Objectives

The overriding objective of IFRS 3 is to improve the relevance, representational faithfulness, transparency and comparability of information provided in financial statements about business combinations and their effects on the reporting entity by establishing principles and requirements with respect to how an acquirer, in its consolidated financial statements:

1. Recognises and measures identifiable assets acquired, liabilities assumed and the non‐controlling interest in the acquiree, if any;
2. Recognises and measures acquired goodwill or a gain from a bargain purchase;
3. Determines the nature and extent of disclosures sufficient to enable the reader to evaluate the nature of the business combination and its financial effects on the consolidated reporting entity;
4. Accounts for and reports non‐controlling interests in subsidiaries; and
5. Deconsolidates a subsidiary when it ceases to hold a controlling interest in it.

Step 1—Identify the acquirer

IFRS 3 strongly emphasises the concept that every business combination has an acquirer. In the “basis for conclusions” that accompanies IFRS 3, the IASB asserts that:

“true mergers” or “mergers of equals” in which none of the combining entities obtain control of the others are so rare as to be virtually non‐existent.¹

The provisions of IFRS 10, Consolidated Financial Statements, should be used to identify the acquirer—the entity that obtains control of the acquiree. The acquirer is the combining entity that obtains control of the other combining entities.

While IFRS 10 provides that, in general, control is presumed to exist when the parent owns, directly or indirectly, a majority of the voting power of another entity, this is not an absolute rule to be applied in all cases. In fact, IFRS 10 explicitly provides that in exceptional circumstances, it can be clearly demonstrated that majority ownership does not constitute control, but rather that the minority ownership may constitute control (refer to Chapter 14). Exceptions to the general majority ownership rule include, but are not limited to, the following situations:

1. An entity that is in legal re‐organisation or bankruptcy;
2. An entity subject to uncertainties due to government‐imposed restrictions, such as foreign exchange restrictions or controls, whose severity casts doubt on the majority owner's ability to control the entity; or
3. If the acquiree is a Special Purpose Entity (SPE), the creator or sponsor of the SPE is always considered to be the acquirer. Accounting for SPEs is discussed later in this chapter.

If applying the guidance in IFRS 10 does not clearly indicate the party that is the acquirer, IFRS 3 provides factors to consider in making that determination under different facts and circumstances.

1. Relative size—Generally, the acquirer is the entity whose relative size is significantly larger than that of the other entity or entities. Size can be compared by using measures such as assets, revenues or net profit.
2. Initiator of the transaction—When more than two entities are involved, another factor to consider (besides relative size) is which of the entities initiated the transaction.
3. Roll‐ups or put‐together transactions—When a new entity is formed to issue equity interests to effect a business combination, one of the pre‐existing entities is to be identified as the acquirer. If, instead, a newly formed entity transfers cash or other assets, or incurs liabilities as consideration to effect a business combination, that new entity may be considered to be the acquirer.
4. Non‐equity consideration—In business combinations accomplished primarily by the transfer of cash or other assets, or by incurring liabilities, the entity that transfers the cash or other assets, or incurs the liabilities, is usually the acquirer.
5. Exchange of equity interests—In business combinations that are accomplished primarily by the exchange of equity interests, the entity that issues its equity interests is generally considered to be the acquirer. One notable exception that occurs frequently in practice is often referred to as a reverse acquisition, discussed in detail later in this chapter. In a reverse acquisition, the entity issuing equity interests is legally the acquirer, but for accounting purposes is considered the acquiree. There are, however, other factors that should be considered in identifying the acquirer when equity interests are exchanged. These include:
   1. Relative voting rights in the combined entity after the business combination—Generally, the acquirer is the entity whose owners, as a group, retain or obtain the largest portion of the voting rights in the consolidated entity. This determination must take into consideration the existence of any unusual or special voting arrangements as well as any options, warrants or convertible securities.
   2. The existence of a large minority voting interest in the combined entity in the event no other owner or organised group of owners possesses a significant voting interest—Generally, the acquirer is the entity whose owner or organised group of owners holds the largest minority voting interest in the combined entity.
   3. The composition of the governing body of the combined entity—Generally, the acquirer is the entity whose owners have the ability to elect, appoint or remove a majority of members of the governing body of the combined entity.
   4. The composition of the senior management of the combined entity—Generally, the acquirer is the entity whose former management dominates the management of the combined entity.
   5. Terms of the equity exchange—Generally, the acquirer is the entity that pays a premium over the pre‐combination fair value of the equity interests of the other entity or entities.

