How does ASC 805 differ from IFRS 3 in business combination accounting?

Full Explanation

ASC 805 (US GAAP) and IFRS 3 (International) both require the acquisition method for business combinations, and they share the same fundamental principles: identify the acquirer, determine the acquisition date, recognise and measure identifiable assets and liabilities at fair value, and record goodwill. However, several meaningful differences exist that affect the reported numbers. Contingent consideration (earnouts) is one of the most significant differences. Under both standards, contingent consideration is recognised at fair value on the acquisition date. However, under IFRS 3, subsequent changes in fair value of contingent consideration classified as a financial liability are recognised in profit or loss. Under ASC 805, the treatment depends on classification — liability-classified contingent consideration is remeasured through earnings, but equity-classified contingent consideration is not remeasured. Bargain purchases (where identified net assets exceed consideration paid) are treated differently. Under IFRS 3, the acquirer must first reassess the identification and measurement of all assets and liabilities, and only then recognise the gain in profit or loss. Under ASC 805, the same reassessment is required, but any remaining gain is also recognised in earnings. Non-controlling interests can be measured at fair value (full goodwill method) or at the NCI's proportionate share of net assets (partial goodwill method) under IFRS 3. ASC 805 requires the fair value method only. This means IFRS reporters can report lower goodwill by choosing the partial method. Goodwill impairment also differs: IFRS tests at the cash-generating unit level and never permits reversal of impairment, while US GAAP tests at the reporting unit level and offers an optional qualitative assessment before quantitative testing.

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