(a) is difficult for users to understand; and
(b) provides less relevant information than would be the case if the legal parent (ie the entity providing the consideration) were treated as the acquirer.
The Board concluded that treating the legal parent as the acquirer in such circumstances places the form of the transaction over its substance, thereby providing less useful information than is provided using the control concept to identify the acquirer. Therefore, the Board concluded that the IFRS should not include any departures from the control concept to identify an acquirer.
Identifying an acquirer when a new entity is formed to effect a business combination (paragraphs 22 and 23)
BC62 ED 3 proposed, and the IFRS requires, that when a new entity is formed to issue equity instruments to effect a business combination, one of the combining entities that existed before the combination should be identified as the acquirer on the basis of the evidence available. In deciding to include this requirement in the IFRS, the Board identified two approaches to the purchase method that had been applied in various jurisdictions. The first approach viewed business combinations from the perspective of one of the combining entities that existed before the combination, ie the acquirer must be one of the combining entities that existed before the combination and therefore cannot be a new entity formed to issue equity instruments to effect a combination. The second approach viewed business combinations from the perspective of the entity, which could be a newly formed entity, providing the consideration, ie the acquirer must be the entity providing the consideration. The Board noted that whereas some jurisdictions had interpreted IAS 22 as requiring the acquirer to be identified as one of the combining entities that existed before the combination, other jurisdictions had interpreted IAS 22 as requiring the entity, which could be a newly formed entity, providing the purchase consideration to be treated as the acquirer.
BC63 The Board observed that if a new entity is formed to issue equity instruments to effect a business combination between, for example, two other entities, viewing the combination from the perspective of the entity providing the consideration would result in the newly formed entity applying the purchase method to each of the two other combining entities. This would, in effect, produce a business combination accounted for as a fresh start. The Board noted that this would potentially provide users of the financial statements with more relevant information than an approach in which one of the pre-existing combining entities must be treated as the acquirer.
BC64 The Board also noted that some of the issues that arise under an approach in which one of the pre-existing combining entities must be treated as the acquirer do not arise if the entity providing the purchase consideration is treated as the acquirer. For example, treating one of several combining entities as the acquirer when those separate entities are brought together to form a new consolidated group might require one of those pre-existing entities to be arbitrarily selected as the acquirer. The Board agreed that the usefulness of the information provided in such circumstances is questionable. If the entity providing the purchase consideration is treated as the acquirer, that entity would be regarded as having obtained control of each of the pre-existing combining entities and would therefore apply the purchase method to each of the combining entities.
BC65 The Board also considered the assertion that treating as the acquirer a new entity formed to issue equity instruments to effect a business combination places the form of the transaction over its substance, because the new entity may have no economic substance. The formation of such entities is often related to legal, tax or other business considerations that do not affect the identification of the acquirer. For example, a combination between two entities that is structured so that one entity directs the formation of a new entity to issue equity instruments to the owners of both of the combining entities is, in substance, no different from a transaction in which one of the combining entities directly acquires the other. Therefore, the transaction should be accounted for in the same way as a transaction in which one of the combining entities directly acquires the other. Those supporting this approach argue that to do otherwise would impair the usefulness of the information provided to users about the combination, because both comparability and reliability (which rests on the notions of accounting for the substance of transactions and representational faithfulness, ie that similar transactions are accounted for in the same way) are diminished.
BC66 In developing ED 3 and the IFRS, the Board concluded that the users of an entity's financial statements are provided with more useful information about a business combination when that information represents faithfully the transaction it purports to represent. Therefore, the Board concluded that the IFRS should adopt the approach in which a business combination is viewed from the perspective of one of the combining entities that existed before the combination. In other words, the acquirer must be one of the combining entities that existed before the combination and therefore cannot be a new entity formed to issue equity instruments to effect a combination.
Cost of a business combination (paragraphs 24-35)
BC67 As proposed in ED 3, the IFRS carries forward from IAS 22, without reconsideration, the principle that the cost of a business combination should be measured by the acquirer as the aggregate of: the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the acquirer, in exchange for control over the acquiree; plus any costs directly attributable to the business combination. The IFRS also incorporates, without reconsideration:
(a) the requirements of SIC-28 Business Combinations—"Date of Exchange" and Fair Value of Equity Instruments on the distinction between the date of exchange and the acquisition date, and, with one amendment (see paragraph BC69), measuring the fair value of equity instruments issued as part of the cost of a business combination;
(b) the requirement previously in paragraph 23 of IAS 22 on the treatment of the cost of a business combination when settlement of all or any part of that cost is deferred; and
(c) the requirements previously in paragraphs 65-70 of IAS 22 on adjustments to the cost of a business combination.
