to exclude from the scope of the IFRS business combinations in which separate entities or operations of entities are brought together to form a joint venture, and business combinations involving entities under common control (see proposed paragraphs 2 and 3 and paragraphs BC9-BC11 of the Basis for Conclusions). 

Are these scope exclusions appropriate? If not, why not? 

The G100 agrees with the scope of the standard. However, we anticipate that the Board will deal with the creation of dual listed entities and similar structures in Phase 2 of this project.
   

to include in the IFRS a definition of business combinations involving entities under common control, and additional guidance on identifying such transactions (see proposed paragraphs 9-12 and Appendix A, and paragraphs BC12-BC15 of the Basis for Conclusions).

Are the definition and additional guidance helpful in identifying transactions within the scope exclusion? If not, what additional guidance would you suggest, and why?

Yes.
   

Is this appropriate? If not, why not? If you believe the pooling of interests method should be applied to a particular class of transactions, what criteria should be used to distinguish those transactions from other business combinations, and why?

In view of recent international developments, particularly in the USA, the G100 supports the use of the purchase method as in the vast majority of cases one entity obtains control of another.

However, we do not consider that the purchase method is appropriate where an acquirer is not identifiable as, for example, occurs in dual listed arrangements. Where a new reporting entity is created under contractual arrangements as occurs for dual listed entities it is unlikely that the pooling of interests method, which combines two sets of book values, generates relevant, useful information for users. On the other hand the purchase method has the impediment that the resulting financial reports reflect a mixture of book and fair values. 
 

Is this an appropriate description of the circumstances in which a business combination should be accounted for as a reverse acquisition? If not, under what circumstances, if any, should a business combination be accounted for as a reverse acquisition?

Yes.
   

proposes additional guidance on the accounting for reverse acquisitions (see proposed paragraphs B1-B14 of Appendix B). Is this additional guidance appropriate? If not, why not? Should any additional guidance be included? If so, what specific guidance should be added?

Yes.
   

Is this appropriate? If not, why not?

There may be a rebuttable presumption that one of the entities is the acquirer. We consider that the formation of a non-operating holding company without the recognition of goodwill is possible under these arrangements and, as such, reflects the economic substance of the arrangements. However, the identification of an acquirer should not be forced in those cases where a new entity is formed. Whether one entity or the other is an acquirer should depend on the facts and economic substance of the transactions.
 

Is this appropriate? If not, what criteria should an acquirer be required to satisfy to recognise a restructuring provision that was not a liability of the acquiree as part of allocating the cost of a combination, and why?

While the G100 believes that the treatment of restructuring costs, whether relating to a business combination or otherwise should be determined by a consistent application of the principles in IAS 37 we believe that the existing requirements of IAS 37 should be amended to better reflect the circumstances of corporate restructurings. In this respect, we believe that the approach in UIG 8 'Accounting for Acquisitions - Recognition of Restructuring Costs as Liabilities' better reflects the variety of circumstances which arise in acquisitions, whether friendly or contested, and the processes adopted in respect of internal restructurings. We do not believe there is a case for special/different accounting for restructurings occurring as part of a business combination. However, we note that this proposal is inconsistent with those made in respect of contingent liabilities.
 

Is this appropriate? If not, why not?

No. The requirements of IAS 37 should apply otherwise there is different accounting for similar items. For example, if an entity acquires a fellow venturer’s interest in a jointly controlled operation its share of the contingent liabilities would be disclosed in accordance with IAS 37 but those assumed as part of the acquisition would be recognised in the financial statements. 

We believe that inconsistent treatments of this nature should not be fostered by an accounting standard and that the recognition of acquired contingent liabilities would facilitate “gaming” similar to that where there was excessive provisioning for acquisitions. This is amplified if changes in fair value are recognised in the profit and loss statement. The existence of contingent assets and contingent liabilities would be taken into account by the acquirer in determining the amount of the purchase consideration and, if crystallised subsequent to the acquisition would impact on the amount of goodwill recognised.

The proposals are also internally inconsistent in the sense that contingent liabilities are required to be recognised but not contingent assets. We believe that if the proposal relating to contingent liabilities is retained the principle should be applied consistently to include contingent assets.
 

Is this appropriate? If not, how should the acquiree’s identifiable assets, liabilities and contingent liabilities recognised as part of allocating the cost of a business combination be measured when there is a minority interest in the acquiree, and why?

