US GAAP vs. IFRS - AU Purepure.au.dk/portal/files/10661/Bachelor_thesis.pdf · US GAAP vs. IFRS With Emphasis on ... 4.3 Comparison ... Minnesota Beat Sugar Cooperation buying a part

Ha. Almen Class U04HA 6’Th Semester Bachelor thesis Department of Business Studies Writer: Morten Aalbæk Andreasen Instructor: Sudarshan Kumar Pillalamarri

US GAAP vs. IFRS

With Emphasis on Goodwill

Aarhus School of Business, Aarhus Universitet 2010

Bachelor thesis Ha. Almen, Class U04HA Aarhus School of Business, Aarhus Universitet Morten Aalbæk Andreasen

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Table of contents

1. Problem statement ..................................................................................................... 3 2. Main differences between US GAAP and IFRS....................................................... 4

2.1 Basics about US GAAP............................................................................................................4 2.2 Basics about IFRS ....................................................................................................................5 2.3 Differences ................................................................................................................................6 2.4 Harmonisation........................................................................................................................10

3. Historical Examination of Goodwill ....................................................................... 11 3.1 Goodwill under the US GAAP ..............................................................................................11

3.1.1 Valuation........................................................................................................................... 11 3.1.2 Impairment ........................................................................................................................ 12

3.2 Goodwill under IFRS.............................................................................................................14 3.2.1 Valuation........................................................................................................................... 15 3.2.2 Amortisation and impairment ........................................................................................... 16

3.3 Comparison.............................................................................................................................17 3.4 Criticism of the Standards ....................................................................................................19

3.4.1 Criticism of FAS 141 ........................................................................................................ 20 3.4.2 Criticism of IAS 22 ........................................................................................................... 21

4. Current Treatment of Goodwill............................................................................... 23 4.1 Goodwill under US GAAP ....................................................................................................23

4.1.1 Valuation........................................................................................................................... 23 4.1.2 Impairment ........................................................................................................................ 24

4.2 Goodwill under IFRS.............................................................................................................24 4.2.1 Valuation........................................................................................................................... 25 4.2.2 Impairment ........................................................................................................................ 27

4.3 Comparison.............................................................................................................................28 4.3.1 US GAAP Development ................................................................................................... 29 4.3.2 IFRS Development............................................................................................................ 30 4.3.3 Impairment Differences .................................................................................................... 31 4.3.4 Other Differences.............................................................................................................. 32

4.4 Was the criticism heard?.......................................................................................................32 4.4.1 US GAAP.......................................................................................................................... 33 4.4.2 IFRS .................................................................................................................................. 34

5. European Sale.......................................................................................................... 35 5.1 Company Descriptions...........................................................................................................35 5.2 Sale under US GAAP.............................................................................................................35

6. American Sale ......................................................................................................... 37 6.1 Company Descriptions...........................................................................................................37 6.2 The Sale under IFRS..............................................................................................................38

7. Conclusion............................................................................................................... 40 8. Abstract.................................................................................................................... 42 9. Sources .................................................................................................................... 44


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1. Problem statement This assignment will be dealing with differences between the International Financial Reporting

Standards (IFRS) and the United States General Accepted Accounting Principles ( US GAAP) with

emphasis on goodwill, historically as well as current rules. First of all, there will be a comparison of

the IFRS and the US GAAP, including looking into the main differences and what is done to har-

monise the two standards.

The historical perspective will first of all be describing if goodwill has changed over the last 10

years for both IFRS and the US GAAP, and if, then how. Including how goodwill should be valu-

ated in a business combination and how it is treated subsequent to the combination.

Besides this, there will be looked into how two real world sales, from respectively the United States

and from Europe, was valuated and how goodwill occurred from thus, where the differences are

and, if possible, what the acquisition price and goodwill should have been if they were using each

other standards, respectively US GAAP and IFRS, instead of their own. This should help to under-

stand whether or not the respectively standards gives accurate pictures, according to the other stan-

dard, and they have developed.

The companies used as basis are 4 different sugar companies. Two from the United States; Southern

Minnesota Beat Sugar Cooperation buying a part of Imperial Sugar and two European; German

Nordzucker buying a part of Danish Danisco. For both sales it is the case that it is only a part of the

other company that have been purchased, which is why these two sales should be good to compare,

and to be used as basis for the comparison of differences between the US GAAP and the IFRS and

what influences this could have concerning the annual report showing a true and fair view.

These problems ought to could be described partly from books, articles, and standard provided by

the IASB and FASB when talking the historical description including the accounting standards and

valuation of goodwill in the private sector. The problems concerning the two companies ought to be

available from their financial statements, of course with some kind of recalculations of numbers,

using the other standard respectively. This should enlighten the problem, there probably would have

been if any of these purchases had been overseas.


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2. Main differences between US GAAP and IFRS

2.1 Basics about US GAAP The US GAAP is administrated by the House of GAAP, which was first published by Steven Rubin

in 1984 in the “Journal of Accountancy.” The House consists of four categories of hierarchy, with

category A as the most authoritative and category D as the least. This means that if guidance on a

specific problem is in more than one category, the guidance in category A is the one to use. The four

categories consist of different publications from the Financial Accounting Standards Board (FASB),

the American Institute Certified Public Accountants (AICPA) and the Securities and Exchange

Commission (SEC). The house is not technically creating the GAAP, but instead making basic

principles from which the GAAP is created1.

The FASB has since 1973 been selected in the private sector to make the accounting standards to be

used as basis for the US financial statements. These standards are officially recognised and author-

ised by the SEC and the AICPA. The SEC is actually a statutory commission with the purpose of

establishing financial accounting and reporting standards for publicly held companies. However, it

has always relied on the private sector “for this function to the extent that the private sector demon-

strates ability to fulfil the responsibility in the public interest2.” Before 1973 the accounting and

financial statement standards were created by AICPA or organisations under it. But this changed

when FASB, which is a totally independent organisation, was established.

The FASB’s mission is to educate and guide the public, including issuers, auditors and users of fi-

nancial information, by establishing and improving the financial accounting and reporting standards,

as they think financial reporting is essential to have an efficient functioning economy. That is be-

cause a lot of people including investors and creditors use these reports to make decisions upon

about investment and lending, and rely on them as credible, transparent, and comparable informa-

tion. In order to accomplish this mission, the FASB acts to:

Make the utility of financial reporting bigger, by focusing on the primary characteristics of rele-

vance and reliability and making them even more comparable and consistent.

Constantly update the standards in order to make then follow trends in the economic environment.

1 http://gaap360.wordpress.com/2007/07/20/finding-the-house-of-gaap-on-the-internet/ 2 Quotation: http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1176154526495


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Quickly consider important parts with imperfections that can be addressed with new standard set-

tings.

Converge the international standards, alongside improving the quality of financial reporting; and

Reform the common understanding of the information, the nature as well as the purposes that can be

derived from financial reports.

Furthermore the board has five precepts of conduct it follows3:

To be objective in its decision making.

To weigh carefully the views of its constituents.

To promulgate standards only when the expected benefits exceed the perceived costs.

To bring about needed changes in ways that minimizes disruption to the continuity of reporting

practice.

To review the effects of past decisions.

Besides working on the American GAAP, the FASB has also agreed on working closely together

with the International Accounting Standards Board (IASB) on harmonising the US GAAP and IFRS

under the so-called Norwalk Agreement. This will be further examined under part 1.4 Harmonisa-

tion.

2.2 Basics about IFRS The constitution of the totally independent IASC, which is the committee behind IASB, was origi-

nally approved in May 2000. It is required that the trustees revise the structure of the organisation

every five years so that it constantly is as effective as possible. This has implied major changed two

times, in 2005, with biggest change probably being the proposal about looking into problems for

small and medium sized entities (SME) and in March 2010. Furthermore, both of these reviews

have resulted in new organs within the foundation. This implies that there now is 5 different boards

and committees, all with different tasks, such as monitoring, funding, interpreting, and reporting to,

each other. In this big puzzle the IASB is in the middle, as probably the most important, as they cre-

ate the IFRS and the IFRS for SMEs4.

3 http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1176154526495 4 http://www.iasb.org/NR/rdonlyres/F9EC8205-E883-4A53-9972-AD95BD28E0B5/0/WhoWeAreJanuary20102.pdf


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The work of the Board began in 2001, resulting in the European Union adopting regulations about

the use of IFRS in 2002. This meant that businesses quoted on the stock exchanges from January

1’st 2005 should be using the IFRS. In 2002 as well, the IASB and FASB announce that they would

be working together towards a harmonisation of the US GAAP and the IFRS and to coordinate fu-

ture work programmes. This resulted in 2006 in the Memorandum of Understanding, which was

updated in 2008. Though IFRS was a European initiative, underlined by its acceptance in EU early

after its beginning, it is now used in over 100 countries, and the G-20 has called for acceleration for

global convergence in standards. This has also resulted in the number of Trustees being expanded a

couple of times, both numerical and geographical, so that there now are 22 Trustees from all over

the world. This of course helps the case of global convergence.

Basically the mission for the IFRS foundation is, almost similar to FASB’s mission with the US

GAAP, to develop a single set of financial reporting standard that are understandable. This should

result in financial reports being of high quality, transparent and comparable, so that interested par-

ties such as investors and creditors can make decisions based upon them. However, in contradiction

to the FASB, the IASB’s objective with the IFRS is furthermore to make them globally accepted

and to harmonise national standards with IFRS. An important step in this is reflected in the rules of

appointing the different boards’ members, as it is required of the 2010 constitution review, that 6 or

4 people respectively from each of following areas Asia/Oceania, Europe, and North America, one

from Africa and South America, and two from any area, as long as it maintains the geographical

balance, has to be appointed.5

2.3 Differences The probably most significant difference in the two boards’ way of working is that the IFRS are said

to constitute a principle-based accounting system, which implies that they just make broad princi-

ples with very few detailed rules, whereas the US GAAP is a ruled based system. This means that

new rules continuously, often hasty, are passed, resulting in companies that follows the rules still

reports misleading financial statements, with Enron being the best example. In response to this and

the Worldcom scandal the US congress passed an act in 2002, that required FASB to look into

whether or not it would be better for them shifting to a principle based approach6. This case is still

being investigated, where the latest news is that a discussion paper was made, in October 2008, with

5 http://www.iasb.org/NR/rdonlyres/B611DD9A-F4FB-4A0D-AEC9-0036F6895BEF/0/Constitution2010.pdf 6 International Accounting, p. 115


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the deadline for commenting being on 14 April 2009, which is where the process has ended for

now7. If this proposal is implemented it would decrease the gap to IFRS when talking flexibility.

