New Accounting for Business Combinations and Non-Controlling Interests

IFRS ADVISORY SERVICES

New Accounting for Business Combinationsand Non-controlling InterestsKPMG LLP

The proposed new accounting standards for business combinations andnon-controlling interests represent significant change from currentCanadian standards. The proposed standards also move Canada muchcloser to the comparable IFRSs.

The Canadian Accounting Standards Board (AcSB) proposes to withdrawCICA Handbook Section 1581, Business Combinations, in 2008 and replaceit with a new standard Section 1582, and replace Section 1600,Consolidated Financial Statements, with new Sections 1602, Non-controllingInterests,1 and 1601, Consolidated Financial Statements. This new businesscombinations standard has been developed in conjunction with newconverged standards issued by the US Financial Accounting StandardsBoard (FASB) as new Statements 141R and 160, and the InternationalAccounting Standards Board (IASB) as revised IFRS 3 and IAS 27.2

Although the proposals have not yet been finalized, if approved, they willsignificantly change the accounting for business combinations and non-controlling interests. Sections 1582 and 1602 will require

• most identifiable net assets, non-controlling interests, and goodwillacquired in a business combination to be recorded at “full fair value”

• non-controlling interests (minority interests) to be reported as acomponent of equity, thus changing the accounting for transactions withnon-controlling interest holders.

Some transactions now accounted for as asset acquisitions will comewithin the scope of business-combination accounting under an expandeddefinition of a business. All other existing aspects of accounting forinvestments in “subsidiaries” and the preparation of consolidated financialstatements in current Canadian GAAP are carried forward unchanged innew Section 1601.

August 2008

1 Exposure Draft—Non-controlling interests, April 2008.2 FASB Statements No. 141 (revised October 2007), Business Combinations, October 2007, and No. 160,

Accounting and Reporting of Noncontrolling Interests in Consolidated Financial Statements, October 2007,are both available at www.fasb.org. In January 2008, the IASB revised IFRS 3, Business Combinations,and revised IAS 27, Consolidated and Separate Financial Statements.

ContentsEffective Date 2Scope 2Fundamental Principles 2The Acquisition Method 3Special Considerations 10Differences in Accounting Standards 13How Can KPMG Help? 15Appendix 1 16

Significant Changes in Accounting for Business Combinations

Appendix 2 18Comparison of New IFRS Standard with Proposed New Canadian Standards

Effective DateThe AcSB decided that Sections 1582, 1601, and 1602 should be mademandatory for fiscal years beginning on or after January 1, 2011, with earlieradoption permitted. The three new sections are to be implementedconcurrently. Non-controlling interests and transactions with non-controllinginterests relating to business combinations completed prior to theimplementation date are presented in accordance with Section 1602, butare not to be remeasured.

The AcSB hopes to issue final standards before the end of 2008.

ScopeSection 1582 applies to all business combinations; Section 1602 applies tothe accounting for non-controlling interests and transactions with non-controlling interest holders in consolidated financial statements.

The new standard defines a business combination as a transaction in whichan entity (the acquirer) obtains control of one or more businesses (theacquiree or acquirees), even if control is not obtained by purchasing equityinterests or net assets, as in the case of control obtained by contract alone.This situation can occur, for example, when certain minority shareholders’rights expire.

The definition of a business will be amended such that Section 1582defines a business as an integrated set of activities and assets that arecapable of being managed to provide a return to investors or economicbenefits to owners, members, or participants. Thus, a set of activities andassets may be considered a business even if it cannot currently accesscustomers or is an “early-stage development stage entity.”

The new standard also applies to combinations among mutual entities3, but,like the replaced standard, it does not apply to formations of joint ventures,combinations among entities under common control, and combinationsbetween not-for-profit organizations or the acquisition of a for-profitbusiness by a not-for-profit organization.

Fundamental PrinciplesSection 1582 is based on the following fundamental principles:

• The acquirer obtains control of the acquiree at the acquisition date and,therefore, becomes responsible and accountable for all of the acquiree’sassets, liabilities, and activities, regardless of the percentage of itsownership in the acquiree.

• The acquirer accounts for the acquisition at the fair value of the acquireeas a whole.

2 New Accounting for Business Combinations and Non-controlling Interests

The expanded definition of abusiness now includes a set of activities and assets that isa development stage entity.

3 A mutual entity is defined as an entity other than an investor-owned entity that provides dividends, lowercosts, or other economic benefits directly and proportionately to its owners, members, or participants.

• The identifiable assets acquired and liabilities assumed in a businesscombination are measured at their fair values on the date control is obtained.

• Any other aspects of the transaction not directly related to acquiring theassets and assuming the liabilities of the acquiree are not accounted foras part of the business combinations; rather, they are accounted for inaccordance with other applicable GAAP.

The Acquisition MethodAll business combinations will be accounted for by applying the acquisitionmethod (previously referred to as the purchase method). Companiesapplying this method will have to identify the acquirer; determine theacquisition date and purchase price; recognize the identifiable assetsacquired and liabilities assumed of the acquiree at their fair values; andrecognize goodwill or, in the case of a bargain purchase, a gain.