Step 2—Determine the acquisition date

The acquisition date is that date on which the acquirer obtains control of the acquiree. As discussed previously, this concept of control is not always evidenced by ownership of voting rights.

The general rule is that the acquisition date is the date on which the acquirer legally transfers consideration, acquires the assets and assumes the liabilities of the acquiree. This date, in a relatively straightforward transaction, is referred to as the closing date. Not all transactions are that straightforward, however. All pertinent facts and circumstances are to be considered in determining the acquisition date and this includes the meeting of any significant condition's precedent. The parties to a business combination might, for example, execute a contract that entitles the acquirer to the rights and obligates the acquirer with respect to the obligations of the acquiree prior to the actual closing date. Thus, in evaluating economic substance over legal form, the acquirer will have contractually acquired the target on the date it executed the contract.

Step 3—Identify assets and liabilities requiring separate accounting

IFRS 3 provides a basic recognition principle that, as of the acquisition date, the acquirer is to recognise, separately from goodwill, the fair values of all identifiable assets acquired (whether tangible or intangible), the liabilities assumed, and, if applicable, any non‐controlling interest (previously referred to as “minority interest”) in the acquiree.

In applying the recognition principle to a business combination, the acquirer may recognise assets and liabilities that had not been recognised by the acquiree in its pre‐combination financial statements, but which meet the definitions of assets and liabilities in the Conceptual Framework at the acquisition date. IFRS 3 permits recognition of acquired intangibles (e.g., patents, customer lists) that would not be granted recognition if they were internally developed.

The pronouncement elaborates on the basic principle by providing that recognition is subject to the following conditions:

1. At the acquisition date, the identifiable assets acquired and liabilities assumed must meet the definitions of assets and liabilities as set forth in the Conceptual Framework, and
2. The assets and liabilities recognised must be part of the exchange transaction between the acquirer and the acquiree (or the acquiree's former owners) and not part of a separate transaction or transactions.

Restructuring or exit activities. Frequently, in a business combination, the acquirer's plans include the future exit of one or more of the activities of the acquiree or the termination or relocation of employees of the acquiree. Since these exit activities are discretionary on the part of the acquirer and the acquirer is not obligated to incur the associated costs, the costs do not meet the definition of a liability and are not recognised at the acquisition date. Rather, the costs will be recognised in post‐combination financial statements in accordance with other IFRS.

Boundaries of the exchange transaction. Pre‐existing relationships and arrangements often exist between the acquirer and acquiree prior to beginning negotiations to enter into a business combination. Furthermore, while conducting the negotiations, the parties may enter into separate business arrangements. In either case, the acquirer is responsible for identifying amounts that are not part of the exchange for the acquiree. Recognition under the acquisition method is only given to the consideration transferred for the acquiree and the assets acquired, and liabilities assumed in exchange for that consideration. Other transactions outside the scope of the business combination are to be recognised by applying other relevant IFRS.

The acquirer is to analyse the business combination transaction and other transactions with the acquiree and its former owners to identify the components that comprise the transaction in which the acquirer obtained control over the acquiree. This distinction is important to ensure that each component is accounted for according to its economic substance, irrespective of its legal form.

The imposition of this condition was based on an observation that, upon becoming involved in negotiations for a business combination, the parties may exhibit characteristics of related parties. In so doing, they may be willing to execute agreements designed primarily for the benefit of the acquirer of the combined entity that might be designed to achieve a desired financial reporting outcome after the business combination has been consummated. The imposition of this condition is expected to curb such abuses.

