IFRS 3 Measurement period complete explanations

IFRS 3 Definition: Measurement period – the period after the acquisition date during which the acquirer may adjust the provisional amounts recognized for a business combination, providing the acquirer with a reasonable time to obtain the information necessary to apply the requirements of IFRS 3. The measurement period shall not exceed one year from the acquisition date.

If the initial accounting for a business combination is incomplete (IFRS 3 45) for particular assets, liabilities, NCI or items of consideration and the amounts recognised in the financial statements for the business combination, therefore, have been determined only provisionally, then the acquirer discloses the following information for each material business combination or in aggregate for individually immaterial business combinations that are material collectively in order to meet the objective of IFRS 3 61: IFRS 3 Measurement period

  1. the reasons why the initial accounting for the business combination is incomplete; IFRS 3 Measurement period
  2. the assets, liabilities, equity interests or items of consideration for which the initial accounting is incomplete; and IFRS 3 Measurement period
  3. the nature and amount of any measurement period adjustments recognised during the reporting period in accordance with IFRS 3 49. (IFRS 3 61 – 62, IFRS 3 B67(a))

Insights 2.6.1060.20 Generally, it is expected that the possibility of subsequent adjustments to the acquisition accounting during the measurement period would have been identified in the disclosures in any financial statements of the acquirer issued subsequent to the business combination but before the adjustments are identified.
Accordingly, unless an acquirer has a high level of confidence that it has identified all contingent liabilities assumed, it is advisable for the acquirer to disclose the status of its identification of such liabilities in financial statements that include the measurement period. IFRS 3 Measurement period


Use of provisional amounts at the reporting date

Accounting for a business combination requires substantial effort and resources. The initial accounting often is incoIFRS 3 Measurement periodmplete at the end of the reporting period in which the business combination happens. This is because the acquirer has been unable to obtain all pertinent information necessary to evaluate the conditions that existed as of the acquisition date. As a result, the acquirer may have to record provisional amounts for certain assets or liabilities — for instance, independent valuations for intangible assets may not yet be finalized.

The measurement period is intended to allow an acquirer sufficient time to obtain the information necessary to evaluate the conditions that existed as of the acquisition date. When the acquirer receives the necessary information, adjustments may be necessary either: IFRS 3 Measurement period

  • To revise the amounts recorded for assets and liabilities recognized at the time of the acquisition IFRS 3 Measurement period
  • To recognize new assets and liabilities that would have been recognized at the time of the acquisition if all facts and circumstances had been known at that time. [IFRS 3 45 – 50]
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An acquirer must not record a measurement period adjustment for either of the following:  IFRS 3 Measurement period

  • The correction of an error. An acquirer must account for the correction of an error according to IAS 8 Accounting policies, Changes in accounting estimates and Errors. For example, an acquirer might record the wrong amount in its general ledger for an asset acquired due to a typo. The adjustment made to record the proper amount is accounted for as the correction of an error under IAS 8. IFRS 3 Measurement period
  • Events that happened after the acquisition date. These events must be accounted for in the periods in which they occur following relevant guidance in other IFRSs.

Amounts that may be reported provisionally and then (potentially) revised include (IFRS 3 46):

When provisional amounts are used, the acquirer discloses: IFRS 3 Measurement period

The measurement period and related adjustments

The measurement period ends at the earlier of (IFRS 3 45): IFRS 3 Measurement period

The following diagram illustrates the measurement period definition: IFRS 3 Measurement period

IFRS 3 Measurement period

Measurement period adjustments must be distinguished from normal accounting adjustments that may arise during the measurement period. The former are limited to those that arise from new information obtained about facts and circumstances that existed at the acquisition date.

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Developments after this date may also lead to changes in estimates and give rise to new assets and liabilities. However, these are not measurement period adjustments and are reported as they occur in the normal way. In making this distinction the acquirer should consider:

  • the timing of the receipt of the new information (information received shortly after the acquisition date is more likely to indicate that the facts and circumstances existed on the acquisition date)
  • the reason for the adjustment.

Type of adjustment

IFRS 3 Accounting

Measurement period adjustments

Retrospectively adjust the provisional amounts and/or recognise additional assets and liabilities to reflect new information (IFRS 3 45)

Adjustments are recognised as if the accounting for the business combination had been completed at the acquisition date. Comparative information from prior periods is revised by:

  • increasing or decreasing the amount of goodwill or gain from a bargain purchase. If the adjustment affects more than one asset or liability, the adjustment to goodwill reflects the net effect of those adjustments
  • making any change in depreciation, amortisation or other income effects recognised in the initial accounting for the business combination (IFRS 3 48-49)

Other adjustments within the measurement period

Prospectively adjust the provisional amounts to reflect new facts and circumstances arising after the acquisition date (ie recognise adjustments in earnings in the period the adjustment is made, without adjusting goodwill)