The Board is reconsidering these requirements as part of the second phase of its project.
BC68 The Basis for Conclusions on SIC-28 provided information on how the former Standing Interpretations Committee reached its consensus on the issues in (a) above (ie the distinction between the date of exchange and the acquisition date, and measuring the fair value of equity instruments issued as part of the cost of a combination). That Basis for Conclusions stated the following:
...when an acquisition is achieved in stages, the distinction between the date of acquisition and the date of the exchange transaction is important. When an acquisition is achieved in one exchange transaction there is no distinction between the date of exchange and the date of acquisition. Sub-paragraph 100(a) of the Framework indicates that when assets are recorded at their historical cost, the assets are recorded at the fair value of the purchase consideration given to acquire them at the time of their acquisition. Therefore, when a business is acquired in one exchange transaction (i.e., not in stages), the fair value of the purchase consideration given is determined when control ... of the net assets and operations of the acquiree is effectively transferred to the acquirer. When a business is acquired in stages (e.g., successive share purchases), the fair value of the purchase consideration given at each stage is determined when each individual investment is recognised in the financial statements of the acquirer.
...marketable securities issued by the acquirer are measured at their fair value, which is their market price as at the date of the exchange transaction, provided that undue fluctuations or the narrowness of the market do not make the market price an unreliable indicator. Under IAS 39, an investment in an equity instrument is measured at its fair value, except in specified circumstances. Equity instruments have only one fair value in a market. IAS 39... indicates that the existence of published price quotations in an active market is normally the best evidence of fair value. Therefore, estimates of premiums for large, and discounts for small, blocks of equity instruments issued in comparison to that exchanged in observable transactions are not considered. When the published price of a quoted equity instrument on the date of an exchange is determined to be an unreliable indicator of its fair value, the information necessary to reliably estimate the effect of the undue fluctuation or market narrowness at that date is unlikely to be available due to the many factors that affect prices. Consequently, other evidence and valuation methods for determining fair value are considered only in the rare circumstance when it can be demonstrated that the published price is an unreliable indicator and that the other evidence and valuation methods provide a more reliable estimate of the equity instrument's fair value at the date of exchange.
BC69 SIC-28 stated that the published price of an equity instrument issued as part of the cost of a business combination is an unreliable indicator of fair value only when it has been affected by an undue price fluctuation or a narrowness of the market. The Board is of the view that the only circumstance in which the published price of an equity instrument is an unreliable indicator of its fair value is when the published price has been affected by the thinness of the market. Therefore, the Board decided to amend accordingly the requirements of SIC-28 included in the IFRS.
BC70 As proposed in ED 3, the IFRS includes additional guidance clarifying that future losses or other costs expected to be incurred as a result of a business combination cannot be included as part of the cost of the combination. The Board observed that those future losses or other costs do not satisfy the definition of a liability and therefore are not liabilities incurred by the acquirer in exchange for control over the acquiree, nor liabilities of the acquiree assumed by the acquirer. In the Board's view, future losses or other costs expected to be incurred as a result of a business combination should not have been included as part of the 'cost of acquisition’ in accordance with IAS 22, but the Board noted that this was not stated explicitly in IAS 22. The IFRS states explicitly that this is the case to ensure that future losses or other costs expected to be incurred as a result of a business combination are treated consistently by all entities.
Costs directly attributable to the business combination (paragraphs 29-31)
BC71 Paragraph 25 of IAS 22 indicated that direct costs relating to an acquisition include the costs of registering and issuing equity instruments, and professional fees paid to accountants, legal advisers, valuers and other consultants to effect the acquisition. The Board noted that treating the costs of registering and issuing equity instruments as costs directly attributable to a business combination is inconsistent with the treatment of such costs in the jurisdictions of its partner standard-setters. It is also inconsistent with the conclusion reached by the G4+1 group of standard-setters at its meeting in August 1998, namely that transaction costs arising on the issue of equity instruments are an integral part of the equity issue transaction and should be recognised directly in equity as a reduction of the proceeds of the equity instruments. The Board observed that treating the transaction costs as a reduction of the proceeds of the equity instruments issued is consistent with the treatment of such costs in accordance with IAS 32 Financial Instruments: Disclosure and Presentation in circumstances involving the issue of equity instruments other than to effect a business combination.