The G100 agrees with the proposals (but see above re contingent liabilities). The initial recognition of an acquisition is at the cost of acquisition and fair values are used to allocate the cost to the identifiable assets and liabilities acquired. For recognition in the financial statements an item must satisfy the relevant definition and recognition criteria.
 

Do you agree that goodwill acquired in a business combination should be recognised as an asset? If not, how should it be accounted for initially, and why? Should goodwill be accounted for after initial recognition at cost less any accumulated impairment losses? If not, how should it be accounted for after initial recognition, and why?

The G100 agrees that goodwill should be recognised as an asset in that it represents future economic benefits expected to flow to the entity from unidentifiable assets. To the extent that goodwill on initial recognition as part of the acquisition transaction does not represent future economic benefits the amount should be written down. As set out in its Statement of Principles the G100 believes that goodwill should not be amortised and strongly supports an approach where the carrying amount of the asset is tested for impairment on a regular basis so that any reductions in its value are recognised as an expense in the periods in which those reductions in value occur.

The G100 believes that this approach is consistent with the increasing use of fair values and best reflects the way in which management assesses the operations and performance of a business.
 

recognise immediately in profit or loss any excess remaining after that reassessment.
   

No. The G100 believes that in a cost-based system the purchase price is the maximum amount at which the net assets of the acquired entity should be recognised. Where an excess over cost arises the excess should be allocated to non-monetary assets acquired. In the event that excess still remains after this allocation process it should be recognised in the profit and loss as a revenue item in the period of acquisition.
 

Is twelve months from the acquisition date sufficient time for completing the accounting for a business combination? If not, what period would be sufficient, and why? 

Yes. We believe that in the vast majority of cases it is reasonable to expect adjustments to be made within one year of the date of acquisition. However, while this may ordinarily be the case, twelve months from the date of acquisition may not be adequate in certain circumstances including resolution of requirements of regulators such as competition authorities, environmental obligations, legal proceedings and tax disputes. Where an entity has not completed the acquisition entries and process in the 12 months from acquisition it should be required to disclose why it has not done so.
   

with some exceptions carried forward as an interim measure from IAS 22, adjustments to the initial accounting for a business combination after that accounting is complete should be recognised only to correct an error (see proposed paragraphs 62 and 63 and paragraphs BC127-BC132 of the Basis for Conclusions). 

Is this appropriate? If not, under what other circumstances should the initial accounting be amended after it is complete, and why?

Yes.
   

The G100 supports the impairment testing of assets to coincide with reporting dates, at least annually. However, we believe that, in general, for consistency and comparability purposes the testing should occur as of the same date for all assets. While this is the general case testing should be undertaken more frequently in respect of specific assets where the indicators of impairment are triggered. We note that review of the triggers of impairment would occur on a regular basis in order for companies to meet their continuous disclosure obligations.
 

Is this appropriate? If not, how should the recoverable amount be measured, and impairment losses (and reversals of impairment losses) be accounted for?

The G100 agrees with these proposals.
 

should an asset’s value in use reflect the elements listed in proposed paragraph 25A? If not, which elements should be excluded or should any additional elements be included? Also, should an entity be permitted to reflect those elements either as adjustments to the future cash flows or adjustments to the discount rate (see proposed paragraph 26A and paragraphs C66 and C67 of the Basis for Conclusions)? If not, which approach should be required?
   

should the assumptions on which cash flow projections are based take into account both past actual cash flows and management’s past ability to forecast cash flows accurately (see proposed paragraph 27(a)(ii) and paragraphs C66 and C67 of the Basis for Conclusions)? If not, why not?
   

s the additional guidance in proposed Appendix B to [draft] IAS 36 on using present value techniques in measuring an asset’s value in use appropriate? If not, why not? Is it sufficient? If not, what should be added?
   

While companies would normally take previous experience into account in preparing forecasts/making estimates we do not consider that the points in (b) warrant this emphasis. We are also concerned about the use of the word “accurate” in this context and how it would be interpreted in practice.

The G100 believes that the standard should set down the objectives of the valuation process and establish the principles to be applied.
 

Should the allocation of goodwill to one or more cash-generating units result in the goodwill being tested for impairment at a level that is consistent with the lowest level at which management monitors the return on the investment in that goodwill, provided such monitoring is conducted at or below the segment level based on an entity’s primary reporting format (see proposed paragraphs 73-77 and paragraphs C18-C20 of the Basis for Conclusions)? If not, at what level should the goodwill be tested for impairment, and why?
   