In analysing a transaction to determine inclusion or exclusion from a business combination, consideration should be given to which of the parties will reap its benefits. If a pre‐combination transaction is entered into by the acquirer, or on behalf of the acquirer, or primarily to benefit the acquirer (or to benefit the to‐be‐combined entity as a whole) rather than for the benefit of the acquiree or its former owners, the transaction most likely would be considered to be a “separate transaction” outside the boundaries of the business combination and for which the acquisition method would not apply.

The acquirer is to consider the following factors, which the IASB states “are neither mutually exclusive nor individually conclusive” in determining whether a transaction is a part of the exchange transaction or recognised separately:

1. Purpose of the transaction—Typically, there are many parties involved in the management, ownership, operation and financing of the various entities involved in a business combination transaction. Of course, there are the acquirer and acquiree entities, but there are also owners, directors, management and various parties acting as agents representing their respective interests. Understanding the motivations of the parties in entering into a particular transaction potentially provides insight into whether or not the transaction is a part of the business combination or a separate transaction.
2. Initiator of the transaction—Identifying the party that initiated the transaction may provide insight into whether or not it should be recognised separately from the business combination. IASB believes that if the transaction was initiated by the acquirer, it would be less likely to be part of the business combination and, conversely, if it were initiated by the acquiree or its former owners, it would be more likely to be part of the business combination.
3. Timing of the transaction—Examining the timing of the transaction may provide insight into whether, for example, the transaction was executed in contemplation of the future business combination to provide benefits to the acquirer or the post‐combination entity. IASB believes that transactions that take place during the negotiation of the terms of a business combination may be entered into in contemplation of the eventual combination for the purpose of providing future economic benefits primarily to the acquirer of the to‐be‐combined entity and, therefore, should be accounted for separately.

IFRS 3 provides the following pair of presumptions after analysing the economic benefits of a pre‐combination transaction:

IFRS 3 provides three examples of separate transactions that are not to be included in applying the acquisition method:

1. A settlement of a pre‐existing relationship between acquirer and acquiree;
2. Compensation to employees or former owners of the acquiree for future services; and
3. Reimbursement to the acquiree or its former owners for paying the acquirer's acquisition‐related costs.

The section entitled “Determining what is part of the business combination transaction,” later in this chapter, will discuss related application guidance for these transactions that are separate from the business combination (i.e., not part of the exchange for the acquiree).

Acquisition‐related costs are, under IFRS 3, generally expensed through profit or loss at the time the services are received, which will generally be prior to, or at, the date of the acquisition. This is consistent with the now‐prevalent view that such costs do not increase the value of the assets acquired, and thus should not be capitalised.

Step 4—Identify assets and liabilities that require acquisition date classification or designation

To facilitate the combined entity's future application of IFRS in its post‐combination financial statements, management is required to make decisions on the acquisition date relative to the classification or designation of certain items. These decisions are to be based on the contractual terms, economic and other conditions, and the acquirer's operating and accounting policies as they exist on the acquisition date. Examples include, but are not limited to, the following:

1. Classification of particular financial assets and liabilities as measured at fair value through profit or loss or at amortised cost, or as a financial asset measured at fair value through other comprehensive income in accordance with IFRS 9, Financial Instruments;
2. Designation of a derivative instrument as a hedging instrument in accordance with IFRS 9; and
3. Assessment of whether an embedded derivative should be separated from a host contract in accordance with IFRS 9 (which is a matter of “classification” as this IFRS uses that term).

In applying Step 5, specific exceptions are provided for lease contracts and insurance contracts: classification of a lease contract as either an operating lease or a finance lease in accordance with IFRS 16, Leases, and classification of a contract as an insurance contract in accordance with IFRS 17, Insurance Contracts. Generally, these contracts are to be classified by reference to the contractual terms and other factors that were applicable at their inception rather than at the acquisition date. If, however, the contracts were modified subsequent to their inception and those modifications would change their classification at that date, then the accounting for the contracts will be determined by the modification date facts and circumstances. The contract's modification date could be the same as the acquisition date.

