North South University

Summer, 2016
Subject: BUS 505 Principles of Accounting

Difference Between GAAP & IFRS

on Business Combination

Submitted by:

MD.Rezwanul Islam
MD. Mahade Hasan
Farhana Islam
Yasin Ahmed
Rusana Khan
SECTION

ID: 1530538660
ID: 1531482660
ID: 1531352060
ID: 1531393660
ID: 1531323060
1

Submitted to:
DR Frank Henry Wade
CPA, CIA, CMA. CISA
North South University

Table of Contents
1.0 Professional Bodies of GAAP and IFRS...............................................................3
2.0 Use of Accounting Principle in Bangladesh........................................................3
3.0 Business Combination....................................................................................... 3
4.0 Difference between GAPP VS IFRS: Business Combination................................4
1

5.0 Definition of control........................................................................................... 6

6.0 Acquired contingencies..................................................................................... 7
7.0 Assignment/allocation and impairment of goodwill...........................................7
8.0 Contingent considerationseller accounting....................................................8
9.0 Combinations involving entities under common control....................................8
10.0 Identifying the acquirer................................................................................... 9
11.0 Push-down accounting.................................................................................... 9
12.0 The key takeaways from this Essay are:........................................................11
13.0 REFERENCE................................................................................................... 12

1.0 Professional Bodies of GAAP and IFRS

Financial Accounting Standards Board (FASB) establishes GAAP from 1973 to present. It regularly
issues the Statement of Financial Accounting Standards (SFAS) that established the GAAP. Generally
Accepted Accounting Principles (GAAP) is a set of accounting principles supported and adhered to by the
accounting professions authoritative bodies.
International Financial Reporting Standards (IFRS) is a set of accounting standards developed by
International Accounting Standards Board (IASB). The goal is to provide a global framework for
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companies to prepare and disclose their financial statements. Over 100 countries permit or require IFRS
for public companies, with more expected to transition to IFRS by 2015.

2.0 Use of Accounting Principle in Bangladesh

In Bangladesh, the profession of accountancy developed during the British colonial period. Today, it is
represented by two professional bodies, the Institute of Cost &
Management Accountants of Bangladesh (ICMAB) and the
Institute of Chartered Accountants of Bangladesh (ICAB).
Chartered Accountants complete their training in practicing firms and specialize in financial accounting,
financial audit and tax. CMAs receive particular training in cost audit, management audit and
management accounting, as well as general accounting and taxation. Both the ICMAB and ICAB are
under the administrative control of the Ministry of Commerce. The Government of Bangladesh considers
both type of professional accountants equal in respect of employment in government services per circular
No.Com/PTMA/AP/2/19/87.
The Generally Accepted Accounting Principles (GAAP) in Bangladesh is based upon standards set by the
ICAB, which has stated its intention to adopt International Financial Reporting Standards. As of 2013,
ICAB has adopted the IFRS as issued by the IASB, except for IAS 39. and all foreign companies, and
domestic companies listed on the Dhaka Stock Exchange (DSE) and/or the Chittagong Stock Exchange
(CSE) are required to use IFRS.

3.0 Business Combination

Definition: A business combination is a transaction in which the acquirer obtains control of another
business (the acquire). Business combinations are a common way for companies to grow in size, rather
than growing through organic (internal) activities.
A business is an integrated set of activities and assets that can provide a return to investors in the form of
dividends, reduced costs, or other economic benefits. A business typically has inputs, processes, and
outputs. A development-stage entity may not yet have outputs, in which case you can substititute other
factors, such as having begun operations and having plans to produce output, and having access to
customers who can purchase the outputs.
A business combination is not the formation of a joint venture, nor does it involve the acquisition of a set
of assets that do not constitute a business.
When there is a business consolidation, the acquirer thereafter reports consolidated results that combine
its own financial statements with those of the acquire. The acquirer does not include in this consolidation
the financial statements of the acquire for any reporting periods prior to the acquisition date.