Because at the moment the IFRS are much more flexible, as it often provides firms two alternatives

to choose between when accounting for a particular item, where the US GAAP more often than not

only has one. However, in some cases IFRS are also more detailed than the US GAAP.

According to a 2005 survey of 130 mostly European companies, Ernst & Young concluded that the

two accounting issues that the most companies needed to adjust changing from US GAAP to IFRS,

was pensions and business combinations, namely 122 and 100, respectively. This must imply that

this is the two biggest differences between the IFRS and the US GAAP.

When talking smaller and more specific differences, the FASB has identified numerous, that can be

classified as follows:8

• Definition differences: In spite of the concepts being similar, differences in definition exists,

this can lead to either recognition or measurement differences.

• Recognition differences: There are three types of differences in recognition crite-

ria/guidance. (1) whether an item is recognised or net, (2) how it is recognised, and (3) when

it is recognised

• Measurement differences: Differences in the amount that should be recognised is either due

to a difference in the method being used or a difference in the detailed guidance for applying

a similar method.

• Alternatives: For some accounting issues one of the standards allows different kinds of

methods being used, while the other only allows one specific method.

• Lack of requirements or guidance: IFRS may not guide on a topic that US GAAP does, and

vice versa.

• Presentation differences: In the financial statements differences does exist in the presenta-

tion of different items.

• Disclosure differences: The information presented in the financial statements’ notes can be

different, which is due to whether a disclosure is required or not and the manner in which the

disclosures are required to be made.

7 http://www.fasb.org/jsp/FASB/FASBContent_C/NewsPage&cid=1175801886492 8 International Accounting p. 115


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The examples being described here are all measurement or recognition differences. The guidance on

inventories is one of the examples where the IFRS is more specific and less flexible than the US

GAAP is. The IFRS guidance is especially more thorough with regard to inventories of service pro-

viders and disclosures related to inventories. The cost of the inventory also includes cost of conver-

sion and an allocation of production overheads, besides of course the purchase price. Furthermore,

the IFRS allows capitalization of interest on inventories that need to be to in stock for a period of

time to bring them to “a saleable condition.” Besides that difference there is also a difference in

which method companies are allowed to use when valuating their inventory as the US GAAP allows

the use of the Last in First out (LIFO) principle, but IFRS does not.

The LIFO principle is one of three generally accepted inventory valuation methods. The other two

are WAC (Weighted average costs) and FIFO (First-in-first-out). LIFO and FIFO are basically two

opposites as the one method assumes, that the goods coming in last, is used first while the other as-

sumes, that the goods that in first, is used first. While WAC, as the name indicates, uses weighted

average prices when calculating the purchase price for the used goods. WAC has the advantage that

no matter if the prices on used resources fall or rise it will always give a medium result, while using

LIFO will give a higher income and ending inventory reported when the prices are falling and lower

when prices are rising, and FIFO vice versa. LIFO is not valid to use under the IFRS, though it is

under a number of European national GAAPs, as it is under the US GAAP as well. The three main

reasons why some standards won’t allow the use of LIFO are:

Reporting: There is no significant reporting benefit as the inflation in the developed economies is

very limited, and there is often simultaneously inflation and deflation and different products and

resources.

Taxation: When there is even a small inflation, the taxable income of a growing business using

LIFO, would be less than it would under FIFO or WAC, and when inflation is reversed LIFO might

create larger swings in taxable income levels than would FIFO or WAC. This is probably why LIFO

is not allowed for tax purposes in many countries.

Accounting: Using LIFO under periods with heavy inflation may lead to a valuation of an inven-

tory that is physically real but is valued at meaningless costs, and therefore giving less credibility to

the balance sheet.


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This last problem is actually the nub of the problem in choosing between the inventory valuation

methods, as it is a question between whether one wants to give a “correct” picture of the income

statement or of the balance sheet. The LIFO method gives the highest costs of goods sold, and there-

fore as before mentioned, the lowest gross margin when the company is in a world with rising

prices, which it is assumed the majority of companies are due to inflation. Furthermore this means

that the ending inventory is also valued at less than it would be under FIFO or WAC. Summing this

lower gross margin and asset valuated at less together; companies using the LIFO method would

perhaps be valuated at less, when talking the company price in an imaginary sale, than the company

would have been under the IFRS hence not using the LIFO method.

Another difference concerning inventory, is the reporting on balance sheets. Under the IFRS it is

required that companies report inventories at the lower of cost or net realisable value, while US

GAAP requires it to be reported at the lower of cost or replacement cost with a ceiling of net realis-

able value and a floor of net realisable value less normal profit margin. This means that the there is

no difference between the two standards’ inventory reporting when replacement costs are bigger

than the net realisable value. The net realisable value is defined as “estimated selling price in the

ordinary course of business less the estimated costs of completion and the estimated costs necessary

to make the sale.”9

Another accounting issue, where recognition and measurement differences results in reporting dif-

ferences, and actually one of the biggest, is in relation with the measurement of property, plant, and

equipment subsequent to initial recognition. The IFRS allows both the cost model and the revalua-

tion model for reporting fixed assets subsequent to their acquisition. The cost model is allowed un-

der the IFRS as well as under US GAAP. It implies that property, plant, and equipment are entered

at the amount of cost less accumulated depreciation and any accumulated impairment loss.

The revaluation model, which is where the before mentioned huge different is, is only allowed un-

der the IFRS. It allows companies to carry property, plant, and equipment at a revaluated amount,

measured as fair value at the date of revaluation, less any accumulated depreciations or impairment

losses. This means that companies using IFRS has a more exact picture of what their fixed assets are

worth, implying that companies under the US GAAP probably will have their fixed assets valuated

at less as pricing in general are rising. This could once again result in a company being valued at

less, than it really was suppose to.

9 Quotation: International accouting, p. 116.


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2.4 Harmonisation As before mentioned the IASB and the FASB is doing a lot to converge the IFRS and the US

GAAP. This harmonisation progress started in 2002 with the so called Norwalk Agreement. This

agreement was further expanded in 2006 where the Boards agreed a Memorandum of Understand-

ing (MoU) to advance the continued convergence of US GAAP and IFRS. This means that the

Boards have joint projects on some topic. The development of accounting for business combination

over the last ten years is one of them. This means that all publications concerning business combina-

tion, hence goodwill has been converging.

This MoU was updated in 2008 and the SEC published “Roadmap for the Potential Use of Financial

Statements Prepared in Accordance with International Financial Reporting Standards by US Issu-

ers10.” A roadmap that could lead to required use of IFRS in the US from the year 2014. This will be

determined in 2011 whether to proceed or not. The basis of this decision is the potential achieving

of seven milestones the SEC has set for the FASB and the IASB. These are milestones about topics

such as the improvement in standards and in the ability to use interactive data for IFRS reporting

and the implementation in the US.

But all of these milestones are actually up to the Boards to achieve and work towards the SEC’s

“demands”, but if this is achieved it would lead to the acceptance of IFRS in the USA, and thereby

the complete convergence could be just around the corner.

10 http://www.sec.gov/rules/proposed/2008/33-8982.pdf


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3. Historical Examination of Goodwill The treatment of goodwill where for many years quite different, but the two standards, US GAAP

and IFRS, respectively has started to converge more and more over the years, and especially over

the last ten years, where steps towards each other have been made in order to converge. It is clear

from the examination below that it is not just one of the standards moving towards the other but

instead they are converging towards the middle.

3.1 Goodwill under the US GAAP Before FAS 141, Business Combinations, of June 200111 and FAS 142, Goodwill and Other Intan-

gible Assets, of June 200112 was published, the guidance on goodwill was to be found in APB Opin-

ion No. 16, Business Combinations and APB Opinion no. 17, Intangible Assets. These opinions had

been the authoritative guidelines on accounting and reporting intangible assets for over 30 years at

this point. Two of the most major differences the FAS 141 and FAS 142 made were the abolishment

of the right to use the pooling-of-interest method and the right to amortise goodwill and other intan-

gible assets over a 40 year period.

3.1.1 Valuation FAS 142 deals with problems only subsequent to the acquisition of the assets, while FAS 141 ad-

dresses financial accounting and reporting on the acquiring of assets in a business combination.

As before mentioned the publication of FAS 141, meant the end of the use of the pooling-of-interest

method, implying that only the purchase method could be used as accounting method when combin-

ing businesses. Under the pooling-of-interest method, the carrying amount of assets and liabilities

from both businesses being combined were just carried forward to a new statement of financial posi-

tion of the new business. This meant that the book values could be kept at book values at historical

prices, and did not need to revaluate assets, by using fair value prices, as that could result in further

depreciations and other expenses decreasing income. As no other assets or liabilities were recog-

nised, and thus no excess of purchase price over the book value were recognised, and therefore no

goodwill either. The use of the pooling-of-interest were abolished because similar business combi-

nations were accounted for using different methods, because the 12 criteria that required to be met 11http://www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable=MungoBlobs&blobkey=id&blobwhere=1175818828551&blobheader=application%2Fpdf 12http://www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable=MungoBlobs&blobkey=id&blobwhere=1175818762681&blobheader=application%2Fpdf


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for using the pooling-of-interest method did not distinguish economically dissimilar transaction.

This meant dramatically different financial statements for two otherwise quite similar combinations.

Furthermore, users of the financial statement found it very hard to compare these statements and

thereby how companies were doing. They also indicated that better information was needed on in-

tangible assets as they were becoming more and more important in many business combinations.

And the pooling-of-interest method did not provide this information as it was on those intangibles

previously recorded by the acquired entity that was being recognised under the pooling. The pur-

chase method, however, recognises all intangible assets acquired in a business combination, either

separately or as goodwill. Business managers found these differences between the two methods to

be damaging for competition.

According to FAS 141 goodwill is generated when the cost of an acquired entity exceeds the

amount assigned to assets acquired and liabilities assumed. This exceed shall be recognised as an

asset of it self, namely goodwill. Furthermore, an acquired asset that does not meet the requirements

in paragraph 39 shall also be included in the asset goodwill. Paragraph 39 states that an intangible

asset should be recognised apart from goodwill if it arises from contractual or other legal rights.