Step 5—Recognise and measure the identifiable tangible and intangible assets acquired and liabilities assumed

In general, the measurement principle is that an acquirer measures the identifiable tangible and intangible assets acquired, and the liabilities assumed, at their fair values on the acquisition date. IFRS 3 provides the acquirer with a choice of two methods to measure non‐controlling interests arising in a business combination:

1. To measure the non‐controlling interest at fair value (recognising the acquired business at fair value); or
2. To measure the non‐controlling interest at the non‐controlling interest's share of the acquiree's net assets.

Exceptions to the recognition and/or measurement principles. IFRS 3 provides certain exceptions to its general principles for recognising assets acquired and liabilities assumed at their acquisition date fair values. These can be summarised as follows:

Step 6—Recognise and measure any non‐controlling interest in the acquiree

The term “non‐controlling interest” replaces the term “minority interest” in referring to that portion of the acquiree, if any, not controlled by the parent subsequent to the acquisition. IFRS 3 provides the acquirer with a choice of two methods to measure non‐controlling interests at the acquisition date arising in a business combination:

1. To measure the non‐controlling interest at fair value (also recognising the acquired business at fair value); or
2. To measure the non‐controlling interest at the present ownership instruments' share in the recognised amounts of the acquiree's identifiable net assets (under this approach the only difference is that, in contrast to the approach of measuring the non‐controlling interest at fair value, no portion of imputed goodwill is allocated to the non‐controlling interest).

The second choice is only available for present ownership interest that entitles the holder to a proportionate share of the entity's net assets in the event of liquidation. All other components of non‐controlling interest are measured at the acquisition date fair value unless required otherwise by IFRS.

The choice of the method to measure the non‐controlling interest should be made separately for each business combination rather than as an accounting policy. In making this election, management must carefully consider all factors, since the two methods may result in significantly different amounts of goodwill recognised, as well as different accounting for any changes in the ownership interest in a subsidiary. One important factor would be the entity's future intent to acquire non‐controlling interest, because of the potential effects on equity when the outstanding non‐controlling interest is acquired. Any subsequent acquisition of the outstanding non‐controlling interest under IFRS 3 would not result in additional goodwill being recognised, since such a transaction would be considered as taking place between shareholders.

Measuring non‐controlling interest at fair value. IFRS 3 allows the non‐controlling interest in the acquiree to be measured at fair value at the acquisition date, determined based on market prices for equity shares not held by the acquirer, or, if not available, by using a valuation technique. If the acquirer is not acquiring all of the shares in the acquiree and there is an active market for the remaining outstanding shares in the acquiree, the acquirer may be able to use the market price to measure the fair value of the non‐controlling interest. Otherwise, the acquirer would measure fair value using other valuation techniques. Under this approach, recognised goodwill represents all of the goodwill of the acquired business, not just the acquirer's share.

In applying the appropriate valuation technique to determine the fair value of the non‐controlling interest, it is likely that there will be a difference in the fair value per share of the non‐controlling interest and the fair value per share of the controlling interest (the acquirer's interest in the acquiree). This difference is likely to be the inclusion of a control premium in the per‐share fair value of the controlling interest or, similarly, what has been referred to as a “non‐controlling interest discount” applicable to the non‐controlling shares. Obviously, an investor would be unwilling to pay the same amount per share for equity shares in an entity that did not convey control of that entity as it would pay for shares that did convey control. For this reason, the amount of consideration transferred by an acquirer is not usually indicative of the fair value of the non‐controlling interest, since the consideration transferred by the acquirer often includes a control premium.

Measuring non‐controlling interest at its share of the identifiable net assets of the acquiree, calculated in accordance with IFRS 3. Under this approach, non‐controlling interest is measured as the non‐controlling interest's proportionate interest in the value of the identifiable assets and liabilities of the acquiree, determined under current requirements of IFRS 3.

IFRS 10 requires that the non‐controlling interest is to be classified in the consolidated statement of financial position within the equity section, separately from the equity of the parent company, and clearly identified with a caption such as “non‐controlling interest in subsidiaries.” Should there be non‐controlling interests attributable to more than one consolidated subsidiary, the amounts may be aggregated in the consolidated statement of financial position.