4.0 Difference between GAPP VS IFRS: Business Combination

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The principal guidance for business combinations in US GAAP (ASC 805, Business Combinations) and
IFRS (IFRS 3(R), Business Combinations) represents the culmination of the first major convergence
project between the IASB and the FASB. Pursuant to ASC 805 and IFRS 3(R), all business combinations
are accounted for using the acquisition method. Upon obtaining control of another entity, the underlying
transaction is measured at fair value, establishing the basis on which the assets, liabilities and
noncontrolling interests of the acquired entity are measured. As described below, IFRS 3(R) provides an
alternative to measuring noncontrolling interest at fair value with limited exceptions. Although the new
standards are substantially converged, certain differences still exist.

Significant

differences
GAPP

Measurement of
noncontrolling interest

Acquirees operating
leases

Noncontrolling
interest
measured at
fair
value,
including
noncontrolling
interests share of goodwill.

IFRS
is
the

If the terms of an acquiree

operating
lease are favorable or unfavorable
relative to market terms, the
acquirer
recognizes an intangible asset or
liability, respectively, regardless of
whether the acquiree is the lessor
or
the lessee

Noncontrolling
interest
is
measured
either at fair value including
goodwill,
or at its proportionate share of the
fair
value of the acquirees identifiable
net
assets, exclusive of goodwill.
Separate recognition of an
intangible
asset or liability is required only if
the
acquiree is a lessee. If the acquiree
is the
lessor, the terms of the lease are
taken
into account in estimating the fair
value
of the asset subject to the lease.
Separate recognition of an
intangible
asset or liability is not required.

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Assets and liabilities arising from

contingencies

Initial Recognition Assets and

liabilities
arising
from
contingencies are recognized at
fair value (in accordance with ASC
820, Fair Value Measurement) if
the fair value can be determined
during the measurement period.
Otherwise,
those
assets
or
liabilities are recognized at the
acquisition date in accordance with
ASC 450, Contingencies, if those
criteria for recognition are met.
Contingent assets and liabilities
that do not meet either of these
recognition
criteria
at
the
acquisition date are subsequently
accounted for in accordance with
other
applicable
literature,
including
ASC
450.
(See
Provisions and Contingencies
for differences between ASC 450
and IAS 37).

Initial Recognition Liabilities

arising from contingencies are
recognized as of the acquisition
date if there is a present obligation
that arises from past events and the
fair value can be measured reliably.
Contingent
assets
are
not
recognized.

US GAAP
Subsequent Measurement If
contingent assets and liabilities
are initially recognized at fair
value, an acquirer should
develop a systematic and
rational basis for subsequently
measuring and accounting for
those
assets and liabilities depending
on
their nature.
If
amounts
are
initially
recognized and
measured in accordance with
ASC 450,
the subsequent accounting and
measurement should be based on
that guidance.

Subsequent Measurement
Liabilities
subject
to
contingencies are
subsequently measured at the
higher
of (i) the amount that would be
recognized in accordance with
IAS 37,
or (ii) the amount initially
recognized
less, if appropriate, cumulative
amortization
recognized
in
accordance
with IAS 18.

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Combination of entities
under common control

The receiving entity records the

net
assets at their carrying amounts
in
the accounts of the transferor
(historical cost).

Outside the scope of IFRS 3(R).

In
practice, either follow an
approach
similar to US GAAP or apply
the
acquisition method if there is
substance
to the transaction (policy
election

Determining whether the acquisition method should be applied

5.0 Definition of control

Determining whether the acquisition method applies to a transaction begins with understanding whether
the transaction involves the acquisition of one or more businesses and whether it is a business
combination within the scope of the business combinations guidance. The business combinations
guidance states that for a business combination to occur, an acquirer must obtain control over a business.
US GAAP and IFRS define control differently. Consequently, the same transaction may be accounted for
as a business combination under US GAAP, but not under IFRS, or vice versa. The table below highlights
various considerations in determining control under US GAAP and IFRS.