However, an intangible asset should still be recognised apart from goodwill if it is separable. That

means, if it capable of being separated or divided from the acquired entity and sold, transferred,

licensed, rented, or exchanged. If it cannot be one of those things, it is however still to be recognised

apart from goodwill if it can be sold, transferred, licensed, rented, or exchanged in combination with

a related contract, asset, or liability. Once the goodwill has been recognised it has to be presented as

a separate line on the balance sheet. While negative goodwill had to be allocated as a pro rata reduc-

tion of the amounts that otherwise would have been assigned to particular assets acquired Impair-

ment losses on goodwill, however, have to be presented in the income statement before the subtotal

income of continuing operations. That is, if the goodwill is not associated with discontinues opera-

tions, of course. This shall be included within the results of discontinued operations.

3.1.2 Impairment As goodwill from June 2001 no longer is subject to amortisation, an annual test of impairment shall

be done, and sometimes in between these annual test if an event occurs or circumstances change that

would more likely than not, result in the fair value of a reporting unit being below its carrying

amount. Such circumstances could be significant change in law that affects the company and loss of

key personnel, or maybe, an accident.


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Impairment occurs when the carrying amount of goodwill exceeds its implied fair value. The fair

value on goodwill, which is defined as “the amount at which an asset (or liability) could be bought

(or incurred) or sold (or settled) in a current transaction between willing parties, that is, other than in

a forced or liquidation sale13,” cannot be measured directly but only as a residual. Thus the FAS 142

includes the estimate ‘implied fair value of goodwill’ to determine an amount that is reasonable es-

timate of the value of goodwill, to test for impairment. To test for impairment companies had to use

a two-step impairment test, to identify potential impairment and the value of such.

The first step in the impairment test compares the fair value of a reporting unit with its carrying

amount. A reporting unit is an operating segment, or one level below that. An operating segment is,

according to FAS 131,14 a component of a business that engages in business activities from which

revenues may be earned and expenses incurred. Furthermore, the enterprise’s chief operating deci-

sion maker has to supervise the segment, and make decisions about its allocated resources and asses

its performance and at last discrete financial information has to be available for the unit for it to be

defined as an operating segment. If the fair value of the reporting unit exceeds its carrying value,

the goodwill associated with the unit is considered not impaired, and the second step is thus not nec-

essary. However, if it is opposite and the carrying value exceeds the fair value step two is necessary.

The second step compares the implied fair value of the goodwill with the carrying amount of good-

will. If the carrying amount exceeds the implied fair value, an impairment has to be recognised at

the amount of that exceed. Furthermore, the loss recognised cannot exceed the carrying amount.

After the loss is recognised the new adjusted carrying have to be used as basis for future impairment

tests. After a measurement of an impairment loss is completed it is not allowed to reverse that im-

pairment.

The implied fair value of a reporting unit is determined in the same way as the amount of goodwill

is determined in a business combination. The excess of fair value over the amount reported to the

unit’s total assets and liabilities is the implied fair value of goodwill. The quoted market prices in an

active market are the best way of getting information, and if they are available they should be used

as basis for the fair value measurement of the reporting unit.

13 Quotation: FAS 141, appendix F, glossary, page 106; Fair Value 14http://www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable=MungoBlobs&blobkey=id&blobwhere=1175818779186&blobheader=application%2Fpdf, paragraph 10.


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3.2 Goodwill under IFRS

For many years the authoritative standard on business combination and hence goodwill under the

IFRS was the IAS 22,15 which was first introduced in November 1983, and revised a couple of times

until April 2004 when it was superseded by IFRS 3 Business Combinations, which is the current

authoritative standard on the topic.

The objective with the IAS 22 was to set down standards on how to account for business combina-

tions, both on combinations in form of acquisitions on the very rare uniting of interest, which is

when the acquirer cannot be identified. However, it had to be decided which of the two kinds one

where dealing with as the method of accounting for them was very different. Therefore the IAS 22

had some indications set up on when it was an acquisition and when it was a uniting of interest. In-

dications of an acquisition are such as one entity getting more than one half of the voting rights of

the entity it is being combined with or has the power over one half of the voting rights after agree-

ment with the investors of the acquired company. Another indication of an acquisition is that one

enterprise has the power to control to remove or appoint the majority of the governing body of the

other company or has the power to cast majority of votes at meetings of the governing body of the

other enterprise. The last indication IAS 22 set up for an acquisition is whether the one company can

control the other company in terms of financial and operating policies.

It is not only important to find out if an acquisition is the question, but also who the acquiring com-

pany is. Usually, it is quite clear who the acquirer is, but if not the IAS 22 also had some guidance

on how to find out who the acquirer is. If the fair value16 of one of the companies is significantly

more than that of the other and if after the combination the one enterprise dominates in the selection

of the new board of directors, then it is very possible that one company is the acquirer. Besides that,

another hint could be in an exchange of shares for cash. In that case the enterprise paying the cash is

of course the acquirer.

The indications of the uniting of interest are such as that the acquirer cannot be indentified follow-

ing the before mentioned guidelines. The shareholders if the two companies share the control over

the new company equally and the managements of the combining companies also share the control

15 http://www.iasplus.com/standard/ias22.htm 16 The fair values are defined as almost the same under the two standards, and are as such assumed to be the same. How-ever, the differences will be discussed later in the thesis, under the comparison under chapter 4, Current treatment of Goodwill.


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over the new company. However, a business combination still had to be presented as an acquisition

unless the three following characteristics are present17:

• The substantial majority of the voting common shares of the combining enterprises are ex-

changed or pooled.

• The fair value of one enterprise is not significantly different from that of the other enterprise.

• Shareholders of each enterprise maintain substantially the same voting rights and interests in

the combined entity, relative to each other, after the combination as before.

Although all these three may be present the combining companies still had to prove that an acquirer

could not be identified, otherwise the combination still had to be treated as an acquisition rather than

a uniting of interest.

3.2.1 Valuation The reason why this identification of acquisition or uniting of interest was so important is because

that the accounting of the combination should be treated either using the purchase method when

talking an acquisition and the pooling-of-interest method when talking a uniting of interest. Under

the pooling-of-interest method the financial statement items such as assets and liabilities of the

combining companies are simply added together in both the current and prior periods, as if the com-

panies had been united from the beginning of the earliest period being presented. If any difference

between the amount recorded as share capital issued and the amount recorded as share capital ac-

quired it had to be adjusted against equity, implying that no goodwill occurred. The cost of the ac-

quisition just had to be entered as an expense when it occurred. This means that the pooling-of-

interest method was allowed till April 2004 when IFRS 3 superseded IAS 22. The reason why the

IASB decided to abolish the use of the pooling-of-interest method was because they concluded that

virtually all business combinations were acquisitions, and hence had to be accounted for using the

purchase method.

Under that method the acquiring company enters the acquired assets and liabilities in their financial

statement from the date of the acquisition, which per definition is the date control of net assets and

operations is transferred to acquiring company. The balance sheet should after the acquisition in-

clude not only the assets and liabilities of the acquired company, but also the generated goodwill,

positive as well as negative. In order to indentify the specific goodwill generated from an acquisi-

tion the cost of the acquisition had to be recognised, as goodwill was defined as the difference be-

tween the costs of the acquisition and fair value of the acquirer’s share of assets less liabilities. The 17 http://www.iasplus.com/standard/ias22.htm


Page 16 of 44

cost is defined as the amount of cash paid and the fair value of other considerations given by the

acquirer plus any costs that can be directly recognised to the acquisition.

Negative goodwill could also appear from an acquisition, and is defined as the full difference be-

tween the acquirer’s interest in the fair value of the identifiable assets and liabilities less the cost of

acquisition. It had to be presented in the same balance sheet as positive goodwill just deducted from

the assets.

3.2.2 Amortisation and impairment The recognised goodwill had to be entered as an asset and amortised as one. Normally on a straight

line basis, over its useful life, this in this case was set to a 20 year period. The presumption of in-

definite life of goodwill, and thus no amortisation was not allowed under the IAS 22. The IAS 22,

however, also had a rebuttable presumption that the useful life of goodwill could be extended be-

yond 20 years, but only in rare cases. For example if the goodwill is associated with a group of iden-

tifiable assets that are expected to generate positive cash flow to the company in forthcoming years.

If the useful life of goodwill exceeded this 20 year period, it had to be tested for impairment every

year after the 20 year period was over, even if there was no indication of impairment. Accounting

for goodwill impairments followed the standards of IAS 36, Impairment of Assets18. According to

that, impairment is when the recoverable amount of an asset is less than the book value. The recov-

erable amount is the highest of the net selling price and its value in use. Net selling price is the

amount the asset could be sold for in an “arm’s length transaction” between willing and knowledge-

able parties, less the cost of disposal. The value in use is the amount the company expects to earn

from the asset in the years to come, calculated in present value with a discount rate that represents

the risk of the market and of course the time value of money. In order to calculate the value in use

the company had to set up cash flow predictions for the asset. And if an asset did not generate cash

flow individually the company had to calculate the recoverable amount or the value in use for the

cash generating unit (CGU) the asset belonged to, from the presumption that a lot of assets does not

generate cash flow by itself, but as a part of a unit. A CGU is defined as the lowest level at which

goodwill is monitored internally for management purposes in the acquiring entity. The rules for rec-

ognising and reversing impairment are the same for CGUs as for individual assets. For impairments

could be reversed if there had been changes in the estimates used to determine the recoverable

amount. Goodwill, however should only be reversed if the external event that specifically caused the

impairment reversed. 18 http://en.allexperts.com/e/i/ia/ias_36:_impairment_of_assets.htm


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3.3 Comparison As mentioned in the beginning of this chapter the authoritative standard on business combinations

and goodwill under the US GAAP had been the APB Opinion 17 for over 30 years before FAS 141

and 142. This could maybe imply that the US GAAP was very static and conservative, but actually

in many ways they were more alike nowadays’ standards, e.g. in terms of whether to amortise or test

for impairment of goodwill. Under the IFRS before 2004 goodwill should be amortised over a 20

year period in a straight line just like any other intangible asset, such as Danisco have presented it in

their 2002-2003 annual report19:

Table 3.3 Danisco’s amortisation of goodwill 1998-2003

Year 1998/99 1999/00 2000/01 2001/02 2002/03

Amortisation of goodwill etc 546 539 437 399 404

Companies under the US GAAP would not have been allowed to do it like this, but instead should

have tested for impairment, and adjusted their assets if impairment was recognised, as the FAS 142

had a presumption that goodwill is an intangible asset with potential indefinite life. A test of im-

pairment had to be done no matter if there were no indication of such, while under the IAS 22 this

only had to be done if there were indications of impairment, as it was done with any other intangible

19http://www.danisco.com/wps/wcm/connect/604873804fa2be80bcf3bc4895e3224e/daniscoreport_0203_en.pdf?MOD=AJPERES&CACHEID=604873804fa2be80bcf3bc4895e3224e (All numbers are for the group)


Page 18 of 44

asset. IAS 22, however, also required an annually test of impairment without indications of it, if

goodwill extra ordinary had a lifespan over 20 years, but this was very rare. Even before the 2001

reform with FAS 141 and 142, the US GAAP where more alike today’s standards as goodwill then

had to be amortised over a 40 year period, which means that they already then expected goodwill to

have a far longer life than the IAS 22 did.