Identifying the acquirer

The first step in identifying the acquirer of a voting interest entity is toconsult the current guidance in Subsidiaries, Section 1590. If this sectiondoes not provide a sufficient basis for identifying the acquirer, the indicatorsin Section 1582, which are similar to those contained in Section 1581,should be considered. The acquirer in a business combination in which avariable interest entity is acquired is always the primary beneficiary of thevariable interest entity determined in accordance with AcG-15.

Acquisition date

The acquisition date is the date the acquirer obtains control of the acquiree,the only relevant date for recognition and measurement. This date is usedto measure the fair value of not only the consideration paid but also theassets acquired and liabilities assumed. When the acquirer issues equityinstruments as full or partial payment for the acquiree, the fair value of theacquirer’s equity instruments will be measured at the acquisition date. Thisapproach differs from the current standard where equity instruments aremeasured at fair value on the date the terms of the business combinationare agreed and announced.

Purchase price

The acquirer must determine the acquisition-date fair value of theconsideration paid for its interest in the acquiree. The consideration paid caninclude cash and other assets, equity interests, and contingentconsideration, all measured at fair value at the acquisition date.

In a change from today’s accounting requirements, contingent considerationis measured at fair value at the acquisition date and included whendetermining the fair value of the consideration paid. The contingent

August 2008 3

In the new standards, the onlyrelevant date for measurement,including the measurement ofconsideration paid, is theacquisition date.

consideration is classified as equity or a liability in accordance with currentGAAP. If the contingent consideration is classified as a liability, it will beremeasured to fair value until resolution and subsequent changes in the fairvalue will be recognized in earnings. Contingent consideration that is equity-classified is not subsequently remeasured. This provision contrasts with thecurrent accounting requirements, under which contingent consideration isgenerally not recognized until the contingency is resolved and theconsideration is paid or payable.

Acquisition costs

Acquisition costs associated with a business combination, such as legalcosts, are not part of the consideration exchanged for the businessacquired. Acquisition costs are therefore excluded from the acquisitionaccounting. Instead, they are accounted for under other GAAP, meaning thecosts (e.g., due diligence costs) are expensed as incurred, unless theyqualify to be treated as debt issue costs, or as a cost of issuing equitysecurities.

Recognizing and measuring assets, liabilities, and non-controlling

interests

Under the acquisition method, the acquirer recognizes most identifiableassets acquired and liabilities assumed of the acquiree at their full fair valueon the acquisition date. Section 1582 provides the following exceptionsfrom fair-value measurement (the section in which the relevant guidance isfound is indicated after each item):

• future income taxes and future income tax liabilities (Section 3465)

• employee future benefits (Section 3461)

• leases (Section 3065)

• assets held for sale (Section 3475)

• intangible assets that do not meet the criteria for separate recognition(Section 1582)

• indemnification assets

• reacquired rights

• share-based payment awards.

All other elements, including contingent liabilities that meet the recognitionthreshold, are measured at full fair value whether the acquirer acquires100% or a lesser amount (i.e., a partial acquisition). The acquiree will havethe option of accounting for non-controlling interest at full fair value, or atthe non-controlling interest’s proportionate interest in the fair value of theacquiree’s net assets.


In the new standards, thedirect costs of a businesscombination are expensed asincurred.

The requirements for fair-value measurement and the changes inrecognition principles will change accounting practices for acquiredcontingencies, restructuring costs, long-lived assets, share-based paymentawards, indemnification assets, and tax benefits.

• Contingencies – The acquirer recognizes, separately from goodwill, theacquisition-date fair value of assets and liabilities arising from contractualcontingencies that were acquired or assumed as part of the businesscombination. The acquirer therefore recognizes, as of the acquisition date,an asset or a liability for a contractual contingency acquired in a businesscombination if it meets the definition of an asset or a liability in FinancialStatement Concepts, Section 1000, even if that contingency does notmeet the recognition criteria in Contingencies, Section 3290.

At this time, it is unclear what accounting treatment the AcSB will requirefor non-contractual contingencies, such as litigation. The AcSB may takethe same approach that the FASB took in revised FAS 141 and requiresuch non-contractual contingencies to be recognized only if it is morelikely than not (i.e., greater than 50% likely) that a liability exists at theacquisition date. Under FAS 141R, after initial recognition, contingenciesthat are recognized as liabilities at the acquisition date would besubsequently measured at the greater of the acquisition-date fair value orthe amount in accordance with HB 3290. Under the FASB’s approach,non-contractual contingencies that do not qualify for recognition at theacquisition date would be accounted for in accordance with Section 3290.All other contingencies are accounted for in accordance with therespective GAAP for that contingency. For example, a contingency that isa financial instrument is accounted for in accordance with applicablefinancial instrument guidance.