Only equity‐classified instruments issued by the subsidiary may be classified as equity in this manner. If, for example, the subsidiary had issued a financial instrument that, under applicable IFRS, was classified as a liability in the subsidiary's financial statements, that instrument would not be classified as a non‐controlling interest since it does not represent an ownership interest.

Step 7—Measure the consideration transferred

In general, consideration transferred by the acquiree is measured at its acquisition‐date fair value. Examples of consideration that could be transferred include cash, other assets, a business, a subsidiary of the acquirer, contingent consideration, ordinary or preference equity instruments, options, warrants and member interests of mutual entities. The aggregate consideration transferred is the sum of the following elements measured at the acquisition date:

1. The fair value of the assets transferred by the acquirer;
2. The fair value of the liabilities incurred by the acquirer to the former owners of the acquiree; and
3. The fair value of the equity interests issued by the acquirer subject to the measurement exceptions discussed earlier in this chapter for the portion, if applicable, of acquirer share‐based payment awards exchanged for awards held by employees of the acquiree that is included in consideration transferred.

To the extent the acquirer transfers consideration in the form of assets or liabilities with carrying amounts that differ from their fair values at the acquisition date, the acquirer is to remeasure them at fair value and recognise a gain or loss on the acquisition date. If, however, the transferred assets or liabilities remain within the consolidated entity post‐combination, with the acquirer retaining control of them, no gain or loss is recognised, and the assets or liabilities are measured at their carrying amounts to the acquirer immediately prior to the acquisition date. This situation can occur, for example, when the acquirer transfers assets or liabilities to the entity being acquired rather than to its former owners.

The structure of the transaction may involve the exchange of equity interests between the acquirer and either the acquiree or the acquiree's former owners. If the acquisition‐date fair value of the acquiree's equity interests is more reliably measurable than the equity interests of the acquirer, the fair value of the acquiree's equity interests is to be used to measure the consideration transferred.

When a business combination is effected without transferring consideration—for example, by contract alone—the acquisition method of accounting also applies. Examples of such combinations include:

1. The acquiree repurchases a sufficient number of its own shares for an existing investor (the acquirer) to obtain control;
2. Minority veto rights lapse that kept the acquirer, holding the majority voting rights, from controlling an acquiree;
3. The acquirer and acquiree agree to combine their businesses by contract alone (e.g., a stapling arrangement or dual‐listed corporation).

In a business combination achieved by contract alone, the entities involved are not under common control and the combination does not involve one of the combining entities obtaining an ownership interest in another combining entity. Consequently, there is a 100% non‐controlling interest in the acquiree's net assets since the acquirer must contribute the fair value of the acquiree's assets and liabilities to the owners of the acquiree. Depending on the option elected to measure non‐controlling interest (at fair value or share of the acquiree's net assets), this may result in recognising goodwill allocated only to the non‐controlling interest or recognising no goodwill at all.

Contingent consideration. In many business combinations, the acquisition price is not completely fixed at the time of the exchange but is instead dependent on the outcome of future events. There are two major types of contingent future events that might commonly be used to modify the acquisition price: the performance of the acquired entity (acquiree) and the market value of the consideration initially given for the acquisition.

The most frequently encountered contingency involves the post‐acquisition performance of the acquired entity or operations. The contractual agreement dealing with this is often referred to as an “earn‐out” provision. It typically calls for additional payments to be made to the former owners of the acquiree if defined revenue or earnings thresholds are met or exceeded. These may extend for several years after the acquisition date and may define varying thresholds for different years. For example, if the acquiree during its final pre‐transaction year generated revenues of €4 million, there might be additional sums due if the acquired operations produced €4.5 million or greater revenues in year one after the acquisition, €5 million or greater in year two and €6 million in year three. Care will have to be taken to ensure that compensation for post‐acquisition services is excluded from the calculation of contingent consideration. Additional guidance is discussed later in this chapter.

