The cost of the business combination will be the total of the fair values of the consideration given by the acquirer plus any attributable cost. In this case the shares of Abbott will be fair valued at $6 million with $3 million being shown as share capital and $3million as share premium. However, the shares issued as contingent consideration may be accounted for under IFRS2. The terms of the issuance of shares will need to be examined. Where part of the consideration may be reliant on uncertain future events, and it is probable that the additional consideration is payable and can be measured reliably, then it is included in the cost of the business consideration at the acquisition date. However, the question to be answered in the case of the additional 5,000 shares per director is whether the shares are compensation or part of the purchase price. There is a need to understand why the acquisition agreement includes a provision for a contingent payment. It is possible that the price paid initially by Abbott was quite low and, therefore, this then represents a further purchase consideration. However, in this instance the additional payment is linked to continuing employment and, therefore, it would be argued that because of the link between the contingent consideration and continuing employment that it represents a compensation arrangement which should be included within the scope of IFRS2.
Thus as there is a performance condition, (the performance condition will apply as it is not a market condition) the substance of the agreement is that the shares are compensation, then they will be fair valued at the grant date and not when the shares vest. Therefore, the share price of $2 per share will be used to give compensation of $50,000 (5 x 5,000 x $2). (Under IFRS3, fair value is measured at the date the consideration is provided and discounted to presented value. No guidance is provided on what the appropriate discount rate might be. Thus the fair value used would have been $3 per share at 31 Oct 2007.) The compensation will be charged to the income statement and included in equity.
The shares issued to the employees of Abbott will be accounted for under IFRS2. The issuance of fully paid shares will be presumed to relate to past service. The normal vesting period for share options is irrelevant, as is the average fair value of the shares during the period. The shares would be expensed at a value of $3 million with a corresponding increase in equity. Goods or services acquired in a share based payment transaction should be recognised when they are received. In the case of goods then this will be when this occurs. However, it is somewhat more difficult sometimes to determine when services are received. In a case of goods the vesting date is not really relevant, however, it is highly relevant for employee services. If shares are issued that vest immediately then there is a presumption that these are a consideration for past employee services.
(c) IAS16 ‘Property, Plant and Equipment’ permits assets to be revalued on a class by class basis. The different characteristics of the buildings allow them to be classified separately. Different
measurement models can, therefore, be used for the office buildings and the film studios. However, IAS8 ‘Accounting policies, changes in accounting estimates and errors’ says that once an entity has decided on its accounting policies, it should apply them consistently from period to period and across all relevant transactions. An entity can change its accounting policies but only in specific circumstances. These circumstances are:
(a) where there is a new accounting standard or interpretation or changes to an accounting standard
(b) where the change results in the financial statements providing reliable and more relevant information about the effects of transactions, other events or conditions on the entity’s financial position, financial performance, or cash flows
Voluntary changes in accounting policies are quite uncommon but may occur when an accounting policy is no longer appropriate. Router will have to ensure that the change in accounting policy meets the criteria in IAS8. Additionally, depreciated historical cost will have to be calculated for the film studios at the commencement of the period and the opening balance on the revaluation reserve and any other affected component of equity adjusted. The comparative amounts for each prior period should be presented as if the new accounting policy had always been applied. There are limits on retrospective application on the grounds of impracticability.