If an entity disposes of an operation within a cash-generating unit to which goodwill has been allocated, should the goodwill associated with that operation be included in the carrying amount of the operation when determining the gain or loss on disposal (see proposed paragraph 81 and paragraphs C21-C23 of the Basis for Conclusions)? If not, why not? If so, should the amount of the goodwill be measured on the basis of the relative values of the operation disposed of and the portion of the unit retained or on some other basis?
   

If an entity reorganises its reporting structure in a manner that changes the composition of one or more cash-generating units to which goodwill has been allocated, should the goodwill be reallocated to the units affected using a relative value approach (see proposed paragraph 82 and paragraphs C24 and C25 of the Basis for Conclusions)? If not, what approach should be used?
   

In other cases, an entity may have acquired a business entity and arbitrarily allocated goodwill to geographic segments as the business is operated on that basis. However, the commercial and management assessment may be undertaken on a whole of business basis. In these circumstances it would be appropriate for the impairment testing to be undertaken on a business rather than a geographic segment basis.
 

that the recoverable amount of a cash-generating unit to which goodwill has been allocated should be measured as the higher of the unit’s value in use and net selling price (see proposed paragraphs 5 (definition of recoverable amount) and 85 and paragraph C17 of the Basis for Conclusions).

Is this appropriate? If not, how should the recoverable amount of the unit be measured?

Yes.
   

the use of a screening mechanism for identifying potential goodwill impairments, whereby goodwill allocated to a cash-generating unit would be identified as potentially impaired only when the carrying amount of the unit exceeds its recoverable amount (see proposed paragraph 85 and paragraphs C42-C51 of the Basis for Conclusions).

Is this an appropriate method for identifying potential goodwill impairments? If not, what other method should be used?

Yes. While we recognise that the impairment test is imperfect and imprecise (e.g. not distinguishing pre-existing goodwill, whether recognised or not, and purchased goodwill) its application is viewing the cash generating unit on an integrated basis which, in most cases, the way in which it will be viewed by management.
   

that if an entity identifies goodwill allocated to a cash-generating unit as potentially impaired, the amount of any impairment loss for that goodwill should be measured as the excess of the goodwill’s carrying amount over its implied value measured in accordance with proposed paragraph 86 (see proposed paragraphs 85 and 86 and paragraphs C28-C40 of the Basis for Conclusions).

Is this an appropriate method for measuring impairment losses for goodwill? If not, what method should be used, and why?

Yes. While the screening mechanism admits the inclusion of pre-existing goodwill (which serves as a buffer or cushion) it reflects more accurately the way in which the business is assessed by management and provides a reasonable practical compromise where purchased goodwill becomes part of the total goodwill of the business.
   

Is this appropriate? If not, what are the circumstances in which reversals of impairment losses for goodwill should be recognised?

The G100 agrees that goodwill impairments should not be reversed because the separation of the various components of the goodwill of a cash generating unit is unlikely to be achievable on a consistent and reliable basis. This is because of the range of factors having on impact on the value of the goodwill.
 

Should an entity be required to disclose each of the items in proposed paragraph 134? If not, which items should be removed from the disclosure requirements, and why?

No. It is not clear what objective is being served by requiring such detailed and comprehensive disclosures. Our impression from the proposed requirements is that they are seeking to provide information that would enable users to replicate the measurements and processes of management. In this regard we strongly oppose proposals to require disclosure of the difference between recoverable and carrying amounts as required by paragraph 134(d).

The G100 has serious concerns about the level of detail and scope of the disclosure requirements. The proposals do not set out the case for, or the purpose of, such comprehensive disclosures. Our concerns relate to the commercial sensitivity of the information and the potential impact on the competitive environment of the company. For example, the requirements are selective and take no account of how a company has grown with the result that a company that has grown through acquisition makes disclosures while another with similar, but internally-generated, intangibles does not. In some cases the disclosure is tantamount to valuing the company and is likely to expose directors to challenge where the margin between the carrying amount and the fair value is disclosed and differs from market estimates. In these circumstances the directors may be challenged on the grounds that they have allowed a false/uninformed market in the company's shares to occur, particularly where their estimates of fair values are different from those of the market. In addition, we believe that the costs of collecting the information and the audit costs if disclosures are required for each cash generating unit would not be justified.
   

Should the information to be disclosed under proposed paragraph 134 be disclosed separately for a cash-generating unit within a segment when one or more of the criteria in proposed paragraph 137 are satisfied? If not, why not?

