5.1 Business Combinations

Although IFRS Accounting Standards and U.S. GAAP are significantly converged in the subject of business combinations, as the table below shows, differences exist in several key areas: (1) measurement of a noncontrolling interest in a business combination, (2) contingent assets and liabilities, (3) transactions between entities under common control, (4) pushdown accounting, (5) operating leases, and (6) the definition of a business (though the definition of a business became more converged with the issuance of Definition of a Business — amendments to IFRS 3).

Topic	IFRS Accounting Standards (IFRS 3, IFRS 15, IFRS 16, IAS 37)	U.S. GAAP (ASC 805, ASC 450, ASC 842)
Measurement of noncontrolling interest in a business combination	An entity must make an accounting policy election, on an acquisition-by-acquisition basis, for measurement of certain components of a noncontrolling interest either at (1) the noncontrolling interest’s proportionate share of the net fair value of the acquiree’s identifiable net assets (i.e., the “proportionate share method”) or (2) fair value (i.e., the “full goodwill” approach), the latter of which is in a manner consistent with U.S. GAAP.	An entity is required to recognize and measure noncontrolling interests at fair value.
Contingent liabilities (i.e., liabilities arising from contingencies under U.S. GAAP) — recognition and initial measurement	An entity recognizes a contingent liability at fair value if it (1) is a present obligation that results from a past event and (2) can be measured reliably.	A liability arising from a contingency is recognized at fair value, if determinable, as of the measurement (acquisition) date. Alternatively, if the fair value cannot be determined, the entity will recognize a liability only if information available before the end of the measurement period indicates that it is probable that a liability had been incurred as of the acquisition date and the amount of the liability can be reasonably estimated.
Contingent assets (i.e., assets arising from contingencies under U.S. GAAP) — recognition and initial measurement	An entity is not permitted to recognize a contingent asset in a business combination.	An asset arising from a contingency is recognized at fair value, if determinable, as of the measurement (acquisition) date. Alternatively, if fair value cannot be determined, the entity will recognize an asset only if the information available before the end of the measurement period indicates that it is probable that an asset existed as of the acquisition date and that the amount of the asset can be reasonably estimated.
Contingent liabilities (i.e., liabilities arising from contingencies under U.S. GAAP) — subsequent measurement	An entity recognizes a contingent liability at the higher of: The amount calculated as the best estimate of the expenditure required to settle the present obligation at the end of the reporting period. The acquisition-date fair value less the cumulative amortization recognized in accordance with IFRS 15 (if appropriate).	Liabilities arising from contingencies should be subsequently accounted for by using a systematic and rational basis, depending on the nature of the contingent liabilities.
Contingent assets (i.e., assets arising from contingencies under U.S. GAAP) — subsequent measurement	Recognition is appropriate only when realization of the income is virtually certain and therefore the related asset is no longer contingent.	Assets arising from contingencies should be subsequently accounted for by using a systematic and rational basis, depending on the nature of the contingent assets.
Business combinations between entities under common control	IFRS Accounting Standards provide no authoritative guidance on the accounting for transfers of businesses between entities under common control. In practice, entities can elect to apply either the acquisition method or the predecessor’s historical cost.	Businesses and net assets transferred between entities under common control are generally recognized at their historical carrying amounts, as reflected in the parent’s financial statements.
Pushdown accounting	There is no authoritative guidance on whether acquired entities can apply pushdown accounting in their separate financial statements. In practice, IFRS preparers around the world do not apply pushdown accounting to separate financial statements.	Acquired entities have the option to apply pushdown accounting in their separate financial statements.
Operating lease in a business combination	If the acquiree is a lessor, favorable or unfavorable terms of the operating lease, relative to current market terms or prices, are embedded in the fair value measurement of the leased asset. No separate intangible asset or liability is recognized.	If the acquiree is a lessor, an intangible asset or liability is recognized separately from the leased asset if the terms of the lease are favorable or unfavorable, respectively, relative to current market terms or prices.
Definition of a business — concentration test	IFRS Accounting Standards provide an optional concentration test that allows an entity to determine whether a set is not a business.	An entity is required to determine whether substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or group of similar identifiable assets. If that threshold, or “screen,” is reached, the set is not a business.
Definition of a business — substantive process	An acquired contract should be considered a substantive process even if the set does not have outputs if it provides access to an assembled workforce that performs a critical process that the entity controls.	An acquired contract (e.g., an outsourcing arrangement) cannot provide a substantive process if the set does not have outputs.
Measurement-period adjustments	An acquirer should recognize adjustments to provisional amounts identified during the measurement period on a retrospective basis as if the accounting for the business combination had been completed at the acquisition date.	An acquirer must recognize adjustments to provisional amounts identified during the measurement period in the reporting period in which the adjustments are determined rather than retrospectively.
Contract assets and contract liabilities from contracts with customers acquired in a business combination	Under IFRS Accounting Standards, contract assets and contract liabilities from contracts with customers that are acquired in a business combination are recognized and measured at their acquisition-date fair values.	ASC 805 requires acquiring entities to apply ASC 606 to account for the recognition and measurement of contract assets and liabilities resulting from a business combination. U.S. GAAP now differ from IFRS Accounting Standards in that an acquirer will generally recognize and measure acquired contract assets and contract liabilities in a manner consistent with how the acquiree recognized and measured them in its preacquisition financial statements.