The US GAAP may have been far more advanced on the subject of amortising/testing for impair-

ment of goodwill, but they were not very keen on generating it. This is reflected in the fact that the

pooling-of-interest where far more common under the US GAAP than under the IFRS, where it was

very seldom used. The US GAAP required the use of the pooling-of-interest method at first and the

purchase method if the 12 criteria for using the pooling-of-interest were not met, while the IFRS

required the use of the purchase method first and then the pooling-of-interest if no acquirer could be

indentified, which very seldom was the case. The pooling-of-interest was also prohibited under both

US GAAP and IFRS after the reforms in 2001 and 2004 respectively. The reasons, however, were

quite different. Under the US GAAP the method was abolished because there were a lot of problems

with it. Two pretty similar trades often gave very different results as two different methods were

used, which meant it was very to compare two sales. And one of FASB’s missions are to provide

standards that makes it easy for users of financial statements to compare companies with exactly

their financial statements, and the use of the pooling-of-interest method opposed this. Another rea-

son why it was prohibited was the need of more information on intangible assets, information that

the purchase method gives. These problems where not present under the IFRS, probably because the

pooling-of-interest method was not so used. The reason why they abolished the use of the method

was simply because they presumed virtually all business combinations as acquisitions and not unit-

ing of interests.

Besides the differences on amortisation/impairment before mentioned, the test of impairment itself

was also quite different between the US GAAP and the IFRS. The US GAAP used a two step test

while the IFRS only used a one step test. The reason why the US GAAP was more specific and

thorough on this topic is probably the fact that everybody had to do this impairment test, and it was

as such more important than the impairment test under the IFRS as it did not have to be used as of-

ten. The first step under the US GAAP was very similar to how the impairment test had to be carried

out under the IFRS. In both cases companies had to compare the potential selling price of the good-

will, defined as fair value and net selling price respectively, with the book value/carrying amount

the assets. Although to different names they actually cover almost the same as it is the price willing


Page 19 of 44

parties would pay for the asset concerned. There may, however, be a difference in how the book

value/carrying amount of the assets was recognised, but that will not be treated in this thesis.

One thing that definitely was a difference was that under the IFRS it was not only the net selling

price that had to be used to compare against. Companies also had to calculate value in use, which is

the expected future cash flows from the asset or CGU concerned and then use whichever of net sell-

ing price and the value in use that were greatest. This means that differences between the US GAAP

and IFRS only occurred in cases when the value in use exceeded the net selling value.

Another difference that also may not always occur is the use of step two under the US GAAP. This

step only had to be used when the carrying value exceeds the fair value, and then compare the im-

plied fair value of goodwill with the carrying amount of goodwill. To calculate the implied fair

value companies under the US GAAP had to calculate it for reporting units and that is another dif-

ference between the two standards. Not so much in the definition is there a difference, as reporting

units under the US GAAP is pretty much the same as the cash generating units are under the IFRS,

although some differences are still present20. The difference occurs more in the use of these other-

wise similar units.

Under the US GAAP the reporting units have to be used at first to calculate the fair value from, as

the US GAAP has the presumption that assets have to be in a group and as such work together to

contribute with value to the company. Under the IFRS, however, the assets have to individually

treated, and only if they do not contribute to the company individually, have to be gathered in

CGUs.

The last, also quite significant, difference concerns the reversal of impairments. Under the US

GAAP no reversal of impairment is allowed when the measurement of impairment loss has been

carried out. Under the IFRS, however, an impairment reversal is allowed if the external event that

created the impairment recognition at first is reversed. But this of course tallies with the fact that

goodwill was treated as any other intangible asset under the IFRS. This interpretation of goodwill

being an intangible asset as any other, and treated it as such, was yet changed when the IFRS 3 su-

perseded the IAS 22, as there will be looked into in the next chapter.

3.4 Criticism of the Standards

In spite of, or maybe as a result of, the boards’ willingness to continuingly develop and improve the

accounting standards, critics still found flaws with these two new standards. This willingness is 20 The differences will be further treated under part 4.3.3 Impairment differences.


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shown, as the boards continuingly are listening to these critics, and make new exposure drafts all the

time. However, the old drafts are not available from the boards’ homepages, so this part will be

treated with extern sources. The criticism the two boards received will be treated here, and the result

in form of the new standards will be examined in the next chapter, with a conclusion on whether or

not the boards have complied with the criticism.

3.4.1 Criticism of FAS 141 When the FAS 141 was first published many complaints were made, and though some of remained,

the general critic of the FAS 141 was calmed down and professionals had accepted it when the FAS

141 was revised and re-published in 2007. The greatest criticism that remained of the FAS 141 was

the accounting for goodwill and intangible assets, and minor criticism pointed out off course less

important stuff, but still topics that influenced on the big picture. Some of the minor criticism was

that fact that the FAS 141 did not include a definition of a business, implying that a segment of a

company was not always recognised as a business. Furthermore, FAS 141 did not define the ac-

quirer; it only applied to business combinations in which considerations were transferred and hence

control was obtained, and it did not provide guidance on measuring the non-controlling interests’

share of the consolidated subsidiary’s assets and liabilities. Besides this, pundits also criticised the

way step acquisitions were accounted for and also on issues such as contingent considerations, rec-

ognition of negative goodwill and acquisition related costs.

This was as mentioned, however, not the most substantial criticism of the FAS 141. That was re-

garding the accounting for goodwill and intangible assets. Goodwill results in companies paying

over the price of the net value of the assets they are buying, as goodwill according to the FAS 141 is

defined as the excess of the cost of the acquisition over the net values assigned to assets being ac-

quired and liabilities assumed. This definition was the same as under the APB Opinion 16, and may

as such been a bit outdated. According to some pundits21 this valuation method of goodwill does not

independently assess the existence or real value of goodwill. Instead, “it throws the residual into

goodwill account without regard to how much value actually exists.22” This means that the goodwill

assigned is unlikely to reflect the true value of the traded assets and liabilities.

The other major point of criticism was on the accounting for intangible assets. Under the original

FAS 141 entities was required to recognise intangible assets apart from goodwill if they either arose

21 Miller, Bahnson, & McAllister in A New Day for Business Combinations, Journal of Accountancy according to http://www.cluteinstitute-onlinejournals.com/PDFs/1703.pdf 22 Quotation: http://www.cluteinstitute-onlinejournals.com/PDFs/1703.pdf page 3


Page 21 of 44

from contractual or other legal rights or was separable. The Statement included a lengthy list of the

intangibles that should be recognised apart from goodwill. This very stringent and specific law pass-

ing caused a lot of debate, especially on those intangibles that were not on the list. Furthermore,

there were complaints on the difficulty of assigning the valued assets to the specific and relevant

reporting units or business segment, and also on determining if an asset had definite or indefinite

life and if definite how long that life was. In addition, entities also found it very difficult to measure

the assets at fair value prices, implying in difficulties on determining the specific amount allocated

to goodwill and hence the value of it.

3.4.2 Criticism of IAS 22 The greatest criticism of the IAS 22 was the use of the pooling-of-interest method, and therefore one

of the key proposals of the exposure draft on IFRS 323. This meant that an acquirer should be recog-

nised under every business combination, as it was concluded was possible. The acquirer was defined

as the entity that obtained control of the other entity or operation. The accounting, for intangibles

with indefinite lives including goodwill, was also proposed to be changed. They should no longer be

amortised but instead tested for impairment once a year and the reversal of impairment losses on

goodwill should be prohibited.

The exposure draft also proposed the treatment of negative goodwill should be changed. Any nega-

tive goodwill remaining after the revaluation of assets purchased should be recognised immediately

in the income statement as a gain. The final two key proposals in the exposure draft were on the

topics of liabilities for terminating or reducing the activities of an acquiree and the date for measur-

ing the cost of the acquisition. Cost that incurred as a result of the acquirer restructuring the ac-

quired entity’s activities should be treated as a post-combination expense, unless the acquired entity

had an existing liability at the acquisition date. Concerning the date of the cost of the acquisition, it

had to be measured on the date control passed to the acquirer, and if it was a transaction in steps the

cost was the aggregate of the individual cost. In addition to these key proposals for changes the ex-

posure draft also proposed some less important changes to be made to the standard.

This was changes regarding initial measurement of identifiable net assets when less than 100 % ac-

quired amongst others. Under the IAS 22 entities were allowed to choose between the acquirer’s

share of net assets at fair value prices plus minority interest’s share at pre-acquisition carrying

amounts and both acquirer’s and minority’s share measured at fair values. It was proposed to be

changed to prohibit the first option and require 100 % fair value measurement. Other changes pro- 23 Highlights of the IASB Exposure Drafts on Business Combinations, http://www.iasplus.com/iasplus/iasp0212.pdf


Page 22 of 44

posed were that minority interests should be presented in the balance sheet, the costs of registering

and issuing instruments should be excluded from the from costs directly attributable to the acquisi-

tion, and recognised as a deduction from equity instead. Concerning the cost of the acquisition it

was proposed that the acquirer should recognise separately a contingent liability if its fair value

could be measured reliably.

Accounting for intangible assets was also subject to some proposals for change. It was among others

proposed that intangible assets acquired in a business combination should be recognised apart from

goodwill if they arose from contractual or legal rights or were separable from the business, while the

subsequent treatment should remain at amortisation and impairment test, and the presumption of the

maximum of a 20 year life should be eliminated.