BC72 Therefore, the Board concluded that the IFRS should not carry forward the requirement in IAS 22 for the costs of registering and issuing equity instruments to be treated as costs directly attributable to a business combination.
*In August 2005 IAS 32 was amended as IAS 32 Financial Instruments: Presentation.
BC73 As part of the first phase of the project, the Board considered issues raised by constituents as part of the Improvements project that related to IAS 22. One of the issues raised was whether the costs of arranging financial liabilities for the purpose of acquisition financing are costs directly attributable to the acquisition and therefore part of the cost of acquisition. Consistently with its conclusions about the costs of registering and issuing equity instruments, the Board concluded that the costs of arranging and issuing financial liabilities are an integral part of the liability and, in accordance with IAS 39 Financial Instruments: Recognition and Measurement, should be included in the initial measurement of the liability rather than as part of the costs directly attributable to a business combination.
Allocating the cost of a business combination (paragraphs 36-60)
Recognising the identifiable assets acquired and liabilities and contingent liabilities assumed (paragraphs 36-50)
BC74 With the exception of the separate recognition of an acquiree's intangible assets, the IFRS carries forward the general principle previously in paragraphs 19 and 26-28 of IAS 22. That principle required an acquirer to recognise separately, from the acquisition date, the acquiree's identifiable assets and liabilities at that date that can be measured reliably and for which it is probable that any associated future economic benefits will flow to, or resources embodying economic benefits will flow from, the acquirer. The IFRS also carries forward:
(a) the requirement previously in paragraph 19 of IAS 22 for the acquirer's income statement to incorporate the acquiree's profits and losses from the acquisition date;
(b) the guidance previously in paragraph 20 of IAS 22 on determining the acquisition date; and
(c) the prohibition previously in paragraph 29 of IAS 22 on recognising as part of allocating the cost of a business combination provisions for future losses or other costs expected to be incurred as a result of the combination.
BC75 However, the IFRS changes the requirements previously in IAS 22 on separately recognising the following items as part of allocating the cost of a combination:
(a) provisions for terminating or reducing the activities of the acquiree; and
(b) contingent liabilities of the acquiree.
The IFRS also clarifies the criteria for separately recognising intangible assets of the acquiree as part of allocating the cost of a combination, and includes guidance on the treatment of payments that an entity is contractually required to make if it is acquired in a business combination.
Provisions for terminating or reducing the activities of the acquiree
BC76 IAS 22 contained one exception to the general principle that an acquirer should recognise separately, from the acquisition date, only those liabilities of the acquiree that existed at the acquisition date and satisfy the recognition criteria. The exception related to provisions for terminating or reducing the activities of the acquiree that were not liabilities of the acquiree at the acquisition date. Paragraph 31 of IAS 22 required the acquirer to recognise as part of allocating the cost of a combination a provision for terminating or reducing the activities of the acquiree (a 'restructuring provision') that was not a liability of the acquiree at the acquisition date, provided the acquirer had satisfied the following criteria:
(a) at or before the acquisition date it had developed the main features of a plan that involved terminating or reducing the activities of the acquiree and related to:
(i) compensating employees of the acquiree for terminating their employment;
(ii) closing the facilities of the acquiree;
(iii) eliminating product lines of the acquiree; or
(iv) terminating contracts of the acquiree that had become onerous because the acquirer had communicated to the other party, at or before the acquisition date, that the contract would be terminated;
(b) raised a valid expectation in those affected by the plan that the plan will be implemented by announcing, at or before the acquisition date, the plan's main features; and
(c) by the earlier of three months after the acquisition date and the date when the annual financial statements are authorised for issued, developed those main features into a detailed formal plan.
BC77 The general criteria for identifying and recognising restructuring provisions are in IAS 37 Provisions, Contingent Liabilities and Contingent Assets. IAS 37 states that a constructive obligation to restructure (and therefore a liability) arises only when the entity has developed a detailed formal plan for the restructuring and either raised a valid expectation in those affected that it will carry out the restructuring by publicly announcing details of the plan or begun implementing the plan. Such a liability is required to be recognised in accordance with IAS 37 when it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation.