Alternatively, the AcSB may require the accounting treatment for non-contractual contingencies that the IASB approved in the revised IFRS 3(2008). Under this approach, all contingencies, including non-contractualcontingencies, would be recognized on the acquisition date andmeasured at fair value. Under this approach, all contingencies would bemeasured in subsequent periods at the greater of their then currentamount in accordance with HB 3290, and the amount recognizedoriginally on the acquisition date, less amortization if applicable, withgains and losses recognized in profit or loss until settlement.

August 2008 5

In the new standards, assetsor liabilities arising fromcontractual contingencies arerecognized and measured atfair value on the date ofacquisition.

• Restructuring costs—Section 1582 nullifies EIC 114 and requires costsassociated with restructuring or exit activities that do not meet therecognition criteria in EIC 134 or EIC 135 as of the acquisition date in theacquiree to be subsequently recognized as post-combination costs whenthose criteria are met.4 Therefore, if the costs are not liabilities of theacquired business on the acquisition date, costs expected to be incurredto terminate or restructure certain activities are expensed in the periodthe criteria under EIC 134 or EIC 135 are met.

• Long-lived assets—Long-lived assets that meet the criteria forrecognition, apart from goodwill, are recognized at fair value. Section1582 will indicate that fair value should reflect the market participants’perspective rather than the acquirer’s specific planned use or non-use ofthe asset. All other guidance on measuring fair value in existing 1581 willlikely not be carried forward into 1582. Statement 1582 refers to theguidance in Section 3475 that assets meeting the held-for-sale criteria asof the acquisition date are measured at fair value less costs to sell.5

• Leases—In accordance with Leases, Section 3065, a lease of theacquiree (regardless of whether the acquiree is the lessee or lessor)retains the lease classification determined by the acquiree at the leaseinception, unless the provisions of a lease are modified as a result of thebusiness combination in a way that would require the acquirer to considerthe revised agreement a new lease agreement in accordance withSection 3065. Consistent with the current requirement of Section 1581,the fair value of the net assets acquired would include recognition ofassets and liabilities in respect of existing favourable and unfavourablelease terms.

Consistent with existing standards, certain accounting elections, such ashedges, will need to be redesignated, and financial assets and liabilitiesdesignated as held-for-trading. Contractual arrangements will also need tobe re-evaluated to determine whether they contain a lease or embeddedderivatives that require separation.

• Share-based payment awards—As is currently required, share-basedpayment awards are segregated into acquisition consideration and post-combination compensation based on the proportion of the requisiteservice period (including service required post-combination) that iscomplete as of the acquisition date. However, unlike current practice, theportion of the share-based payment that is part of the acquisitionconsideration is a temporary difference between the tax basis and thereported amount, and a deferred tax asset is therefore recognized as partof the acquisition accounting.


Under the new standards, fairvalue for long-lived assetsreflects the marketparticipants' perspective ratherthan the acquirer's specificplanned use or non-use of theasset.

In many cases, restructuringcosts will be expensed aspost-acquisition costs.

4 EIC 134, Accounting for Severance and Termination Benefits, March 2003; EIC 135, Accounting for Costs Associated withExit and Disposal Activities (Including Costs Incurred in a Restructuring); EIC 114, Liability Recognition for Costs Incurred inPurchase Business Combinations.

5 Section 3475, Disposal of Long-Lived Assets and Discontinued Operations.

• Indemnification assets—If an acquirer receives an indemnity for theoutcome of an uncertainty in connection with a business combination(e.g., for tax uncertainties), the acquirer will recognize an indemnificationasset amount equal to the recognized amount for the related contingency.However, consideration will need to be given to whether any valuationallowance against the indemnification asset is required due touncertainties associated with collectibility.

• Tax benefits—The acquirer’s unrecognized tax benefits (e.g., tax loss carry-forwards) that are recognizable as a result of the acquisition are notincluded in the acquisition accounting as is currently required. Instead, theamounts are recognized as a tax benefit in consolidated income.Adjustments for recognized tax benefits related to the acquiree (e.g., inresponse to an effectively settled tax uncertainty) that are recognizedsubsequent to the acquisition date will generally be recognized inconsolidated income, not as an adjustment to the acquisition accounting asis currently required. Section 3465 will be amended to reflect this change.

Partial acquisitions

A company that obtains control, but acquires less than 100% of anacquiree, records 100% of the fair value at the acquisition date of theacquiree’s assets, liabilities, and non-controlling interests, excluding theexceptions to fair-value measurement previously described. Under currentrequirements, an acquiring company that obtains less than 100% of anacquiree adjusts the assets and liabilities only for its proportionateownership interest, and recognizes only its portion of the goodwill of theacquiree. Non-controlling interests are currently recorded at the acquiree’sbook value. Under Section 1582, the acquirer has the option to record ornot record the goodwill attributable to the non-controlling interest.