US GAPP

IFRS

Consolidation decisions are evaluated

first under the variable interest entity
model.
Qualitatively assess if the variable
interest meets both criteria:
o Power to direct activities that
most significantly impact
economic performance
o Potential to receive significant
benefits or absorb significant
losses
All other entities are evaluated under the
Voting interest model.

An investor has control over an investee

when all of the following elements are
present:
Power over the investee
Exposure, or rights, to variable
returns from its involvement with the
investee
Ability to use power to affect the
returns

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BUS 505 Accounting Principle Term paper

6.0 Acquired contingencies

There are significant differences related to the recognition of contingent liabilities and contingent assets.
US GAPP
Acquired assets and liabilities subject to
contingencies are recognized at fair value
if fair value can be determined during the
measurement period. If fair value cannot
be determined, companies should
typically account for the acquired
contingencies using existing guidance. If
recognized at fair value on acquisition, an
acquirer should develop a systematic and
rational basis for subsequently measuring
and accounting for assets and liabilities
arising from contingencies depending on
their nature.

IFRS
The acquirees contingent liabilities are
recognized at the acquisition date
provided their fair values can be
measured reliably. The contingent
liability is measured subsequently at the
higher of the amount initially recognized
less, if appropriate, cumulative
amortization recognized under the
revenue guidance (IAS 18) or the best
estimate of the amount required to settle
(under the provisions guidanceIAS 37).
Contingent assets are not recognized.

7.0 Assignment/allocation and impairment of goodwill

The definition of the levels at which goodwill is assigned/allocated and tested for impairment varies
between the two frameworks and might not be the same. Additional differences in the impairment testing
methodologies could create further variability in the timing and extent of recognized impairment losses.
US GAPP
Goodwill is assigned to an entitys reporting units,
as defined within the guidance. Goodwill is tested
for impairment at least on an annual basis and
between annual tests if an event occurs or
circumstances change that may indicate an
impairment

IFRS
Goodwill is allocated to a cash-generating
unit (CGU) or group of CGUs, as defined
within the guidance.
Goodwill is tested for impairment at least
on an annual basis and between annual
tests if an event occurs or circumstances
change that may indicate an impairment

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BUS 505 Accounting Principle Term paper

8.0 Contingent considerationseller accounting

Entities that sell a business that includes contingent consideration might encounter significant differences
in the manner in which such contingent considerations are recorded.

US GAPP
Under US GAAP, the seller should
determine whether the arrangement
meets the definition of a derivative. If the
arrangement meets the definition of a
derivative, the arrangement should be
recorded at fair value. If the arrangement
does not meet the definition of a
derivative, the seller should make an
accounting policy election to record the
arrangement at either fair value at
inception or at the settlement amount
when the consideration is realized or is
realizable, whichever is earlier.

IFRS
Under IFRS, a contract to receive
contingent consideration that gives the
seller the right to receive cash or other
financial assets when the contingency is
resolved meets the definition of a
financial asset. When a contract for
contingent consideration meets the
definition of a financial asset, it is
measured using one of the measurement
categories specified in the financial
instruments guidance.

9.0 Combinations involving entities under common control

Under US GAAP, there are specific rules for common-control transactions.
US GAPP
Combinations of entities under common
control are generally recorded at
predecessor cost, reflecting the
transferors carrying amount of the assets
and liabilities transferred.

IFRS
IFRS does not specifically address such
transactions. In practice, entities develop
and consistently apply an accounting
policy; management can elect to apply the
acquisition method of accounting or the
predecessor value method to a business
combination involving entities under
common control.

10.0 Identifying the acquirer

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Different entities might be determined to be the acquirer when applying purchase accounting. Impacted
entities should refer to the Consolidation chapter for a more detailed discussion of differences related to
the consolidation models between the frameworks that might create significant differences in this area
US GAPP
The acquirer is determined by reference
to ASC 81010, under which generally the
party that holds greater than 50 percent
of the voting shares has control, unless
the acquirer is the primary beneficiary of
a variable interest entity in accordance
with ASC 810.