BC78 The Board observed that the requirement in IAS 22 for the acquirer to recognise a restructuring provision that was not a liability of the acquiree at the acquisition date provided specified criteria were met leads to different accounting, depending on whether a plan to restructure arose in connection with, or in the absence of, a business combination. The Board agreed that it should not, as part of its Business Combinations project, reconsider the general requirements in IAS 37 on the identification and recognition of restructuring provisions, but that it should consider whether the differences in accounting should be carried forward in the IFRS arising from the first phase of that project.
BC79 In developing ED 3 and the IFRS, the Board considered the view that a restructuring provision that was not a liability of the acquiree at the date of acquisition should nonetheless be recognised by the acquirer as part of allocating the cost of the combination if the decision to terminate or reduce the activities of the acquiree is communicated at or before the acquisition date to those likely to be affected and, within a limited time after the acquisition date, a detailed formal plan for the restructuring is developed. Those supporting this view, including some respondents to ED 3, argued that:
(a) the estimated cost of terminating or reducing the activities of the acquiree would have influenced the price paid by the acquirer for the acquiree and therefore should be taken into account in measuring goodwill; and
(b) the acquirer is committed to the costs of terminating or reducing the activities of the acquiree as a result of the business combination: in other words, the combination is the past event that gives rise to a present obligation to terminate or reduce the activities of the acquiree.
BC80 The Board rejected these arguments, noting that the price paid by the acquirer would also be influenced by future losses and other 'unavoidable’ costs that relate to the future conduct of the business, such as costs of investing in new systems. Such costs are not recognised as liabilities as part of allocating the cost of the business combination because they do not represent liabilities or contingent liabilities of the acquiree at the acquisition date, although the expected future outflows may affect the value of existing recognised assets. The Board also agreed that it is inconsistent to argue that when a business combination gives rise to 'unavoidable’ restructuring costs, the combination is a past event giving rise to a present obligation, but to prohibit recognition of a liability for other 'unavoidable’ costs to be incurred as a result of the combination as part of allocating the cost.
BC81 The Board also noted the assertion that the necessary condition for the existence of a constructive obligation for restructuring is the creation of a valid expectation in those affected that it will carry out the restructuring by beginning implementation or by a sufficiently specific announcement. As a result, some argue that satisfying the criteria previously in paragraph 31 of IAS 22 is sufficient to establish the existence, at the acquisition date, of a liability for terminating or reducing the activities of the acquiree. Based on the Framework, a liability for terminating or reducing the activities of the acquiree does not exist at the acquisition date unless at that date there is a present obligation (legal or constructive) for the costs of terminating or reducing the acquiree's activities arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. Based on the conclusions reached in IAS 37, this will be the case only when, before the acquisition date, firm contracts for the restructuring have been entered into, or a detailed formal plan for the restructuring has been developed, and a valid expectation has been raised in those affected (either by a public announcement of the main features of the plan or by the start of its implementation) that the restructuring will be carried out. The Board decided that any reconsideration of the necessary conditions that must be satisfied for a constructive obligation for restructuring to exist should be part of a future project on IAS 37, and not part of the Business Combinations project, because it relates to broader issues associated with the existence of obligations for restructurings generally.
BC82 The Board concluded that if the criteria previously in paragraph 31 of IAS 22 for the recognition of a restructuring provision were carried forward, similar items would be accounted for in dissimilar ways because the timing of the recognition of restructuring provisions would differ, depending on whether a plan to restructure arises in connection with, or in the absence of, a business combination. The Board agreed that this would impair the usefulness of the information provided to users about an entity's plans to restructure, because both comparability and reliability would be diminished.
BC83 The Board considered the concern expressed by some that removing the exception in IAS 22 would simply open the way to accounting that achieves the same result by other means. For example, the acquiree, on the instructions of the acquirer, might enter into obligations to restructure the business before the formal transfer of control. The Board considered the suggestions that to overcome the potential for entities to structure business combinations so as to achieve a desired outcome, the IFRS should require either of the following:
(a) prohibiting restructuring provisions that are recognised liabilities of the acquiree at the acquisition date from being recognised as part of allocating the cost of the combination (and therefore from the determination of goodwill or any excess of the acquirer's interest in the net fair value of the acquiree's identifiable net assets over the cost of the combination). Under such an approach, the acquiree's existing liability would be excluded from the acquiree's pre-combination net assets and instead treated as arising after the combination.