Goodwill

Goodwill is recognized as the excess of the acquisition-date fair value of thepurchase price over the recognized amounts of assets, liabilities, and non-controlling interests. If an acquirer obtains less than 100% of the acquireeat the acquisition date, goodwill is allocated to the controlling interest, andmay be allocated to the non-controlling interests. The amount of goodwillallocated to the controlling interest is the difference between the fair valueof the controlling interest and the controlling interest’s share in the fairvalue of the identifiable net assets acquired. If the acquirer elects, anyremaining goodwill may be allocated to the non-controlling interests. Thissituation is illustrated in the boxed example on the following page.

August 2008 7

In the new standards, theacquirer's unrecognized taxbenefits that are recognizableas a result of the acquisitionare recognized as a reductionof income tax expense.


Example: Allocating Goodwill to Controlling and Non-controlling Interests

Assume Company A acquires 80% of Company B’s outstanding common stock for $160 million incash. The non-controlling interests remain publicly traded and have a fair value of $35 million (i.e., the$160 million paid for the 80% interest includes a control premium). As of the acquisition date, thebook value and fair value of the separately recognizable and identifiable net assets acquired are $100 million and $150 million, respectively.

Under three options—the current purchase method, the new acquisition method, and the optionalmethod under which the non-controlling interests’ share of goodwill is not recorded—the amountsallocated to identifiable net assets, goodwill, non-controlling interests, and controlling interest inCompany B are:

Millions

Purchase Acquisition OptionalMethod Method Method

Identifiable net assets $140a $150b $150b

Goodwill $ 40c $ 45d $ 40c

Non-controlling interests $ 20e $ 35f $ 30g

Controlling interest $160 $160 $160

a Book value of identifiable net assets plus Company A’s share of the difference between fair valueand book value of identifiable net assets ($100 + (($150 – $100) � 80%))

b Fair value of identifiable net assets

c Purchase price paid by Company A less Company A’s share of fair value of identifiable net assets($160 – ($150 � 80%))

d Consideration paid by Company A plus fair value of non-controlling interests less fair value ofidentifiable net assets [($160 + $35) – $150)]. Goodwill includes only the control premium paid bythe acquirer in respect of its 80% interest, and such control premium is not taken intoconsideration in determining the fair value of the non-controlling interests.

e Non-controlling interests’ share of the book value of identifiable net assets ($100 � 20%)

f Fair value of non-controlling interests

g Non-controlling interest in fair value of identifiable assets ($150 � 20%)

Goodwill is allocated to controlling and non-controlling interests as follows:

Fair value of Company A’s 80% interest $160

Less: fair value of Company A’s share of

identifiable net assets ($150 � 80%) (120)

Company A’s share of goodwill $40

Total goodwill $45d

Company A’s share of goodwill 40

Non-controlling interests’ share of goodwill $ 5

Bargain purchase

In a “bargain purchase,” the fair value of the recognized identifiable netassets acquired exceeds the fair value of the acquirer’s interest in theacquiree plus the recognized amount of any non-controlling interests in theacquiree. In such cases, the acquirer should re-evaluate the measurementsof the recognized assets and liabilities at the acquisition date. If noadjustments are necessary, or if an excess remains after the adjustments,the acquirer should recognize the excess as a gain at the acquisition date.Under current accounting for “negative” goodwill, the reported amounts ofspecified identifiable long-lived assets are reduced to zero before anyremaining amount is recognized as an extraordinary gain.

Measurement period

Section 1582 defines the measurement period as the period after theacquisition date during which the acquirer may make adjustments to the“provisional” amounts recognized at the acquisition date. As is the caseunder Section 1581, the measurement period ends as soon as the acquirerreceives the necessary information about facts and circumstances thatexisted at the acquisition date, or concludes that the information cannot beobtained. Consistent with Section 1581, the measurement period may notexceed one year from the acquisition date. However, unlike today’saccounting requirements, any adjustments to the provisional amountsduring the measurement period are reflected by retrospectively adjustingthe provisional amounts and recasting the prior-period information.

Section 1582 also requires that changes in acquired tax benefits (e.g., byeliminating a valuation allowance) and in acquired tax uncertainties duringthe measurement period, resulting from new information about facts andcircumstances that existed as of the acquisition date, are to be applied firstto reduce goodwill and then to reduce income tax expense. All otheradjustments are made as a direct adjustment to income tax expense ratherthan an adjustment of goodwill.

August 2008 9

Negative goodwill arising in abargain purchase is recognizedin profit or loss.

Special Considerations

Non-controlling interests

Section 1602 specifies that non-controlling interests are to be treated as aseparate component of equity, not as a liability or other item outside equity.Because non-controlling interests are treated as an element of equity,increases and decreases in the parent’s ownership interest that leave controlintact are accounted for as capital transactions (i.e., as increases ordecreases in ownership), rather than as step acquisitions or dilution gains orlosses. The carrying amount of the non-controlling interests is adjusted toreflect the change in ownership interests, and any difference between theamount by which the non-controlling interests are adjusted and the fairvalue of the consideration paid or received is recognized directly in equityattributable to the controlling interest (i.e., increase or reduction incontributed surplus or retained earnings—in accordance with Section3251, Equity).