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4. Current Treatment of Goodwill

The historical examination showed that the earlier authoritative FAS 141 and 142 was superseded in

December 2007 by the FAS 141(R)24 and the IFRS’ IAS 22 was from April 1 2004 superseded by

IFRS 3. These two new standards converged even more than FAS 141 and 142 did with IAS 22, as

it was a part of a joint project between the two Boards. This resulted in a high degree of conver-

gence, although there still may be some significant differences.

4.1 Goodwill under US GAAP The revision of FAS 141 in 2007 was of course a part of the FASB’s continuing mission to improve

the quality of financial reports. In order to do this the FAS 141(R) provides guidance on how an

acquirer should recognise and measure identifiable assets, liabilities assumes and any non-

controlling interest in the acquiree in business combinations. The FAS 141(R) does not provide

guidance on how to account for joint ventures, acquisitions of assets that do not constitute a busi-

ness, combination of entities and business under common control or combination of non-profit or-

ganisations or the acquisition of a for-profit business by a non-profit organisation. According to the

standard a group of assets constitutes a business when they integrated with activities are “capable of

being conducted and managed for the purpose of providing a return in the form of dividends, lower

costs, or other economic benefits directly to investors or other owners, members, or participants.”25

4.1.1 Valuation As the original FAS 141 the FAS 141(R) only allows the acquisition method being used, the origi-

nal 141 called it the purchase method though. Application of the acquisition method requires identi-

fication of the acquirer, determination of the acquisition date, recognition and measurement of iden-

tifiable assets, the liabilities assumed, and any non-controlling interest in the acquiree, and last rec-

ognition and measurement of goodwill or a gain from a bargain purchase. Identifying the acquirer

and the acquisition date are two basic actions as they both often are quite easily determined. The

acquirer is most likely the one to transfer cash, or other kinds of payment, and thereby gaining con-

trol over the other. Another hint is often that in cases where one entity is significantly larger than the

24http://www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable=MungoBlobs&blobkey=id&blobwhere=1175818828579&blobheader=application%2Fpdf 25 Quotation: FAS 141 (R), key terms page 2 (16)


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other, the biggest is the acquirer. The date of acquisition is simply the closure that is the day the

acquirer gets control over the acquired assets. The next step of the acquisition method, the measur-

ing and recognition of the identifiable assets acquired, the liabilities assumed, and any non-

controlling interest in the acquiree, will not be treated here as they all have to be recognised apart

from goodwill and hence is not relevant for this thesis.

Goodwill is generated in a business combination when the aggregate of the consideration trans-

ferred, generally measured as acquisition-date fair value, the fair value of any non-controlling inter-

est in the acquiree and in a business combination in steps the fair value of the acquirer’s previously

held equity interest in the acquiree exceeds the net amounts of the identifiable assets and liabilities

assumed measured at the acquisition date in accordance with the FAS 141(R). The amount of the

excess is the amount recognised as goodwill. However, if the net amount exceeds the aggregate, the

business combination has to be accounted for as a bargain purchase, which generates no goodwill.

4.1.2 Impairment FAS 142 is still the authoritative statement on the topic of testing goodwill for impairment, this

means the impairment test that has to be carried out annually, after the goodwill has been allocated

to reporting units has not changed, as no amendments to FAS 142 has been made.

4.2 Goodwill under IFRS When IFRS 3, Business Combination, superseded the IAS 22 on April 1 2004 it did not just imply

major changed in the treatment and valuation of goodwill it also accumulated it with interpretations.

The IFRS has been revised a bit since the first version was published in 2004; these amendments

were effective for any annual reporting beginning on 1 July 2009. Earlier application was permitted

but only on annual reports starting after 30 June 2007, and only if the IAS 27 (as amended in 2008)

was also applied. Danisco’s sale of their sugar division was closed by the end of February 2009, and

hence followed the original IFRS 3 before amendments from 2004. The only of these amendments26

that may have had an impact on the combination of Danisco’s Sugar division and Nordzucker, is the

permit to use the full goodwill method, which means that the acquiring company can recognise the

entire goodwill of the acquired entity, instead of just the acquirer’s portion of the goodwill with the

increased amount of goodwill also increasing in the non-controlling interest in the net assets of the

26 http://www.iasplus.com/pastnews/2008jan.htm#ifrs3 (10 January 2008: IASB issues a revised standard on business combinations)


Page 25 of 44

acquired entity. This means that under the sale goodwill was calculated as the old standards re-

quired, which was that goodwill was recognised as the excess of the cost of the combination over

the acquirer’s interest in the net fair value of the identifiable assets and liabilities and contingent

liabilities assumed.

The IFRS 3 was issued as part of IASB’s mission to provide standards that helps to relevance, reli-

ability and comparability of annual reports. In the case of IFRS 3 it is done by providing principles

and requirements for how an acquirer should recognise and measure identifiable assets acquired,

liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired in the

business combination, besides determining what information to disclose.

4.2.1 Valuation As before mentioned the pooling-of-interest method is no longer accepted under IFRS, as a result of

the Board’s conclusion that virtually all business combinations are acquisitions, and the pooling-of-

interest method only was allowed when a uniting of interest was in the question. This means that

now, only the acquisition method is allowed when accounting for a business combination. This has

implied that companies no longer have to define whether or not an acquirer can be identified, as this

was the method to define if it is was an acquisition or a uniting of interests, and it according to IFRS

virtually always was possible. Instead now companies have to define, when buying assets from an-

other company, if they are dealing with a business combination or simply an asset acquisition. This

is important as the IFRS 3 only authorises on business combinations, and it is only a business com-

bination when the group of assets acquired constitutes a business. This also means that the acquisi-

tion of one asset and a joint venture not are defined as business combinations and hence not affected

by IFRS 3. In order to find out whether or it was a business being acquired, the IFRS has given

some guidelines on how to find out. The basic presumption is that a business has inputs, processing

of these inputs, and may have outputs, but that is not necessary for the group of assets to be defined

as a business. This is information that very well may be available from a company’s annual report.

In the Danisco sale, some may have been in doubt if the group of assets being sold constituted a

business. This could be examined from the disclosure 31 in their 2008/09 annual report27.

Table 4.2.1: Income statement for Danisco’s discon-

tinued sugar operations 2008/09. (in DKKm)

Revenue 5535

27http://www.danisco.com/wps/wcm/connect/c1bb13004fa2be7dbcdabc4895e3224e/AnnualReportUK2009Online.pdf?MOD=AJPERES&CACHEID=c1bb13004fa2be7dbcdabc4895e3224e (page 114)


Page 26 of 44

Cost of sales (4561)

Gross profit 974

Expenses including depreciations (638)

Special items (152)

Operating profit 184

As this table shows, Danisco had inputs, operations, and outputs recognised with this division,

which then clearly constitutes a business, and the sale is hence affected by IFRS 3. Another, easier

way of telling, that the group of assets in the question in this case did constitute a business, is the

fact that the IFRS 3 has another presumption concerning goodwill, and the sugar division had

goodwill. A group of assets to which goodwill is recognised, should always be presumed as a busi-

ness, unless evidence of the contrary is present. A business does, however, not always have to have

goodwill.

When the evaluation of the group of assets concerned concludes that it was a business, the acquisi-

tion has to be accounted for using the acquisition method, as before mentioned. The use of the ac-

quisition method requires for steps: Identification of the acquirer, determining the acquisition date,

recognising and measuring the identifiable assets acquired, the liabilities assumed and any non-

controlling interest in the acquiree, and last recognising and measuring goodwill or gain from a bar-

gain purchase.

Identifying the acquirer, which is defined as the entity that gains the control of the acquiree, ought

not to be a great issue, as is should be quite clear who gets the control after a business combination

is carried through. However, if that is not the case, guidance on how to identify the acquirer is pro-

vided: In a business combination effected primarily by transferring cash, the acquirer is the one

transferring the cash. The acquirer is often also the company, whose shareholders and board of di-

rectors receives the control over the other, and usually the acquirer is the on whose relatively size is

significantly greater than the others. The date of acquisition is simply the date the acquirer gets the

control over the group of assets acquired.

The goodwill under a business combination is defined as the excess of the aggregate28 of (I) fair

value of the assets acquired, (II) the amount of any non-controlling interest in the acquiree measured

in accordance with IFRS 3 and (III) in business combination in stages the fair value of the acquirer’s

previously held equity interest in the acquiree over the net of amounts of the identifiable assets ac- 28 This aggregate will occasionally simply be referred to as the aggregate.


Page 27 of 44

quired and the liabilities assumed, measured in accordance with IFRS 3. All of these amounts are as

measured on the date of acquisition. If this aggregate is negative the resulting gain has to be ac-

counted for as a bargain purchase in profit or loss.

4.2.2 Impairment When the goodwill is recognised as the result of a business combination it has, from the acquisition

date, to be allocated to a specific cash generating unit for impairment test purposes. This allocation

to CGUs for impairment test has become more important under the new IAS 36, as amended with

effect from April 1 2004, as it has abolished the amortisation of goodwill, and in consistency with

the US GAAP regards goodwill to be an asset with indefinite life and hence can not be amortised,

but instead has to be tested annually for impairment. When allocating goodwill acquired in a busi-

ness combination to CGUs it have to allocated to all of the acquirer’s CGUs or groups of CGUs that

will benefit from acquisition. The units goodwill is allocated to have to represent the lowest level at

which goodwill is monitored internally for management purposes in the acquiring entity, and they

may not be larger than operating segments in accordance with IFRS 8, Operating Segments29. The

definition of an operating segment under the IFRS 8 is the same as it is under the US GAAP (FAS

131), that is a component of a business being controlled by the entity chief operators, engaging in

business activities from which revenues may be earned and expenses incurred and for which dis-

crete financial information is available. Goodwill does not generate a cash flow of its own and often

contributes to the cash flow of several CGUs, and can hence not be allocated to one specific CGU.

This results in the lowest level to which an entity can allocate goodwill is a group of units.

If goodwill is allocated to a CGU that the entity wants to dispose an operation within, the goodwill

allocated to that operation should be included in the carrying amount of the operation when calculat-

ing the gain or loss measured on the relative value between the operation being disposed and the

remaining CGU. That is unless the entity can demonstrate a better way. The same procedure shall be

used if an entity decides to reorganise units to which goodwill is allocated, again unless the entity

can demonstrate a better way.