(b) continuing to permit recognition of restructuring provisions that are not liabilities of the acquiree at the acquisition date as part of allocating the cost of the combination provided that, within a limited time after the combination, the decision to terminate or reduce the activities of the acquiree is communicated to those likely to be affected, and a detailed formal plan for the restructuring is developed.
BC84 The Board observed that for the acquirer to have, in effect, the 'free choice’ to recognise a liability as part of allocating the cost of the business combination requires such a level of cooperation between the acquirer and acquiree that the acquiree, on the instructions of the acquirer, would enter into obligations to restructure the business before the formal transfer of control. The Board concluded that possible cooperation between parties to a combination does not provide sufficient justification for departing from the Framework and treating post-combination liabilities as arising before the combination or pre-combination liabilities as arising after the combination.
BC85 Moreover, if the acquirer can compel the acquiree to incur obligations, then it is likely that the acquirer already controls the acquiree, given that control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. If, alternatively, the acquirer suggests that negotiations cannot proceed until the acquiree arranges, for example, to restructure its workforce, and the acquiree takes the steps necessary to satisfy the recognition criteria for restructuring provisions in IAS 37, then those obligations are pre-combination obligations of the acquiree and, in the Board's view, should be recognised as part of allocating the cost of the combination.
BC86 The Board considered the assertion that another way in which an acquirer could achieve the same result as that previously achieved for restructuring provisions under IAS 22 would be for the acquirer to recognise the restructuring provision either as part of the cost of the business combination, ie as a liability incurred by the acquirer in exchange for control of the acquiree, or as a contingent liability of the acquiree.’ The Board noted that a provision for restructuring the acquiree could be recognised by the acquirer, and therefore included as part of the cost of the combination, only if the criteria in IAS 37 for recognising a restructuring provision are satisfied. In other words, the acquirer, at or before the acquisition date, must have developed a detailed formal plan for the restructuring and raised a valid expectation in those affected that it will carry out the restructuring by publicly announcing the main features of the plan or beginning its implementation. These criteria are not the same as the criteria previously in IAS 22 for recognising restructuring provisions as part of allocating the cost of a combination. Therefore, the Board disagreed that an acquirer can recognise a provision for restructuring the acquiree as part of the cost of the combination to achieve virtually the same result as that previously available under IAS 22.
BC87 Consequently, the Board concluded that liabilities for terminating or reducing the activities of the acquiree should be recognised by the acquirer as part of allocating the cost of the business combination only when the acquiree has, at the acquisition date, an existing liability for restructuring recognised in accordance with IAS 37. A majority of respondents to ED 3 supported this conclusion.
Intangible assets
BC88 The IFRS requires an acquirer to recognise separately at the acquisition date an intangible asset of the acquiree, but only when it meets the definition of an intangible asset in IAS 38 Intangible Assets and its fair value can be measured reliably. A non-monetary asset without physical substance must be identifiable to meet the definition of an intangible asset. In accordance with IAS 38, an asset meets the identifiability criterion in the definition of an intangible asset only if it arises from contractual or other legal rights or is separable. Previously IAS 22 required an acquirer to recognise any identifiable asset of the acquiree separately from goodwill at the acquisition date if it was probable that any associated future economic benefits would flow to the acquirer and the asset could be measured reliably. The previous version of IAS 38 clarified that the definition of an intangible asset required an intangible asset to be identifiable to distinguish it from goodwill. However, it did not define 'identifiability', but stated that an intangible asset could be distinguished from goodwill if the asset was separable, though separability was not a necessary condition for identifiability. Therefore, previously under international standards, to be recognised separately from goodwill an intangible asset would have to be identifiable and reliably measurable, and it would have to be probable that any associated future economic benefits would flow to the acquirer.
* See paragraphs BC107-BC110 for a discussion of this latter point.
BC89 Changes during 2001 to the requirements in Canadian and United States standards on the separate recognition of intangible assets acquired in a business combination prompted the Board to consider whether it also should explore this issue as part of the first phase of its Business Combinations project. The Board observed that intangible assets comprise an increasing proportion of the assets of many entities, and that intangible assets acquired in a business combination were often included in the amount recognised as goodwill, despite the previous requirements in IAS 22 and the previous version of IAS 38 that they should be recognised separately from goodwill. The Board also agreed with the conclusion reached in IAS 22 and by the Canadian and US standard-setters that the usefulness of financial statements would be enhanced if intangible assets acquired in a business combination were distinguished from goodwill. Therefore, the Board concluded that IAS 38 and the IFRS arising from the first phase of the project should provide a definitive basis for identifying and recognising intangible assets acquired in a business combination separately from goodwill.