Step acquisitions

Under current requirements for step acquisitions, each investment tranche isreflected in the financial statements at its basis, either through theapplication of the equity method or in consolidation once control is obtained.Under Section 1582, when a business combination is achieved in stages, theacquirer’s interest in the acquiree includes the acquisition-date fair value ofthe equity interest the acquirer held in the acquiree before the businesscombination. Therefore, the carrying amounts of the previously acquiredtranches are adjusted to fair value as of the date control was obtained (theacquisition date), and the acquirer recognizes the differences as a gain orloss in income at the acquisition date. Amounts the acquirer previouslyrecognized in accumulated other comprehensive income (e.g., cumulativetranslation adjustments recognized during the period the equity method wasused to account for the investment tranches) would be included in the gainor loss recognized in income at the date control is obtained.

Loss of control

Section 1602 requires that a transaction that ends control is also aremeasurement event. Therefore, a retained interest after a sale of intereststhat ends control would be remeasured to fair value. The gain or lossrecognized in income includes the realized gain or loss related to the portionof the ownership interest sold (including all amounts recognized in othercomprehensive income in relation to that subsidiary), and the gain or loss onthe remeasurement to fair value of any interest retained.

The following examples illustrate the accounting for transactions with non-controlling interests: the first with control retained, and the second with lossof control.


The new standards requirenon-controlling interest to bepresented as a separatecomponent of shareholders'equity.

Example: Control retained Assume that Company A on January 1, 20X8, acquires 60% of Company B’s common stock for $700 million, which is the fair value of a 60% interest in Company B. The fair value of the non-controlling interests is $400 million. After the acquisition, the consolidated financial statements wouldreport the following amounts related to Company B:

Millions

Net assets (including goodwill) $1,100

Non-controlling interests $ 400

Controlling interest $ 700

Total equity (excluding contributed surplus) $1,100

Company B’s net income and comprehensive income for 20X8 are zero. On January 1, 20X9, CompanyA acquires an additional 20% of Company B’s common stock for $250 million. Since Company A hadcontrol both before and after the transaction, it is treated as a capital transaction. Non-controllinginterests are reduced by the carrying amount of the proportionate interest relinquished ($400 million �20% / 40%). The difference between the carrying amount of non-controlling interests acquired ($200 million) and the amount paid ($250 million) is reported as an adjustment to additional paid-incapital. After the transaction, the consolidated financial statements would report the following amountsrelated to Company B:

Millions





Company B’s net income and comprehensive income for 20X9 again are zero. On January 1, 20Y0,Company A sells 10% of Company B’s common stock for $100 million. Since Company A retainscontrol of Company B after the transaction, the sale is recorded as a capital transaction. Non-controlling interests are increased by the carrying amount of the interest sold by Company A ($900million � 10% / 80%). The difference between the increase to non-controlling interests ($113 million)and the selling price is reported as an adjustment to additional paid-in capital. After the transaction, theconsolidated financial statements would report the following amounts related to Company B:

Millions





August 2008 11

Example: Loss of control

Company B’s net income and comprehensive income for 20Y0 again are zero. On January 1,20Y1, Company A sells 30% of Company B’s common stock for $400 million. The fair value ofthe 40% retained interest in Company B is determined to be $525 million. Company A wouldrecognize a gain on the date of the sale, computed as follows:

Millions

Sales proceeds on 30% sold interest $ 400

Fair value of 40% retained interest $ 525

Carrying amount of non-controlling interest $ 313

$1,238

Less: carrying amount of Company B's ($1,100)net assets

Gain recognized on January 1, 20Y1 $138

Series of transactions

Section 1602 contains guidance designed to prevent manipulation ofincome through a series of planned transactions designed to takeadvantage of the fact that obtaining or surrendering control over an investeeis a remeasurement event through income. The section identifies thefollowing four conditions, one or more of which may indicate that multiplearrangements should be accounted for as a single transaction:

• The arrangements are entered into at the same time or are entered intoin contemplation of one another.

• They form a single transaction designed to achieve an overall commercialeffect.

• The occurrence of one arrangement depends on the occurrence of atleast one other arrangement.

• One arrangement considered on its own is not economically justified, butthe arrangements are economically justified when considered together.

Allocation of income and other comprehensive income

Under Section 1602, non-controlling interest in income is not deducted inarriving at consolidated net income or other comprehensive income.Rather, net income and each component of other comprehensive incomeare allocated to the controlling and non-controlling interests based onrelative ownership interests, unless a contractual arrangement between thecontrolling and non-controlling interests requires a different attribution.Losses applicable to the non-controlling interests are attributed and


recorded as adjustments to the non-controlling interests—even if the losseswould cause non-controlling interests to be negative—whether or not thenon-controlling interests have an obligation to fund those losses.

Presentation and disclosure

The new requirements for non-controlling interests, results of operations,and comprehensive income of subsidiaries change not only thepresentation of operating results but also earnings per share and equity.Section 1602 requires net income and comprehensive income to bedisplayed for both the controlling and the non-controlling interests.