Contingent consideration arrangements in connection with business combinations can be structured in many different ways and can result in the recognition of either assets or liabilities under IFRS 3. An acquirer may agree to transfer (or receive) cash, additional equity instruments or other assets to (or from) former owners of an acquiree after the acquisition date, if certain specified events occur in the future. In either case, according to IFRS 3 the acquirer is to include contingent assets and liabilities as part of the consideration transferred, measured at acquisition‐date fair value. Contingent consideration can only be recognised when the contingency is probable and can be reliably measured. The acquirer shall classify an obligation to pay contingent consideration that meets the definition of a financial instrument as a financial liability or as equity on the basis of the definitions of an equity instrument and a financial liability in IAS 32, as discussed in Chapter 16.

The acquirer is to carefully consider information obtained subsequent to the acquisition‐date measurement of contingent consideration. Additional information obtained during the measurement period that relates to the facts and circumstances that existed at the acquisition date result in measurement period adjustments to the recognised amount of contingent consideration and a corresponding adjustment to goodwill or gain from bargain purchase. The IFRS accounting requirements on subsequently measuring and accounting for contingent consideration in the post‐combination periods are discussed later in this chapter in the section entitled “Post‐combination measurement and accounting.”

Step 8—Recognise and measure goodwill or gain from a bargain purchase

The last step in applying the acquisition method is the measurement of goodwill or a gain from a bargain purchase. Goodwill represents an intangible that is not specifically identifiable. It results from situations when the amount the acquirer is willing to pay to obtain its controlling interest exceeds the aggregate recognised values of the net assets acquired, measured following the principles of IFRS 3. It arises largely from the synergies and economies of scale expected from combining the operations of the acquirer and acquiree. Goodwill's elusive nature as an unidentifiable, residual asset means that it cannot be measured directly but rather can only be measured by reference to the other amounts measured as a part of the business combination. In accordance with IFRS 3, management must select, for each acquisition, the option to measure the non‐controlling interest, and consequently the amount recognised as goodwill (or gain on a bargain purchase) will depend on whether non‐controlling interest is measured at fair value (option 1) or at the non‐controlling interest's share of the acquiree's net assets (option 2).

Thus, when application of the formula yields an excess of the acquisition‐date fair value of the consideration transferred plus the amount of any non‐controlling interest and plus fair value of the acquirer's previously held equity interest over the net assets acquired, this means that the acquirer has paid a premium for the acquisition and that premium is characterised as goodwill.

When the opposite is true, that is, when the formula yields a negative result, a gain from a bargain purchase (sometimes referred to as negative goodwill) is recognised, since the acquirer has, in fact, obtained a bargain purchase as the value the acquirer obtained in the exchange exceeded the fair value of what it surrendered.

In a business combination in which no consideration is transferred, the acquirer is to use one or more valuation techniques to measure the acquisition‐date fair value of its equity interest in the acquiree and substitute that measurement in the formula for CT, “the consideration transferred.” The techniques selected require the availability of sufficient data to properly apply them and are to be appropriate for the circumstances. If more than one technique is used, management of the acquirer is to evaluate the results of applying the techniques, including the extent of data available and how relevant and reliable the inputs (assumptions) used are. Guidance on the use of valuation techniques is provided in the standard, IFRS 13, Fair Value Measurement, presented in Chapter 25.

Bargain purchases. A bargain purchase occurs when the value of net assets acquired is in excess of the acquisition‐date fair value of the consideration transferred plus the amount of any non‐controlling interest and plus fair value of the acquirer's previously held equity interest. While not common, this can happen, as, for example, in a business combination that is a forced sale, when the seller is acting under compulsion.

Under IFRS 3, when a bargain purchase occurs, a gain on acquisition is recognised in profit or loss at the acquisition date, as part of income from continuing operations.