IFRS
The acquirer is determined by reference
to the consolidation guidance, under
which generally the party that holds
greater than 50 percent of the voting
rights has control. In addition, control
might exist when less than 50 percent of
the voting rights are held, if the acquirer
has the power to most significantly affect
the variable returns of the entity in
accordance with IFRS 10.

11.0 Push-down accounting

The lack of push-down accounting under IFRS can lead to significant differences in instances where push
down accounting was utilized under US GAAP.
US GAPP

IFRS

Companies have the option to apply

pushdown accounting in their separate
financial statements upon a change-incontrol
event. The election is available to
the acquired company, as well as to any
direct or indirect subsidiaries of the
acquired company.
If an acquired company elects to apply
pushdown accounting, the acquired
company should reflect the new basis of
accounting established by the parent for
the individual assets and liabilities of the
acquired company arising from the
acquisition in its standalone financial
statements.

There is no discussion of pushdown

accounting under IFRS. There may be
situations in which transactions, such as
capital reorganizations, common control
transactions, etc., may result in an
accounting outcome that is similar to
pushdown accounting where the new
basis of accounting established by the
parent, including goodwill and purchase
price adjustments, is reflected in the
companys standalone financial
statements.

This following easy the key characteristics of a business and identifies which transactions require the
application of business combination accounting. Business combination accounting is referred to as the
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BUS 505 Accounting Principle Term paper

acquisition method in ASC 805, Business Combinations (ASC 805), and in International Financial
Reporting Standard 3 (revised 2008), Business Combinations (IFRS 3) (collectively, the Standards).
Determining whether the acquisition method applies to a transaction begins with understanding whether
the transaction involves the acquisition of one or more businesses and whether it is a business
combination within the scope of the Standards. Some differences exist between the definitions of a
business combination under U.S. generally accepted accounting principles (U.S. GAAP) and International
Financial Reporting Standards (IFRS). The converged definitions use terms that U.S. GAAP and
IFRS define differently in other nonconverged standards. For example, the Standards state that for a
business combination to occur, an acquirer must obtain control over a business. U.S. GAAP and IFRS
define control differently. That difference may lead to divergent accounting results. For example, recently
issued IFRS 10, Consolidated Financial Statements (IFRS 10), incorporates the concepts of effective
control and substantive potential voting rights, whereas U.S. GAAP does not. Active FASB and IASB
(collectively, the Boards) projects may result in amendments to existing guidance. These projects
include the FASBs response to the Financial Accounting Foundations (FAF) post implementation review
of ASC 805 as well as the IASB and IFRS Interpretations Committees (IFRS IC) post implementation
review of
IFRS 3. Amendments from these projects, if any, may impact the guidance in this chapter. The FASB has
also undertaken projects related to principal versus agent assessments in consolidations and the definition
of a business. Final standards for these projects have not yet been released as of 31 December 2013.
Following is a summary of the FASB projects:
Consolidation: The proposal would provide guidance for determining whether a decision maker is
acting as a principal or an agent for another entity. A decision maker acting as a principal consolidates the
other entity, while a decision maker acting as an agent generally does not. The proposal is largely
consistent with the principal versus agent guidance in the IASBs recently issued consolidation standard,
IFRS 10. The proposed changes to the consolidation model also would rescind the deferral of the current
consolidation guidance, ASC 810, Consolidations (ASC 810), for certain investment entities. A final
accounting standard update for this project is expected to be issued in 2014.
Clarifying the Definition of a Business: In May 2013 the FASB added a project intended to clarify the
definition of a business. The project will include clarifying the guidance for partial sales or transfers and
the corresponding acquisition of partial interests in a nonfinancial asset or assets.