Additional required disclosures and reconciliations include a separateschedule that shows the effects of any transactions with the non-controllinginterests on the equity attributable to the controlling interest.

Differences in Accounting Standards

Differences from existing Canadian GAAP requirements

The new Canadian standards for business combinations and non-controllinginterests differ in some significant ways from existing Canadian GAAP.Appendix 1 provides a comparison of the new requirements and theexisting standards, and summarizes the significant changes.

New US GAAP differences that will arise

The existing Canadian business combinations accounting standard isaligned with Statement 141. However, certain US GAAP differences willarise when the new Canadian business combinations standard is effective.These differences arise because, in certain areas, the new Canadianstandard was aligned with the equivalent IFRS standard, given Canada’splanned adoption of IFRS in 2011.

The principal difference relates to the measurement of non-controllinginterest. Under the proposed Canadian standard, the acquirer can elect tomeasure non-controlling interest at the acquisition-date fair value, or itsproportionate interest in the fair value of the identifiable assets andliabilities of the acquiree at the acquisition date. However, under the newUS standard, the acquirer is required to measure non-controlling interest atthe acquisition-date fair value.

In addition, differences may arise due to differences in the effective dates ofthe new Canadian and US standards. Section 1582 is expected to beeffective for business combinations entered into on or after January 1, 2011.

August 2008 13

Certain new requirementschange not only thepresentation of operatingresults but also earnings pershare and equity.

Section 1602 is expected to be effective for fiscal periods beginning on orafter January 1, 2011. Both standards, which are expected to be finalizedbefore the end of 2008, will permit early adoption, so as to permit theentity to largely eliminate differences between Canadian GAAP and/or USGAAP and/or IFRS. However, the comparable US Statements are effectivefor periods beginning on or after December 15, 2008, and earlier adoption isprohibited. Statement 141R will be applied to business combinationsoccurring after the effective date. Statement 160 will be appliedprospectively to all non-controlling interests, including any that arose beforethe effective date.

Differences from IFRS and their impact on Canadian companies

The new Canadian standards for business combinations and non-controllinginterests have been developed in conjunction with the new convergedstandards issued by the International Accounting Standards Board (IASB) asa revised IFRS 3, Business Combinations, and amended IAS 27,Consolidated and Separate Financial Statements. The IASB’s revisedstandards are effective for fiscal years beginning on or after July 1, 2009.

The new Canadian and IFRS standards are, however, not identical, and IFRSdifferences will remain. Appendix 2 compares the new IFRS and Canadianstandards, highlighting the differences that will remain until Canadian publiclyaccountable companies fully adopt IFRS in 2011.

In considering how these remaining IFRS differences will affect Canadiancompanies’ adoption of IFRS, companies should be aware that IFRS 1, First-time Adoption of IFRS, provides certain elective exemptions from theretroactive application of IFRS, when it is adopted as a financial reportingframework for the first time. IFRS 1 also contains certain electiveexceptions for business combinations that occurred prior to the entity’sIFRS transition date. All business combinations that occur after thetransition date (January 1, 2010, for most Canadian publicly accountableentities) must be accounted for in accordance with revised IFRS 3.

The descriptive and summary statements in this publication are not intended to

be a substitute for the text of CICA Section 1582 and Section 1602, or for the text

of any other potential or cited requirements. Reporting entities complying with

applicable requirements or complying with SEC filing requirements should consult

the texts of the requirements, the particular circumstances to which the

requirements are to be applied, and their accounting and legal advisers.


Consider IFRS 1, First-timeAdoption of IFRS, whenconsidering how the remainingIFRS differences will affectCanadian companies.

How Can KPMG Help?

KPMG has helped many organizations to assess the impact andimplementation of new accounting standards, as well as the adoption ofIFRS. We have developed tools to be used for a quick assessment of thepotential impact of the new accounting standards. We can help you tointerpret these new standards, and we can conduct technical accountingtraining for your organization.

For broader IFRS conversion projects, KPMG has an established conversionmethodology that incorporates the different disciplines critical to asuccessful implementation. Our IFRS conversion services teams aremultidisciplinary teams of professionals knowledgeable in IFRS andCanadian GAAP, and skilled in financial reporting processes and financialintegration. Our teams are supported by internationally trained professionalswith global experience in both converting to IFRS and applying IFRS.

To learn more about our IFRS resources and our conversion services,

visit www.kpmg.ca/ifrs.

August 2008 15


Appendix 1Significant Changes in Accounting for Business Combinations

Topic Existing Standards

CICA 1581 and 1600

Proposed New Standards

CICA 1582 and 1602

Definition of a

business

A business is defined as a self-sustainingintegrated set of activities and assetsconducted and managed for the purpose ofproviding a return to investors.

For a transferred set of activities and assetsto be a business, it must contain all of theinputs and processes necessary for it tocontinue to conduct normal operations afterthe transferred set is separated from thetransferor, which includes the ability tosustain a revenue stream by providing itsoutputs to customers.