Before recognising a gain on a bargain purchase, IASB prescribed a verification protocol for management to follow given the complexity of the computation involved. If the computation initially yields a bargain purchase, acquirer's management should perform the following procedures before recognising a gain on the bargain purchase:

1. Perform a completeness review of the identifiable tangible and intangible assets acquired and liabilities assumed to reassess whether all such items have been correctly identified. If any omissions are found, recognise the assets and liabilities that had been omitted.
2. Perform a review of the procedures used to measure all of the following items. The objective of the review is to ensure that the acquisition‐date measurements appropriately considered all available information available at the acquisition date relating to:
   1. Identifiable assets acquired;
   2. Liabilities assumed;
   3. Consideration transferred;
   4. Non‐controlling interest in the acquiree, if applicable; and
   5. Acquirer's previously held equity interest in the acquiree for a business combination achieved in stages.

Measurement period. More frequently than not, management of the acquirer does not obtain all of the relevant information needed to complete the acquisition‐date measurements in time for the issuance of the first set of interim or annual financial statements subsequent to the business combination. If the initial accounting for the business combination has not been completed by that time, the acquirer is to report provisional amounts in the consolidated financial statements for any items for which the accounting is incomplete.

IFRS 3 provides for a “measurement period” during which any adjustments to the provisional amounts recognised at the acquisition date are to be retrospectively adjusted to reflect new information that management obtains regarding facts and circumstances existing as of the acquisition date. Information that has a bearing on this determination must not relate to post‐acquisition events or circumstances. The information is to be analysed to determine whether, if it had been known at the acquisition date, it would have affected the measurement of the amounts recognised as of that date.

In evaluating whether new information obtained is suitable for the purpose of adjusting provisional amounts, management of the acquirer is to consider all relevant factors. Critical in this evaluation is the determination of whether the information relates to facts and circumstances as they existed at the acquisition date, or the information results from events occurring after the acquisition date. Relevant factors include:

1. The timing of the receipt of the additional information; and
2. Whether management of the acquirer can identify a reason that a change is warranted to the provisional amounts.

Obviously, information received shortly after the acquisition date has a higher likelihood of relevance to acquisition‐date circumstances than information received months later. However, the measurement period should not exceed one year from the acquisition date.

In addition to adjustments to provisional amounts recognised, the acquirer may determine during the measurement period that it omitted recognition of additional assets or liabilities that existed at the acquisition date. During the measurement period, any such assets or liabilities identified are also to be recognised and measured on a retrospective basis.

In determining adjustments to the provisional amounts assigned to assets and liabilities, management should be alert for interrelationships between recognised assets and liabilities. For example, new information that management obtains that results in an adjustment to the provisional amount assigned to a liability for which the acquiree carries insurance could also result in an adjustment, in whole or in part, to a provisional amount recognised as an asset representing the claim receivable from the insurance carrier. In addition, as discussed in this chapter and Chapter 26, changes in provisional amounts assigned to assets and liabilities frequently will also affect temporary differences between the items' income tax basis and IFRS carrying amount, which in turn will affect the computation of deferred income tax assets and liabilities.

Adjustments to the provisional amounts that are made during the measurement period are recognised retrospectively as if the accounting for the business combination had actually been completed as of the acquisition date. This will result in the revision of comparative information included in the financial statements for prior periods, including any necessary adjustments to depreciation, amortisation or other effects on profit or loss or other comprehensive income related to the adjustments. The measurement period ends on the earlier of:

1. The date management of the acquirer receives the information it seeks regarding facts and circumstances as they existed at the acquisition date or learns that it will be unable to obtain any additional information; or
2. One year after the acquisition date.

After the end of the measurement period, the only revisions that are permitted to be made to the initial acquisition‐date accounting for the business combination are restatements for corrections of prior period errors in accordance with IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, discussed in detail within Chapter 7.

Acquisition‐related costs

Acquisition‐related costs, under IFRS 3, are generally to be charged as an expense in the period in which the costs are incurred and the related services received. Examples of these costs include:

Acquisition‐related costs are not part of the fair value exchange between the buyer and the seller for the acquired business, they are accounted for separately as operating costs in the period in which services are received. This may significantly affect the operating results reported for the period of any acquisition.