12.0 The key takeaways from this Essay are:

Differentiating between a business and a group of assets can be challenging. The different
accounting for asset acquisitions and business combinations can have a substantial impact on the financial
statements. A
business consists of inputs and processes applied to those inputs that have the ability to create outputs.
Many transactions will be obvious business combinations or obvious asset transactions. However, the
assessment becomes difficult when an acquired group excludes some inputs or processes.
The scope of the Standards covers all situations where control of a business is obtained .
Business combination accounting applies to more than the purchase of a business for consideration. A
business combination occurs when control is obtained through the execution of a contract, by an action by
the
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acquiree, without the exchange of consideration, or through transactions that combine multiple companies
to form a single company. The Standards scope excludes joint venture formations because by definition
no party obtains control.
There are differences between U.S. GAAP and IFRS. The Standards are largely converged, but
use terms that are defined differently in other nonconverged standards. Different control models, for
example, exist under U.S. GAAP and IFRS, and the definition of control is important in identifing a
business combination. These differences may lead to different conclusions about whether a business
combination has occurred.

13.0 REFERENCE
Business Combinations (IFRS 3). (2015). Including Comparisons with US GAAP, China GAAP,
and India Accounting Standards International Trends in Financial Reporting under IFRS, 263279. doi:10.1002/9781119197102.ch20
Bohuov, H., & Svoboda, P. (2008). IFRS and US GAAP convergence in the area of business
combination. Acta Universitatis Agriculturae Et Silviculturae Mendelianae Brunensis Acta Univ.
Agric. Silvic. Mendelianae Brun., 56(6), 13-24. doi:10.11118/actaun200856060013

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Remaining differences in other IFRSs and US GAAP. (n.d.). Retrieved August 16, 2016, from
http://www.ifrs.org/Current-Projects/IASB-Projects/Business-Combinations/Pages/Remainingdifferences-in-other-IFRSs-and-US-GAAP.aspx
IAS Plus. (n.d.). Retrieved August 16, 2016, from http://www.iasplus.com/enus/standards/international/ifrs-en-us/ifrs3
U.S. GAAP vs. IFRS: Business combinations at-a-glance. (n.d.). Retrieved August 16, 2016,
from http://rsmus.com/pdf/business_combinations-at-a-glance.pdf
Business Combinations. (n.d.). Retrieved August 16, 2016, from http://www.ifrs.org/CurrentProjects/IASB-Projects/Business-Combinations/Pages/Business-Combinations-II.aspx

IFRS - Business Combinations. (n.d.). Retrieved August 16, 2016, from

https://quizlet.com/35594768/ifrs-business-combinations-flash-cards/

IASB Issues Business Combinations Statement. (n.d.). Retrieved August 16, 2016, from
http://www.valuationresearch.com/knowledge-base/alert/iasb-issues-business-combinationsstatement

IFRS 3 (revised) business combinations. (2014, September 09). Retrieved August 16, 2016, from
http://www.accaglobal.com/an/en/discover/cpd-articles/corporate-reporting/ifrs3combinations.html

Schmid, D. Martino, R. DiNardo, T (2015). IFRS and US GAAP: similarities and differences. Retrieved
from: http://www.pwc.com/us/en/cfodirect/assets/pdf/accounting-guides/pwc-ifrs-us-gaap-similaritiesand-differences-2015.pdf
Santoro, J. Bielstein, M. M.(2014). IFRS compared to US GAAP: An overview. Retrieved from:
http://www.kpmg.com/CN/en/IssuesAndInsights/ArticlesPublications/Documents/IFRS-compared-toUS-GAAP-An-overview-O-201411.pdf
Fabian, S. Bachman, H. (2015). Comparison between U.S. GAAP and IFRS. Retrieved from:
http://www.grantthornton.com.br/images/src/gt%20comparison%20usgaap_ifrs%202015.pdf

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Business Combination Definition - AccountingTools. (n.d.). Retrieved August 16, 2016, from
http://www.accountingtools.com/dictionary-business-combinatio
Business combinations and noncontrolling interests - 2014 global second edition (February
2016). (n.d.). Retrieved August 16, 2016, from
http://www.pwc.com/us/en/cfodirect/publications/accounting-guides/global-guide-to-accountingfor-business-combinations-and-noncontrolling-interests.html

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