The definition of a business is expanded such thatthe integrated set of activities only must becapable of being conducted and managed toprovide a return or lower costs. As aconsequence, a business or group of assets nolonger must be self-sustaining to be a businessand the previous presumption that an early-stagedevelopment stage entity is not a business hasbeen removed.

Measuring equity

instruments issued

Equity instruments issued by the acquirer asconsideration are measured at fair value a fewdays before and after the measurement date(i.e., date when the terms and conditionshave been agreed and the acquisitionannounced).

Equity instruments issued by the acquirer asconsideration are measured at fair value on theacquisition date.

Acquisition-related

costs

The purchase price includes direct costs of a business combination.

Direct costs of a business combination are notpart of the acquisition accounting. Instead, suchcosts are accounted for under other GAAP andwill be expensed, unless they constitute the costsassociated with issuing debt or equity securities.

Contingent

consideration

Contingent consideration based on earnings is generally recognized as an adjustment to the purchase price when the contingencyis resolved and consideration is issued orissuable. Contingent consideration based onthe acquirer’s security price is recognized asan adjustment to paid-in capital when thecontingency is resolved and the considerationis issued or issuable.

Contingent consideration is recognized andmeasured at fair value on the date of acquisition.Subsequent changes in fair value of liability-classified contingent consideration are recognizedin earnings and not as an adjustment to thepurchase price. Equity-classified contingentconsideration is not remeasured after theacquisition date.

Recognizing and

measuring assets

acquired, liabilities

assumed, and

non-controlling

interests

The assets acquired and liabilities assumedare adjusted only for the acquirer’s share ofthe fair value. Non-controlling interests andtheir share of the acquiree’s assets andliabilities are measured based on the carryingamount of the recognized assets and liabilitiesin the acquiree’s financial statements.

Whether the acquirer acquires all or a partialinterest in the acquiree, the full fair value of theassets acquired and liabilities assumed isrecognized. The carrying amount of previouslyacquired tranches is adjusted to fair value at thedate when control is obtained, and the acquirerrecognizes the differences as a gain or loss inincome at the acquisition date. Non-controllinginterest is recorded at either fair value or the non-controlling interest in the fair value of theacquiree’s net assets.

August 2008 17

Topic Existing Standards

CICA 1581 and 1600

Proposed New Standards

CICA 1582 and 1602

Contingencies If the fair value of a contingent liability is notreadily determinable at the acquisition date, a contingent liability is recognized at the date of acquisition only if it is probable andreasonably estimable. It is measured at thebest estimate of the settlement amount rather than its fair value.

A liability is recognized at fair value on the date ofacquisition for contractual contingencies. At thistime, the AcSB has not indicated whether it willrequire that a liability be recognized at fair value on the acquisition date for non-contractualcontingencies if it is more likely than not that theliability exists. The AcSB may require the IFRStreatment under which all contingencies, includingnon-contractual contingencies, are to be recognized at fair value on the date of acquisition.

Restructuring costs Restructuring costs for plans to beimplemented subsequent to the acquisitionare recognized as a liability in purchaseaccounting, if criteria established in EIC-114 are met within a short period of time after the acquisition date.

Restructuring costs are not recognized as a liabilityin acquisition accounting unless the criteria in EIC134 or EIC 135 are met in the acquiree at theacquisition date.

Tax benefits The acquirer’s unrecognized tax benefits thatare recognizable as a result of an acquisitionare in purchase accounting at the acquisitiondate. A post-acquisition recognition of theacquiree’s tax benefits is generally anadjustment to the purchase accounting.

The acquirer’s unrecognized tax benefits that arerecognizable as a result of an acquisition arerecognized as a reduction of income tax expense.Unrecognized tax benefits related to the acquireethat are recognized subsequent to the acquisitiondate are generally recognized in income rather thanas an adjustment to the acquisition accounting.

Increases in

ownership interest

Each investment tranche is reflected in thefinancial statements with a separate purchaseadjustment and goodwill amount related to each tranche.

Increases in the parent’s share of ownership aftercontrol is obtained are accounted for as a capitaltransaction.

Decreases in

ownership interest

Decreases in ownership interest result in adilution gain or loss.

Decreases in the parent’s share of ownership while retaining control are accounted for as capital transactions. A transaction that results inthe loss of control produces a gain or loss thatcomprises a realized portion related to the portionsold and an unrealized portion on any retained non-controlling investment that is remeasured to fair value.

Non-controlling

interest

Non-controlling interest is presented outsideconsolidated shareholders’ equity. The non-controlling interest in the net income of asubsidiary is shown as a deduction to arrive at consolidated net income.

Non-controlling interest is presented inconsolidated shareholder’s equity. Consolidated net income and other comprehensive income areshown “gross” and then are allocatedproportionately between the controlling and non-controlling interests.