BC90 The Board focused its deliberations first on intangible assets, other than in-process research and development projects, acquired in a business combination. Paragraphs BC91-BC103 outline those deliberations. The Board then considered whether the criteria for recognising those intangible assets separately from goodwill should also be applied to in-process research and development projects acquired in a business combination, and concluded that they should. The Board's reasons for reaching this conclusion are outlined in paragraphs BC104-BC106.
BC91 In revising IAS 38 and developing the IFRS, the Board affirmed the view contained in the previous version of IAS 38 that identifiability is the characteristic that conceptually distinguishes other intangible assets from goodwill. The Board concluded that to provide a definitive basis for identifying and recognising intangible assets separately from goodwill, the concept of identifiability needed to be articulated more clearly.
BC92 Consistently with the guidance in the previous version of IAS 38, the Board concluded that an intangible asset can be distinguished from goodwill if it is separable, ie capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged. Therefore, in the context of intangible assets, separability signifies identifiability, and intangible assets with that characteristic that are acquired in a business combination should be recognised as assets separately from goodwill.
BC93 However, again consistently with the guidance in the previous version of IAS 38, the Board concluded that separability is not the only indication of identifiability. The Board observed that, in contrast to goodwill, the values of many intangible assets arise from rights conveyed legally by contract or statute. In the case of acquired goodwill, its value arises from the collection of assembled assets that make up an acquired entity or the value created by assembling a collection of assets through a business combination, such as the synergies that are expected to result from combining two or more entities or businesses. The Board also observed that, although many intangible assets are both separable and arise from contractual-legal rights, some contractual-legal rights establish property interests that are not readily separable from the entity as a whole. For example, under the laws of some jurisdictions some licences granted to an entity are not transferable except by sale of the entity as a whole. The Board concluded that the fact that an intangible asset arises from contractual or other legal rights is a characteristic that distinguishes it from goodwill. Therefore, intangible assets with that characteristic that are acquired in a business combination should be recognised as assets separately from goodwill.
BC94 As outlined in paragraph BC88, the previous Standards required an intangible asset acquired in a business combination and determined to be identifiable also to satisfy the following recognition criteria to be recognised as an asset separately from goodwill:
(a) it must be probable that any associated future economic benefits will flow to the acquirer; and
(b) it must be reliably measurable.
BC95 ED 3 and the Exposure Draft of Proposed Amendments to IAS 38 proposed that the above recognition criteria would, with the exception of an assembled workforce, always be satisfied for an intangible asset acquired in a business combination. Therefore, those criteria were not included in ED 3. ED 3 proposed requiring an acquirer to recognise separately at the acquisition date all of the acquiree's intangible assets as defined in IAS 38, other than an assembled workforce. After considering respondents' comments, the Board decided:
(a) to proceed with the proposal that the probability recognition criterion is always considered to be satisfied for intangible assets acquired in a business combination.
(b) not to proceed with the proposal that, with the exception of an assembled workforce, sufficient information should always exist to measure reliably the fair value of an intangible asset acquired in a business combination.
BC96 In developing ED 3 and the IFRS, the Board observed that the fair value of an intangible asset reflects market expectations about the probability that the future economic benefits associated with the intangible asset will flow to the acquirer. In other words, the effect of probability is reflected in the fair value measurement of an intangible asset. The Board concluded that, given its decision to require the acquirer to recognise the acquiree's intangible assets satisfying the relevant criteria at their fair values as part of allocating the cost of a business combination, the probability recognition criterion need not be included in the IFRS. The Board observed that this highlights a general inconsistency between the recognition criteria for assets and liabilities in the Framework (which states that an item meeting the definition of an element should be recognised only if it is probable that any future economic benefits associated with the item will flow to or from the entity, and the item can be measured reliably) and the fair value measurements required in, for example, a business combination. However, the Board concluded that the role of probability as a criterion for recognition in the Framework should be considered more generally as part of a forthcoming Concepts project.