When goodwill has been allocated to a CGU, it has to be tested for impairment annually, and when-

ever there are indications of impairment. This is done by comparing the carrying amount including

goodwill of the unit with the recoverable amount of the unit. If the recoverable amount exceed the

carrying amount the unit, and the goodwill allocated to it is regarded as not impaired. However, if

the carrying amount exceeds the recoverable amount an impairment loss has to be recognised. The 29 http://www.iasplus.com/standard/ifrs08.htm


Page 28 of 44

loss shall be allocated to reduce the carrying of amount of the assets of the CGU. First by reducing

any goodwill allocated to the unit and then to the other assets of the group pro rata with the carrying

amount of each asset in the unit as basis. The carrying amount of the assets in the group can how-

ever, not be reduced below its fair value less costs to sell, the value in use, or zero.

Under the earlier IAS 36, as described under the historical examination, reversal of impairment of

goodwill was allowed when the extern event that caused the impairment was reversed. This is no

longer allowed under the IAS 36, and an impairment loss can hence no longer be reversed under any

circumstances.

4.3 Comparison As mentioned in the beginning of this chapter, the publishing of the IFRS 3 and the FAS 141(R)

meant even more convergence than it was the case before. As described above there is not much

difference in how goodwill is valuated anymore. Both standards have defined goodwill as the excess

of the aggregate of the consideration transferred, generally measured at acquisition-date fair value,

the fair value of any non-controlling interest in the acquiree, and in a business combination in steps

the fair value of the acquirer’s previously held equity interest in the acquiree exceeds the net

amounts of the identifiable assets and liabilities assumed measured at the acquisition date in accor-

dance with the statement (FAS 141(R) or IFRS 3). Although the wording may be the same the result

may differ when calculated as there are still differences in how the things are defined, in spite if

having the same name.

Under the US GAAP the acquirer must measure a non-controlling interest at its acquisition-date fair

value, while under the IFRS the acquirer can choose from combinations to combination if it wants

to measure the non-controlling interest at the fair value, as under the US GAAP or as “the non-

controlling interest’s proportionate share of the acquiree’s net identifiable assets.” And this is not

the only difference, as earlier mentioned the fair value principle is quite alike each other under the

two standards, however there are small differences that might result in quite different valuations.

The US GAAP defines the fair value as the price on an asset or the amount paid to transfer a liabil-

ity in an orderly transaction, which means between willing parties in a non forced or liquidation

sale, with the prices existing on the measurement date, and represents and exit price. The measure-

ments standards assumes the transaction being carried out on a principal market, and if that is ab-

sence the most advantageous market. It also assumes that the participants on that market use the

assets being fair valued at its “highest and best.” This is no matter how the reporting market partici-


Page 29 of 44

pant is planning on using the considerations. The fair value of a liability is measured from a transfer

concept, and reflects non-performance risk, which generally considers the entity’s own risk.

The IFRS defines fair value as the amount at which an assets could be exchanged or a liability trans-

ferred in an “arm’s length transaction” between to willing and knowledgeable parties. The price

under IFRS is not referred to as either an exit or entry price as it is under the US GAAP. IFRS does

furthermore neither guide on about which market should be used when measuring the fair value nor

an equivalent to the highest and best use of an asset. This is an example of the IFRS being a little

less strictly in guiding companies, in the case with markets it would probably not have a big influ-

ence anyway, as observable markets typically does not exists, and hence hypothetical markets will

be used under both standards, which are most likely to be similar. The lack of an equivalent to the

highest and best use of an asset, could however, may result in an asset being valued at less under

IFRS, than it may would under the US GAAP.

4.3.1 US GAAP Development As the two standards have been converging over the last years, they have naturally changed com-

pared with the earlier standards respectively. Although the FAS 141(R) does not provide very big

changed it has implied some. The most significant change, with regards to the scope of this assign-

ment, it without a doubt the new of valuating goodwill generated from a business combination. Un-

der the original FAS 141, goodwill was generated when the cost of an acquired entity exceeded the

amount assigned to assets acquired and liabilities assumed, while under the revised 141 goodwill is

generated when the aggregate exceeded the net amounts of the identifiable assets and liabilities as-

sumed. One of the reasons why they have changed this, except for the purpose of converging with

IFRS, was that under the cost allocation process the cost of completing an acquisition had to be al-

located to the asset concerned. This meant that it was no longer recognised at its fair value. Under

the revised 141 the acquisition costs are required to be assessed apart from the acquisition. Further-

more, the new statement improves the way the acquirer should recognise and measure contingent

considerations30, which in turn should improve the way goodwill is measured. The 141(R) requires

the acquirer to recognise the contingent considerations at the acquisition date, measured at its fair

value on the date. Under the original 141 they were usually recognised when the contingency was

resolved and the consideration was issued or became issuable. In addition, issuance of additional

securities or paying extra cash or assets according to contingencies based upon reaching particular

earnings levels was recognised as adjustment to the accounting for the business combination, while 30 Obligations to make payments conditioned on the outcome of future events


Page 30 of 44

issuance of shares and distribution of assets upon resolution of contingencies based on security

prices was recognised differently. Hence, the revised statement should improve the information giv-

ing about an acquirer’s obligations and rights under contingent consideration arrangements.

In addition this improvement, the revised 141 has also changed how negative goodwill should be

treated. Under the original statement negative goodwill had to be allocated as a pro rata reduction of

the amounts that otherwise would have been assigned to particular assets acquired. The new state-

ment requires negative goodwill to be addressed to as a bargain purchase, and recognise the excess

in earnings as a gain for the acquirer.

4.3.2 IFRS Development It is not just the US GAAP that has been undergoing some changes during the converging mission.

The IFRS has changed a lot as well. First of all they have, just like the US GAAP, abolished the use

of the pooling of interest method. But the last years have also implied changes to the acquisition

method, including a new name, as it under the IAS 22 was called the purchase method. Under that

method goodwill was defined as the difference between the costs of the acquisition and fair value of

the acquirer’s share of assets less liabilities assumed, where costs included not only the price paid

for the assets but also costs relating to complete the business, such as finder’s fee, legal advise, ac-

counting etc. This means that although the assets had been calculated at fair values during the com-

bination, it was not reported at those values as the acquiring company had to add the costs. Under

the IFRS 3 those costs has to be recognised as expenses in the period they occur or the service is

received, resulting in the assets being reporting on the balance sheet exactly at their fair value. That

change also implies that the definition of goodwill had to be changed, as it is now the difference

between the aggregate and the net of amounts of the identifiable assets acquired and the liabilities

assumed.

The treatment of negative goodwill has also changed quite a lot. Under IAS 22 it had be presented

in the same balance sheet classification as goodwill as a deduction from the assets. Under the IFRS

3 it has to be presented as a bargain purchase in profit or loss.

The subsequent treatment of goodwill has changed a lot over the last ten years as a result of IASB’s

wish to improve the quality and international convergence on the area. This meant that amortisation

of goodwill was prohibited and an annual impairment test of goodwill was mandatory instead. The

impairment test itself has however, not developed a lot over the years, except from becoming more

important, as it now have to be used always, and not just in rare cases, is it was the case before. The

biggest difference between nowadays’ impairment test and the one in the beginning of the decade, is


Page 31 of 44

that back then goodwill was first allocated to individual assets in contradiction to now, where

goodwill have to be allocated to CGU’s which is more a group of assets. So although there may not

have been huge difference in how impairment test are carried out, the subsequent treatment of

goodwill under the IFRS has developed a lot. This is mainly because of the change of attitude to-

wards goodwill being an indefinite asset, allocated to groups of assets instead of just one.

4.3.3 Impairment Differences As a result of the fact that neither US GAAP nor the IFRS has changed the impairment test of

goodwill significantly over the last decade, differences between the two standards are quite signifi-

cant. Although, both standards requires companies to allocate goodwill to groups of assets named

reporting and cash generating units, respectively, the difference between can be quite significant.

Both standards define operating segment as a component of a business that engages in business ac-

tivities from which revenues may be earned and expenses incurred. Furthermore, the enterprise’s

chief operating decision maker has to supervise the segment, and make decisions about its allocated

resources and asses its performance and at last discrete financial information has to be available for

the unit for it to be defined as an operating segment. The difference occurs in the way these seg-

ments are used. Under the US GAAP a reporting unit, which is the unit goodwill must be allocated

to, is the size of or smaller than the operating segment, while the IFRS’ CGUs are the lowest level at

which goodwill is monitored internally for management purposes in the acquiring entity. This

means in practice that the CGUs in general are smaller than the reporting units, implying that good-

will is being allocated more specific, and as such probably more thorough.

The impairment test itself is even more different under the two standards. Under the US GAAP the

impairment test consist of a two step test, composed of a test of the reporting unit itself and the im-

pairment test of goodwill itself. The IFRS’ impairment only is a one step test consisting of a test of

CGU.

The US GAAP’s two step test’s first step is a comparison of the fair value and the carrying amount

of a reporting unit, including goodwill. If the fair value exceeds the carrying amount, no impairment

is recognised. If the carrying amount exceeds the fair value, the second step is carried out. That step

compares the fair value goodwill itself with its carrying value. The impairment is valuated as the

carrying amount’s excess over the implied fair value of the goodwill. The implied fair value is cal-

culated as the fair value of goodwill is calculated under a business combination that is the difference

between the fair value and the carrying value of the assets and liabilities included in the reporting


Page 32 of 44

unit. Any loss recognised must not exceed the carrying amount of goodwill, and the impairment

charge should be included in the operating income.

The one step approach under the IFRS nearly just combines the two steps into one, and adds a little

extra. It compares the recoverable amount of the CGU or group of CGUs with their carrying

amount. This use of the recoverable amount is probably one of the biggest differences in this area of

accounting. The recoverable amount is the highest of the fair value less cost to sell or the value in

use of the CGU. The value in use is a calculation of all expected future cash flows, presented in pre-

sent values. The possible impairment loss is recognised in operating results as the excess of the car-

rying amount over the recoverable amount, and is allocated first to goodwill and if any excess over

that book value on a pro rata basis to the other assets of the CGU or the group of so.

4.3.4 Other Differences There are other small differences between the US GAAP and the IFRS concerning business combi-

nation. One of them, and the most relevant for this thesis, is concerning contingent consideration.

Under both IFRS and the US GAAP the contingent consideration is recognised initially at fair value

as an asset, liability, or equity. Under the US GAAP contingent consideration classified as an asset

or liability have to be re-measured to fair value at each report date until the consideration is re-

solved, and changes are recognised in earnings, unless the arrangement is a hedging instrument. If

the consideration is recognised as equity it is not to be re-measured at each report date, and any set-

tlement is accounted for within equity.