Issue IFRS 3 (2008) and IAS 27 (2008) CICA 1582 and 1602

Scope Transactions among entities under commoncontrol are outside the scope of IFRS 3 (2007).IFRS currently provides very limited guidanceon the accounting for such common-controltransactions.

Like IFRSs, transactions among entities undercommon control are outside the scope of CICASection 1582. Such transactions are governed byCICA Section 3840, Related Party Transactions.

Identifying the

acquirer—definition

of control

Control is used with the same meaning as IAS 27 (2007), i.e., the power to govern thefinancial and operating policies of an entity.

IFRSs do not include the concept of variableinterest entities.

Control carries the same meaning, as defined in CICA Section 1590, Subsidiaries— “thecontinuing power to determine its strategic,operating, investing, and financing policies without the co-operation of others.”

Control carries the meaning of “primarybeneficiary” for variable interest entities.

Measurement

principle—definition

of fair value

Fair value is the amount for which an assetcould be exchanged, or a liability settled,between knowledgeable, willing parties in an arm’s-length transaction.

Fair value is currently defined in 1582 as “theamount of the consideration that would be agreedupon in an arm's-length transaction betweenknowledgeable, willing parties who are under no compulsion to act”. However, the AcSB mayharmonize this definition with the FASB and IASBdefinition under a new Fair Value Measurementstandard.

Contingent liabilities

(assets and

liabilities subject to

contingencies)

Contingent liabilities are recognized on theacquisition date and measured at fair value if they relate to a present obligation of theacquiree that arises from past transactions and fair value can be measured reliably, i.e., a contingency is recognized even if it is not probable.

Like IFRSs, all contractual contingencies arerecognized on the acquisition date at fair value.Such contractual contingencies are recognized ifthey meet the definition of an asset or liabilityunder CICA Standard 1000, Financial StatementConcepts, even if they do not meet the definitionunder CICA Standard 3290, Contingencies.

At this time, it is unclear whether the accountingtreatment the AcSB will require for non-contractualcontingencies will be consistent with IFRS 3 orwhether it will adopt the approach taken by theFASB in its revised business combinationsstandard. Under the FASB’s approach, only non-contractual contingencies that are more likelythan not to exist at the acquisition date would be recognized.

Appendix 2Comparison of New IFRS Standard with Proposed New Canadian Standards

August 2008 19

Issue IFRS 3 (2008) and IAS 27 (2008) CICA 1582 and 1602

Remeasurement

of retained

non-controlling

equity investment

on a loss of control

or significant

influence

When control, significant influence, or jointcontrol is lost, a gain or loss is recognized in the profit or loss comprising both:

• a realized gain or loss on the disposedinterest, and

• an unrealized gain or loss fromremeasurement to fair value of any retainednon-controlling equity investment in theformer subsidiary, equity methodinvestment, or joint venture.

Like IFRSs, when control is lost, a gain or loss isrecognized in the profit or loss comprising both:

• a realized gain or loss on the disposed interest,and

• an unrealized gain or loss from remeasurementto fair value of any retained non-controllingequity investment in the former subsidiary.

Unlike IFRSs, the loss of significant influence is not an event resulting in remeasurement.

Other recognition

and measurement

exceptions

referenced to

existing IFRSs

and US GAAP

The following items are recognized andmeasured in accordance with other relevantIFRSs:

• deferred income taxes

• employee benefit arrangements

• share-based payment awards and related tax impact

• acquisition-related costs

• classification of contingent consideration as a liability and equity.

Like IFRSs, the following items are recognized andmeasured in accordance with other relevant IFRSs:

• future income taxes

• employee future benefits

• stock-based compensation and other stock-based payments

• acquisition-related costs

• classification of contingent consideration as a liability and equity.

However, those requirements differ in certainrespects from IFRSs.

Effective date and

transition

IFRS 3 (2008) is effective for annual periodsbeginning on or after July 1, 2009, but earlyadoption is permitted. If an entity adopts thestandard early, then it must also apply theamendments to IAS 27 and disclose that fact.Early adoption is prohibited prior to annualperiods on or after June 30, 2007.

IFRS 3 (2008) requires prospective application.

The amendments to IAS 27 (2008) areeffective July 1, 2009, but early adoption is permitted. The amendments applyretrospectively, except in specific limitedcircumstances.

IFRS 3 (2008) provides no special transitionalrules for business combinations betweenmutual entities or by contract alone, but states that these must be accounted forprospectively.

The proposals indicate that CICA 1582 would bemandatory for fiscal years beginning on or afterJanuary 1, 2011, with earlier adoption permitted. If an entity early adopts the standard, then it mustalso apply the amendments to HB 1602 anddisclose that fact. The AcSB expects to issue a final pronouncement before the end of 2008.

Like IFRSs, CICA 1582 requires prospectiveadoption.

CICA 1602 will have the same transition provisionsas IAS 27R, but a later effective date (January 1,2011).

Like IFRSs, CICA 1582 provides no specialtransitional rules for combinations between mutual entities.

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Documents

New Accounting for Business Combinations and Non-Controlling Interests