IFRS Conference – Revised IFRS 3 on Business Combination


To be effective on July 2009.

Auditors trained in the world of historical cost accounting now have to deal with issues of Fair Value.

1. Stepped acquisition as a way of earning management.
Suppose you had intended to buy 60% stake in the target business with projection that that business would be in net loss in Year 1 and significant profit in Year. To avoid consolidating the bad result of target business into your company from Year 1, you decide to split the acquisition over 2 years ie. 30% in Year 1 and another 30% in Year 2.

2. The magic of 1% stake
If we base on 50% as a measure of control over a company, and you expect your 50%-stake-subsidiary to lose heavily this year and that you do not wish to consolidate that results with other companies in your Group, can you enter into sell-and-buyback contract for the 1% stake ie. sell 1% to demerge the loss-making subsidiary in one year and buy-back 1% to re-consolidate?

3. Internal consistency (within a FRS), external inconsistency (between FRSs)
The choice words from Professor Pearl Tan from SMU. She cited an inconsistency when borrowing costs can be capitalised but pre-acquisition costs must be expensed off to P&L under the revised IFRS 3. Sir Tweedie responded to that comment but I missed the rebuttal sadly.

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