Correcting any error retrospectively in accordance with IAS 8

Adjustments after the measurement period

No adjustment to the accounting for the business combination is allowed except for correction of an error in accordance with IAS 8 (IFRS 3 50)

EXAMPLE – Changes to provisional amounts

On 1 October 20X1, Company Q acquired 100% interest in Company S. When Company Q issued its 31 December 20X1 financial statements, the valuation of an acquired trademark was incomplete. Company Q used CU10 million as the provisional fair value of trademarks and determined a 5-year amortisation life. Company Q appropriately disclosed in its 31 December 20X1 financial statements that the trademark was measured at a provisional amount. On 30 April 20X2, the valuation of the trademark was finalised. The fair value at the acquisition date amounted to CU12 million.

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Adjustments in the 31 December 20X2 financial statements:
Company Q will make retrospective adjustments to the accounting for the business combination in the comparative amounts for 20X1 as follows:

  • the carrying amount of trademarks as of 31 December 20X1 is increased by CU1.9 million, representing the increase in fair value of CU2 million less additional amortisation from the acquisition date to 31 December 20X1 of CU0.1 million (CU 2 million x 3 months/60 months)
  • amortisation expense for 20X1 is increased by CU0.1 million. The amortisation adjustment is intended to reflect that the trademark’s final fair value of CU12 million has been recognised on the acquisition date
  • goodwill is decreased by CU2 million.

The consequences

If the initial accounting for a business combination is not complete at the end of the financial reporting period in which the combination occurs, IFRS 3 45 requires the acquirer to recognise in its financial statements provisional amounts for the items for which the accounting is incomplete.

During the measurement period, the acquirer recognises adjustments to the provisional amounts needed to reflect new information obtained about facts and circumstances that existed as of the acquisition date and, if known, would have affected the measurement of the amounts recognised as of that date. IFRS 3 49 requires the acquirer to recognise such adjustments as if the accounting for the business combination had been completed at the acquisition date. Measurement period adjustments are not included in profit or loss.

Suppose that Boss Inc acquires Acu Co on 30 September 20X7. Boss Inc seeks an independent valuation for an item of property, plant and equipment acquired in the combination, and the valuation was not complete by the time Boss Inc authorised for issue its financial statements for the year ended 31 December 20X7.

In its 20X7 annual financial statements, Boss Inc recognised a provisional fair value for the asset of CU30,000. At the acquisition date, the item of property, plant and equipment had a remaining useful life of five years. Five months after the acquisition date, Boss Inc received the independent valuation, which estimated the asset’s acquisition-date fair value as CU40,000.

In its financial statements for the year ended 31 December 20X8, Boss Inc retrospectively adjusts the 20X7 prior year information as follows:

  1. The carrying amount of property, plant and equipment as of 31 December 20X7 is increased by CU9,500. That adjustment is measured as the faIFRS 3 Measurement periodir value adjustment at the acquisition date of CU10,000 less the additional depreciation that would have been recognised if the asset’s fair value at the acquisition date had been recognised from that date (CU500 for three months’ depreciation).
  2. The carrying amount of goodwill as of 31 December 20X7 is decreased by CU10,000.
  3. Depreciation expense for 20X7 is increased by CU500.

In accordance with IFRS 3 B67 Boss Inc discloses:

  1. in its 20X7 financial statements, that the initial Boss Inc accounting for the business combination has not been completed because the valuation of property, plant and equipment has not yet been received.
  2. in its 20X8 financial statements, the amounts and explanations of the adjustments to the provisional values recognised during the current reporting period. Therefore, Boss Inc discloses that the 20X7 comparative information is adjusted retrospectively to increase the fair value of the item of property, plant and equipment at the acquisition date by CU9,500, offset by a decrease to goodwill of CU10,000 and an increase in depreciation expense of CU500.

 

Measurement period

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2 thoughts on “IFRS 3 Measurement period complete explanations”

  1. what if the accounts of the target company were warranted and the acquirer knew there would be a claim on this insurance contract – however because there was no certainty re timing or amount it could not be accrued as a receivable within the measurement period. Once the measurement period ends then how do you account for the subsequent receipt of insurance proceeds? It seems odd that within 12 months you would clearly reduce goodwill but after 12 months you would potentially credit P&L…despite the fact that this was known within the measurement period.

    Reply
    • This is where judgment steps in. All solutions are possible. It is not forbidden to still reduce goodwill after 12 months or to credit profit or loss. But the context will provide guidance, a company making losses will more likely want to credit profit or loss. And that is where auditors play a certain role (hopefully). But also disclosure covers (should cover) it, explain what and why the reporting entity did what it did. This is also why financial reporting is done by humans and not robots.

      Reply

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