acquired company arising from the acquisition in its stand-alone financial statements. Goodwill should be calculated and recognized consistent with business combination accounting. Bargain purchase gains, however, should not be recognized in the income statement of the acquired company that applies push-down accounting. Instead, they should be recognized in additional paid-in capital within equity. Debt (including acquisition related debt) and any other liabilities of the acquirer should be recognized by the acquired company only if they represent an obligation of the acquired company pursuant to other applicable guidance in US GAAP. |
There is no discussion of push-down accounting under IFRS. There may be situations in which transactions, such as capital reorganizations, common control transactions, etc., may result in an accounting outcome that is similar to push-down accounting where the new basis of accounting established by the parent, including goodwill and fair value differences on acquisition is reflected in the company’s stand-alone financial statements.
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Measurement period adjustment
Differences exist related to how measurement period adjustments are recorded in US GAAP and IFRS. Measurement period adjustments are recorded in the period of the adjustment under US GAAP but retrospectively under IFRS.
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An acquirer has up to one year from the acquisition date (referred to as the measurement period) to finalize the accounting for a business combination. If during the measurement period, the measurements are not finalized as of the end of a reporting period, the acquirer should record the cumulative impact of measurement period adjustments made to provisional amounts in the period that the adjustment is determined. However, the acquirer should present separately on the face of the income statement or disclose in the notes the portion of the adjustment to each income statement line items that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. |
An acquirer has up to one year from the acquisition date (referred to as the measurement period) to finalize the accounting for a business combination. An acquirer should retrospectively record measurement period adjustments made to provisional amounts as if the accounting was completed at the acquisition date. The acquirer should revise comparative information for prior periods presented in the financial statements as needed, including making any change in depreciation, amortization, or other income effects recognized in completing the initial accounting. |
Employee benefit arrangements and income tax
Accounting for share-based payments and income taxes in accordance with separate standards not at fair value might result in different results being recorded as part of acquisition accounting based on underlying differences between US GAAP and IFRS in these areas IFRS vs US GAAP Business combinations
IFRS vs US GAAP Business combinations
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