The rules under the IFRS are quite a like, but differences may still occur, if the contingent consid-

eration recognised as an asset or a liability is not classified as a financial instrument, which it, how-

ever, is most likely to be. When the consideration classified as an asset or a liability and is a finan-

cial instrument gains or losses are recognised in profit or loss, and when it is not a financial instru-

ment it should be accounted for in accordance with the provisions standard. Considerations classi-

fied as equity is not re-measured under IFRS either, and settlement is also accounted for within the

equity.

These differences in classification of the considerations are the reason why differences may occur,

and therefore create differences in the subsequent treatment of the considerations.

4.4 Was the criticism heard? Chapter 3.4 commented on the fact that both of the boards remain keen on continuously improving

and changing the standards. And both of the boards received criticism of the newly published stan-


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dards at the time, IAS 22 and FAS 141 respectively, and then decided to renew the old ones, both as

a result from the criticism they received, and as result of the fact that business combination is a joint

project and thus the boards wants to converge the two standards respectively.

4.4.1 US GAAP The FAS 141 was mainly criticised for the fact that the way goodwill was recognised did not fully

and correctly asses the value of the goodwill, and the price paid for an entity was probably not cor-

rect. That was however, as described in the previous part taking care of and goodwill was changed,

so that it now should be a more accurate valuation rather than just a residual of goodwill. That sure

does make sense since it was the most criticised topic of the original FAS 141, and not only was it

changed in order to comply with the criticism, it was also converged with the IFRS 3 at the same

time, so the FASB killed two birds with one stone in that case.

With regards to the other great critic of FAS 141, the concern with recognising some intangible as-

sets apart from goodwill and other not, it was however retained according the original 141 in the

revision.31 This probably means that the same critic is still present. The supposed reason why the

FASB did not want to comply with this criticism is that the 141 was mainly revised in order to sig-

nificantly improve the use of the acquisition method hence taking care of the problem concerning

goodwill.

The last major criticisms was difficulties of assessing the valued assets to the specific and relevant

reporting units or business segment, and also on determining if an asset had definite or indefinite

life and if definite how long that life was. In addition, entities also found it very difficult to measure

the assets at fair value prices, implying in difficulties on determining the specific amount allocated

to goodwill and hence the value of it. In summary, difficulties with assessing, defining, and measur-

ing and not so much critic of the rules them selves. The board has complied with many of these

problems mainly by providing additional guiding in the revised 141, e.g. the guidance on recognis-

ing and measuring assets in paragraphs 12 to 33 of FAS 141(R).

Many of the minor critics were about that the FAS 141 did not provide enough guidance, resulting

in differences in two companies in spite of them being quite alike. This was e.g. the case with guid-

ing on when a group of assets constitutes a business and on identifying the acquirer. Both cases have

been taking of under the revised 141 as comprehensive guidance has been provided on both topics.

The remaining minor critic was also complied as changes have been made concerning both the non-

controlling interests’ share of the consolidated subsidiary’s assets and liabilities and the way step 31 FAS 141 (R), page ii, “How Will This Statement Improve Current Accounting Practice?”


Page 34 of 44

acquisitions were accounted for in addition to how contingent considerations, recognition of nega-

tive goodwill and acquisition related costs are treated.

4.4.2 IFRS The most major change that was proposed to the IAS 22 was probably the abolishment of the pool-

ing-of-interest method. This proposal was carried out and the IFRS 3 does not allow the use of the

pooling-of-interest method. The reason why is the IASB had concluded that virtually all business

combination were acquisition because an acquirer could be defined for almost every single one

hence be accounted for using the acquisition method anyway. Another major proposal that was car-

ried out was the proposal of changing the way goodwill and other intangible assets was treated sub-

sequent to their acquisition. Under the IAS 22 all intangible assets with indefinite lives including

goodwill should as known be amortised with a lifespan of maximum 20 years, this was proposed to

be changed to no amortisation and instead an annual test for impairment, which was also carried out,

and no reversal of impairment loss of goodwill was no longer allowed.

It was also proposed that any negative goodwill remaining after the revaluation of assets purchased

should be recognised immediately in the income statement as a gain. This was also complied, and

the name has furthermore been so that it is now called a bargain purchase, which actually is a more

appropriate name as negative goodwill obviously was a very negative name for something that the

acquirer very well might capitalise from.

The two remaining key proposals were also passed as proposed. This concerns the proposal about

costs to reorganise an acquiree’s activities and determination of the acquisition date. The costs

should not be recognised during the acquisition method, but instead they are to be recognised as a

post-combination cost in the financial statement32 while the acquisition date is defined, as proposed,

as the date on which the acquirer obtain control over the acquiree.

The changes proposed regarding initial measurement of identifiable net assets when less than 100 %

acquired is now changed to the acquirer shall measure any non-controlling interest in the acquiree

either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s identifi-

able net assets and the remaining proposed changes was also all carried out, more or less they were

proposed. This meant that all of the proposal from the exposure draft were added to the IFRS 3 and

was a part of the development of accounting for business combination that was present from IAS 22

to IFRS 3.

32 IFRS 3, Recognition Conditions, paragraph 11.


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5. European Sale

5.1 Company Descriptions

Danisco Sugar had plants in 5 different countries with the most sugar produced in Denmark. All the

plant were sold in February 2009 to German company Nordzucker, who has renamed it to Nordic

Sugar, for the acquisition price of 6.8 billion DKK, controlling them from March 2 2009. The sugar

production under Danisco had in 2008/09 revenues of 5,535 DKKm. With profit before taxes on 58

DKKm. Danisco decided to sell their sugar operations, and the rights to Dansukker, as a part of a

new strategy towards becoming a more society conscious company by trying to reduce obesity. This

is done by replacing natural sugar with other kinds of sweeteners in almost all kinds of products.

Danisco had for 20 years been the only manufacturer of sugar in Denmark, which had resulted in

nearly a total monopoly on the Danish sugar consumer market.

Nordzucker bought Danisco Sugar, including name rights to Dansukker, as a part of their strategy

towards becoming the biggest sugar manufacturer in the European Union. As a part of this goal they

want to have around 20 % share of the total sugar consumer market in Europe. Nordzucker revenues

have been very stable over the last 5 years as it has been nearly between 1200-1300 EUR m, with

net incomes between 44 and 115 EUR m. All numbers according to IFRS standards. By taking over

the sugar production in Scandinavia Nordzucker is now also very large on these markets, as they, as

before mentioned, also bought the brand Dansukker. Though they have nearly monopoly on the

Danish consumer market, and their goals are specified on the consumer market, it is only 20 % of

their output there is sold to consumers. The remaining 80 % of Nordic Sugar’s output is sold to the

food industry.

5.2 Sale under US GAAP

The acquisition of the Danisco Sugar Division was priced at a total of 6.8 billion DKK, where 4.9

billion was paid in cash by Nordzucker, corresponding to 671.6 million Euros.33 The last 1.9 billion

DKK is composed by a half billion vendor note, 0.6 billion sugar inventory, and pensions and other

obligations taken over by Nordzucker valued 0.8 billion. The total of assets and liabilities Nord-

33http://www.nordzucker.de/fileadmin/NordzuckerCorp/Internet_Struktur/investor_relations/Quartalsbericht/NZ_2009_9M_englisch.pdf (Nordzucker 9 month report, page 7)


Page 36 of 44

zucker bought were valuated at 6,141 million DKK34, and as before mentioned the cost of the acqui-

sition amounted to 6.8 billion DKK, and since goodwill was defined as the difference between the

costs of the acquisition and fair value of the acquirer’s share of assets less liabilities, the goodwill

that has to be recognised from this sale, was therefore DKKm 6,800 less 6,141 DKKm = 659

DKKm. This is of course a simplification, and it may not be exact same result as the annual reports

will be showing.

If the sale had been under the US GAAP regulations the goodwill would have had to be recognised

as the amount the aggregate of the consideration transferred, generally measured as acquisition-date

fair value and the fair value of any non-controlling interest in the acquiree exceeds the net amounts

of the identifiable assets and liabilities assumed measured at the acquisition date in accordance with

the FAS 141(R). This means that though the wording may be different the result may not be differ-

ent. One thing that could make differences is in the calculation of the fair values, as it may could as

mentioned in the beginning of chapter 4 cause some different results because of slight differences in

the standards. As fair values are assessed with markets as basis, usually by market experts, they are

hard to calculate and therefore the differences are hard to show, and will hence not be shown in this

thesis.

The vendor note can in this case be considered as a contingent consideration, as a vendor note

means that Nordic Sugar owes Danisco money. To be specific EUR 68 million, at an interest rate at

4 % p.a. The note is classified an asset under Other Receivables by Danisco, hence also a financial

instrument. This means that it will probably be treated the same way under the US GAAP as under

the IFRS.

34http://www.danisco.com/wps/wcm/connect/c1bb13004fa2be7dbcdabc4895e3224e/AnnualReportUK2009Online.pdf?MOD=AJPERES&CACHEID=c1bb13004fa2be7dbcdabc4895e3224e (Danisco 2008/09 annual report, page 68, pro forma balance sheet)


Page 37 of 44

6. American Sale

6.1 Company Descriptions Imperial sugar was founded in 1843 and is therefore one of the oldest operating companies in the

State of Texas, which of course means they have a very strong brand on that market, where they

have around 40 % market share. Besides the imperial sugar brand they also have another brand,

Dixie Crystals which is sold in the south eastern areas with a market share of around 25 %.

The corporation had sales in 2008 of around $600 million and is a public traded corporation. How-

ever, this figure has been falling the last couple of years as their sales in 2006 were almost $1 bil-

lion. That has resulted in their first loss since 2005. That is the year the sale of Holly Sugar took

place, which is the sale this thesis will handling. Holly Sugar was a subsidiary with their main op-

erations being two beet sugar plants, a beet seed operation and a distribution facility. The sale was a

part of a strategy to reduce sales of purely commodity products. Holly produced in 2005 4.5 million

cwt of sugar with the total of the company producing 32 million cwt of sugar. Although they sold

the Holly Sugar, they did not sell the brand, which thus is still a part of Imperial Sugar. The price

tag on Holly Sugar was $55.1 million, of which approximately $4.5 million of proceeds were placed

in two escrows35. The buyer was Southern Minnesota Beet Sugar Cooperative (SMBSC).