No. The G100 is concerned about the level of detail required and the intrusive nature of the matters to be disclosed. The G100 believes that although impairment is tested at the cash generating unit level disclosure would be more appropriate at the segment level. There is a presumption that management in identifying reportable segments takes account of the source and nature of the entity's risks and returns.
   

Is the inclusion of revalued assets within the scope of the revised IAS 38 appropriate? If not, why not?

Yes. The AASB standard should reflect the requirements of the IASB standard.
 

Is this appropriate? If not, how should recoverable amount be measured?

Yes. The AASB should adopt IAS 36 as amended.
 

Is this appropriate? In particular, should the value in use calculation of an asset that is voluntarily scaled down to undergo a multi-period capital expenditure program exclude the future net benefits of capital expenditure that the entity is committed to but yet to incur? If not, why not?

The G100 believes that ongoing maintenance and enhancement programs and expenditure on existing business should be distinguished from expansion activities such as new acquisitions. The future benefits of maintenance and enhancement programs should be taken into account.
 

Community service obligations are not specifically addressed in this Exposure Draft, but guidance is provided in the current AASB 1010/AAS 10 (paragraphs 5.3 and 5.3.2).

Does the concept of cash-generating units remove the need to explicitly provide guidance on calculating the recoverable amount of assets subject to community service obligations? 

We believe that the guidance included in AASB 1010 and AAS 10 "Recoverable Amount of Non-Current Assets", paragraphs 5.3 - 5.3.2 should be included in the proposed standard.
 

“an entity whose financial objectives do not include the generation of profit”.

The Exposure Draft proposes the following definition:

“A not-for-profit entity is an entity whose principal objective is not the generation of profit. A not-for-profit entity can be a single entity or a group of entities comprising the parent entity and each of the entities that it controls.” (See IAS 36 AASB Material in Preface section 6.).

Is this definition appropriate? If not, how should a not-for-profit entity be defined?

No comment.
 

Is this appropriate? If not, how should the value in use of such an asset be measured?

No comment.
 

The AASB considers a modified retrospective application of the Australian converged Standard as at the beginning of the reporting period to which it is first applied to be the most appropriate approach. Where this gives rise to initial adjustments which would otherwise be recognised in net profit or loss/result, the net amount of those adjustments, including any adjustments to deferred income tax balances, would be adjusted against retained profits (surplus) or accumulated losses (deficiencies) as at the beginning of the reporting period to which these proposals are first applied. (See Preface section 4.2.3).

Are these transitional provisions appropriate? If not, why not?

Yes, provided that this does not lead to subsequent adjustments and restatements in accordance with the forthcoming IASB standard dealing with first-time application of IFRSs.
 

Are the separability and contractual/other legal rights criteria appropriate for determining whether an asset meets the identifiability criterion in the definition of an intangible asset? If not, what criteria are appropriate, and why?

As stated in the G100’s Statement of Principles the G100 believes that where an item satisfies the definition of an asset and recognition criteria it should be recognised as an asset (that is future economic benefits and a cost or value that can be measured reliably). We do not see any grounds for treating intangible assets any differently than tangible assets in this respect.
 

Do you agree that, with the exception of an assembled workforce, sufficient information can reasonably be expected to exist to measure reliably the fair value of an intangible asset acquired in a business combination? If not, why not? The Board would appreciate respondents outlining the specific circumstances in which the fair value of an intangible asset acquired in a business combination could not be measured reliably.

No. We consider that other examples of intangibles where reliable measurement is unlikely to be satisfied as, for example, occurs in respect of customer lists and non-contractual customer relationships. The G100 believes that if the definition and recognition criteria are satisfied the entity should recognise an asset. We believe that this principle should be applied consistently to all assets. Accordingly, the principles should apply whether items are purchased or internally developed.
 

Is this appropriate? If not, under what circumstances, if any, should an intangible asset be regarded as having an indefinite useful life?

The G100 supports these proposals.
 

Is this an appropriate basis for determining the useful life of an intangible asset arising from contractual or other legal rights that are conveyed for a limited term that can be renewed? If not, under what circumstances should the useful life include the renewal period(s)?

The G100 supports these proposals.
 

Is this appropriate? If not, how should such assets be accounted for after their initial recognition?

The G100 supports these proposals.
 

Is the proposed treatment of research expenditure appropriate? If not, why not?

While, in general, this may be the case an entity that can demonstrate the existence of future economic benefits should not be precluded from recognising an asset. On balance, the G100 believes that the AASB should harmonise with the IASB requirements.
 

• it is technically feasible to complete the intangible asset so that it will be available for use or sale;
• the entity intends to complete the intangible asset and use or sell it;
• the entity is able to use or sell the intangible asset;
• the intangible asset will generate probable future economic benefits. Among other things, the entity can demonstrate the existence of a market for the output of the intangible asset or the intangible asset or, if it is to be used internally, the usefulness of the intangible asset;
• adequate technical, financial and other resources are available to complete the development and to use or sell the intangible asset; and
• the expenditure attributable to the intangible asset during its development can be measured reliably (see proposed paragraph 49).

Are the proposed requirements appropriate for determining whether an intangible asset arising from development should be recognised? If not, what criteria are appropriate, and why? (Note not-for-profit specific questions in section Preface5.2.2(b)(i.)

Yes, on the basis that these are the types of factors taken into account in determining the existence of future economic benefits.
 

Is the proposed prohibition appropriate? If not, why not?

No. If the definition and recognition criteria for assets are met an asset should be recognised. In addition, it is incongruous for these items to be recognised only when purchased.
 

Is the proposed restriction on the revaluation of intangible assets appropriate? If not, why not?

No. As stated in the G100 Statement of Principles, if the criteria for a revaluation are satisfied intangible assets should be able to be revalued. We do not believe that there are any grounds for applying requirements differentially to different types of non-current assets.
 

Are the proposed requirements suitable for determining whether an intangible asset arising from development should be recognised by not-for-profit entities? If not, what criteria would be appropriate, and why?

No comment.
 

• All intangible assets that are not permitted to be recognised by the proposed Australian converged Standard;
• Where an internally generated intangible asset is recognised at cost, the portion of the cost of the internally generated intangible asset that represents costs which are not permitted to be included in the cost of an internally generated intangible asset under the proposed Australian converged Standard; and
• All revaluations of intangible assets that are not permitted to be recognised by the proposed Australian converged Standard. 

Where this gives rise to initial adjustments which would otherwise be recognised in profit or loss/result, the net amount of those adjustments, including any adjustments to deferred tax balances, would be adjusted against retained profits (surplus) or accumulated losses (deficiencies) as at the beginning of the annual reporting period to which the proposed Australian converged Standard is first applied. In respect of revaluations of intangible assets that are not permitted to be recognised by the proposed Australian converged Standard, in the first instance, any initial adjustments would be made against the asset revaluation reserve to the extent, and only to the extent, that a credit balance exists in the asset revaluation reserve in respect of those assets. (See Preface section 4.3.3).

Is this appropriate, particularly in relation to previously revalued intangible assets carried at deemed cost? If not, why not?

The G100 supports these proposals. However, derecognition of assets which do not qualify under IASB Standards and/or write back of revalued amounts would have a significant impact on the reported net assets of some companies. These impacts are likely to be exacerbated where thin capitalisation rules for taxation purposes rely on amounts reported in financial reports.

In addition, we have serious concerns that quite significant changes to Australian requirements and practice in respect of accounting for internally generated identifiable intangible assets and the revaluation of identifiable intangibles assets are foreshadowed as part of this project while, at the same time, the IASB/AASB are undertaking a more comprehensive project on accounting for intangible assets. It is likely that the outcome of the IASB/AASB project will modify the existing requirements of IAS 38 in respect of internally generated identifiable intangible assets. It would be unsatisfactory both from the point of view of preparers and users of financial statements if entities were required to derecognise some assets and, in some cases, write back revaluations in respect of meeting the Year 2005 timetable and shortly thereafter be required to reinstate some of those assets.

The G100 believes that in view of these circumstances there is a strong case for providing some relief to those entities most likely to be impacted by these changes and potential changes. For example, the existing practices of these entities could be grandfathered pending the outcome of the IASB/AASB project.
 

ED 109 contemplates the treatment of intangibles other than goodwill that have not previously been recognised. However, it does not seem to contemplate goodwill that has not previously been recognised (e.g. if a local accounting standard, such as AASB 1038, required something other than goodwill to be recognised on acquisition but which is essentially akin to goodwill).

Issues that arise in this context are whether the new IASB and AASB standards on goodwill should establish requirements on the recognition of goodwill that has not previously been recognised, and if so, how the goodwill is to be calculated and the basis of measurement.