This is a relatively new company founded in 1978 by local farmers, because they had to make a new

factory as an existing factory in Chaska, Minnesota ceased operations in 1971, and the growers thus

had no market for their crop. After a lot of problems, and with help from American Crystal Sugar,

who managed the operation from 1975 until 1978, when new grower contracts were made, a new

board of directors was hired and SMBSC were founded. Their operations are primarily on the B2B

market, and their refined and liquid sugar are only sold in bulks, 50 pounds bags, and 2000 pounds

super bags, are marketed by another company namely Cargill. The Cooperative underwent a vast

development over the 3 years around the sale, probably mainly because of the Holly acquisition.

The development was most significant in the revenues and expenses has been over doubled, and

nearly tripled, respectively. Unfortunately, it is the expenses that have tripled, resulting in only a

5.55 % progress in net proceeds, in spite of the 33 % progress in total assets. This means that the

SMBSC have been worse at using their assets. See table 6.1 for more information:

35 http://media.corporate-ir.net/media_files/irol/11/113809/10K2005.pdf (Imperial Sugar, 2005 Annual Report, page 52, note 12, Discontinued Operations.


Page 38 of 44

Table 6.1. SMBSC Net revenues, total expenses, net proceeds and total assets (in 1000 $), 2004-2006

Type/year 2004 2005 2006 Rise/fall

Net revenue 185,125 233,669 404,210 118 %

Total expenses 103,117 116,547 297,975 189 %

Net Proceeds 99,538 115,995 105,062 5,55 %

Total Assets 210,755 205,896 280,731 33 %

After the acquisition of the Holly factories, but not the name rights to Holly, SMBSC decided to

name their new subsidiary Spreckels Sugar Company, Inc36, and purchased these name rights from

Imperial Sugar. The reason for choosing this name is because, that was the name of the operations

on the factories before 1996, when the old company merged with the Holly Sugar Corporation.

6.2 The Sale under IFRS

The sale of Holly Sugar Corporation for the price of $55.1 million resulted in goodwill valuated at

$2,228,956. If this goodwill is a result of goodwill recognised in the brand name Spreckels, or the

result of some kind of synergy effect because of the merging with the SMBSC’s operations, is not to

know. But it can of course, per definition be a result of both. A calculation of how much this good-

will would have been worth under the IFRS is not possible to calculate. Both as a result of the fair

value problem once again, but also because of the fact that companies under the US GAAP, is not

permitted to disclose the value of the discontinued assets, as Danisco have done it, which means that

it cannot be seen from the annual reports how much the Holly assets were worth. However, as

goodwill was defined as “the excess of the cost of an acquired entity over the net of the amounts

assigned to assets acquired and liabilities assumed”, the net amounts of the assets acquired and li-

abilities assumed should be $ 55.1 million less $2.3 million = $ 52.8 million. Under the IFRS the

goodwill would was defined is the same although the wording may have been different, so it is as-

sumed, that the goodwill would have been calculated at the same amount, assuming no finished

products were transferred as well, but this is not to be seen from the annual reports.

36 http://www.spreckelssugar.com/history.php


Page 39 of 44

The reason why the goodwill only would have been the same under the IFRS if no finished products

were sold is because Imperial Sugar used the LIFO system to valuate their finished inventories.37

And that inventory valuation system is as earlier described not allowed under the IFRS. The conse-

quence of the LIFO method is that the finished sugar is probably valuated at less, than its counter-

part under IFRS would have been and therefore valuating the assets acquired at less.

The two escrow accounts are contingent consideration, and a difference may appear under that as

well. But it is not likely as it under both standards should be recognised at fair values, and only if

the event the consideration is contingent of, is somewhat likely to happen.

37 http://media.corporate-ir.net/media_files/irol/11/113809/10K2005.pdf (Imperial Sugar 2005 Annual Report, Note 1, accounting policies, Inventories, Page 37. (44/72))


Page 40 of 44

7. Conclusion The objective with thesis was to investigate what differences still remained between the US GAAP

and the IFRS with emphasis on goodwill. First of all there was a comparison of the way the two

boards responsible for issuing the standards, IASB and FASB respectively, issues the standards. The

IASB uses a principle-based system when making new IFRSs while the FASB uses a more rule

based system when setting the US GAAP. The FASB is at the moment considering whether or not

to start using a principle based system like IASB instead, as the rule system has resulting in account-

ing scandals such as the ones with Enron and Worldsom.

This thesis describes 8 different kinds of differences that are present between the US GAAP and the

IFRS. One of the categories is recognition differences under which the use of the LIFO inventory

valuation system is. This valuation system is only allowed under the US GAAP, and can result in

companies being valuated at less than a similar company under the IFRS would have been, as the

LIFO implies that both earning and ending inventory is less than when using FIFO or WAC. How-

ever, the boards are doing a lot to make the two standards converge and have therefore agreed on

the Norwalk agreement, which means that the boards have joint project which eventually should

converge to two completely. One of these joint projects is business combination.

This means that over the last 10 years the rules of combining business under the two standards have

become quite similar. At the beginning of the decade there were a lot of differences between the

two. The most significant difference was probably that it under the IFRS was mandatory to amortise

goodwill over a 20 year period as any other intangible asset, unless in very rare cases. In these cases

an annually test of impairment should be carried out instead. This was the same as under the US

GAAP although the two impairment tests were quite different. The US GAAP impairment test is a

two step test while the IFRS only uses a one step test.

The biggest development of the standards was the abolishment of the pooling-of-interest method. It

was prohibited under the IFRS because the board had concluded that virtually all business combina-

tions were acquisitions hence use the acquisition method. The reason it was prohibited under the US

GAAP was that users needed more information on the assets involved in the combinations, and the

pooling-of-interest method did not give those. Besides that, it was considered to be damaging for

competition because often similar combinations were treated very differently.

Both boards received some criticism on the new standards they issued, and this meant yet more

changes. As these changes were made the rules of business combinations converged even more. It


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has for instance resulted in the two standards defining goodwill the same way and they are both us-

ing the fair value principle a lot, which although may cause some differences as there is small dif-

ferences on how the two standards uses it. This whole convergence of the rules of business combi-

nations also implies that the two sales would not have been very different even if they were using

the other standard. This is because most of the differences and the biggest as well, concern the sub-

sequent treatment of goodwill. Where differences occurs on how the annually impairment test,

which is now mandatory under both standards, is carried out. Under the US GAAP it has changed

while it under IFRS has developed a bit as a result of it being more important now that it is prohib-

ited to amortise goodwill.


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8. Abstract This thesis is treating and investigating the differences that still remain between the IFRS and the

US GAAP, with emphasis on goodwill and what other things that may influence business combina-

tions. The first difference between the US GAAP and the IFRS is the way the boards issues new

standards. The IASB, which is the board issuing IFRS uses a principle based system, which means

that the rules are less stringent than those under US GAAP issued by the FASB.

One of the biggest differences between the IFRS and the US GAAP is the inventory value system

LIFO. This is not allowed to be used under the IFRS but it is under the US GAAP. The influence

this has on business combinations is that in an inflationary market, which all markets are assumed to

be, the use of the LIFO-principle will result in higher cost per unit hence lower profit and a lower

ending inventory, both of these causes a lower value of a company. This difference with LIFO is

defined as a recognition difference which is one of eight difference-categories there are between the

US GAAP and the IFRS.

The thesis also describes the development both standards have undergone over the last ten years.

Development that also means that the rules of business combination, including goodwill has con-

verged quite a lot, as a result of a joint project between the IASB and FASB. This means that both

standards have prohibited the use of the pooling-of-interest method when accounting for business

combination. Under this method companies combining should just make an aggregate of the two’s

assets assessed at historic prices, that is no use of fair value, and not goodwill were created. This is

actually on of the reasons why the FASB prohibited it, its users found that more information on as-

sets acquired where necessary, while the IASB prohibited it because they had concluded that virtu-

ally all business combination where acquisitions as an acquirer always could be identified.

Besides this likeness, the two standards’ ways of defining goodwill from an acquisition were also

quite alike. Under both standards it was defined as the cost of an acquisition over the net value of

the assets acquired and liabilities assumed. This was later changed, after criticism that cost was not

the right way of valuating goodwill to now being the amount an aggregate of the consideration

transferred, generally measured as acquisition-date fair value, the fair value of any non-controlling

interest in the acquiree and in a business combination in steps the fair value of the acquirer’s previ-

ously held equity interest in the acquiree exceeds the net amounts of the identifiable assets and li-

abilities assumed measured at the acquisition date under both standards. This also means that the

sales would not have been very different even if they were using the other standard. The most im-


Page 43 of 44

portant development in accounting for business combination is probably is extensive use of fair

value, while the biggest differences are in the subsequent treatment of the goodwill.

This has always been a topic under which big differences were. In the beginning of the decade com-

panies under the IFRS should amortise goodwill over a 20 year period while goodwill under the US

GAAP was presumed to have indefinite life, which meant that it instead of amortisation should be

tested for impairment annually. Such a test was actually also present under the IFRS, but it was only

in rare cases when a company could prove that the goodwill was associated with a group of assets

whose lifespan was more than 20 years.

The test of impairment itself was, and still is quite different between the two standards. Under the

US GAAP the test is a two step test which first compares the fair value of a reporting unit with its

carrying amount. And then if the carrying value exceeds the fair value the second step compares the

implied fair value of the goodwill with the carrying amount of goodwill. While the test under the

IFRS only compares the carrying amount including goodwill of the unit with the recoverable

amount of the unit. These units also represents another difference between the two standards but it a

quite small which is unlikely to have any major influence, like most of the difference, hence the

differences in impairment test probably stands out as the biggest difference between goodwill under

the US GAAP and the IFRS.


Page 44 of 44

9. Sources Book: International Accounting, International edition 2009 by Timothy Doupnik and Hector Perera Web pages: www.fasb.org www.iasb.org www.sec.gov www.iasplus.com www.danisco.com www.nordzucker.de www.imperialsugar.com www.smbsc.com www.spreckelssugar.com http://gaap360.wordpress.com/2007/07/20/finding-the-house-of-gaap-on-the-internet/ http://en.allexperts.com/e/i/ia/ias_36:_impairment_of_assets.htm http://www.cluteinstitute-onlinejournals.com/PDFs/1703.pdf

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