IFRS 3 makes an exception to the general rule of charging acquisition‐related costs against profit with respect to costs to register and issue equity or debt securities. These costs are to be recognised in accordance with IAS 32 and IFRS 9. Share issuance costs are normally charged against the gross proceeds of the issuance. Debt issuance costs are treated as a reduction of the amount borrowed or as an expense of the period in which they are incurred; however, some reporting entities have treated these costs as deferred charges and amortised them against profit during the term of the debt (see Chapter 24).

Post‐combination measurement and accounting

In general, in accordance with IFRS 3 in post‐combination periods, an acquirer should measure and account for assets acquired, liabilities assumed or incurred, and equity instruments issued in a business combination on a basis consistent with other applicable IFRS for those items, which include:

• IAS 38 prescribes the accounting for identifiable intangible assets acquired in a business combination;
• IAS 36 provides guidance on recognising impairment losses;
• IFRS 17 prescribes accounting for an insurance contract acquired in a business combination;
• IAS 12 prescribes the post‐combination accounting for deferred tax assets and liabilities acquired in a business combination;
• IFRS 16 provides guidance on leases;
• IFRS 2 provides guidance on subsequent measurement and accounting for share‐based payment awards; and
• IAS 27 prescribes accounting for changes in a parent's ownership interest in a subsidiary after control is obtained.

IFRS 3 provides special guidance on accounting for the following items arising in a business combination:

1. Reacquired rights;
2. Contingent liabilities recognised as of the acquisition date;
3. Indemnification assets; and
4. Contingent consideration.

After acquisition, a reacquired right recognised as an intangible asset is amortised over the remaining contractual term, without taking into consideration potential renewal periods. If an acquirer subsequently sells a reacquired right to a third party, the carrying amount of the right should be included in calculating the gain or loss on the sale.

In post‐combination periods, until the liability is settled, cancelled or expires, the acquirer measures a contingent liability recognised as of the acquisition date at the higher of:

1. The amount that would be recognised by applying the requirements of IAS 37; and
2. The amount initially recognised, less any cumulative amount of income recognised in accordance with IFRS 15, Revenue from Contracts with Customers.

This requirement would not apply to contracts accounted for under the provisions of IFRS 9. In accordance with this standard, the financial liability is to be measured at fair value at each reporting date, with changes in value recognised either in profit or loss or in other comprehensive income in accordance with IFRS 9.

At each reporting date subsequent to the acquisition date, the acquirer should measure an indemnification asset recognised as part of the business combination using the same basis as the indemnified item, subject to any limitations imposed contractually on the amount of the indemnification. If an indemnification asset is not subsequently measured at fair value (because to do so would be inconsistent with the basis used to measure the indemnified item), management is to assess the recoverability of the asset. Any changes in the measurement of the asset (and the related liability) are recognised in profit or loss.

The acquirer needs to carefully consider information obtained subsequent to the acquisition‐date measurement of contingent consideration. Some changes in the fair value of contingent consideration result from additional information obtained during the measurement period that relates to the facts and circumstances that existed at the acquisition date. Such changes are measurement period adjustments to the recognised amount of contingent consideration and a corresponding adjustment to goodwill or gain from bargain purchase. However, changes that result from events occurring after the acquisition date, such as meeting a specified earnings target, reaching a specified share price, or reaching an agreed‐upon milestone on a research and development (R&D) project, do not constitute measurement period adjustments, and no longer result in changes to goodwill.

Contingent consideration, which is classified as an asset or liability, is remeasured at fair value at each reporting date. All changes in fair value are recognised in profit or loss in accordance with IFRS 9. Contingent consideration which is classified as equity is not remeasured.

The potential impact of post‐acquisition remeasurements on subsequent profit or loss as well as on debt covenants or management remuneration should be analysed at the date of acquisition.

IFRS guidance on recognising and measuring reacquired rights, contingent liabilities and indemnification assets on the acquisition date was discussed earlier in this chapter in the paragraph entitled “Accounting for Business Combinations under the Acquisition Method, Steps 3, 4 and 5—Classify or designate the identifiable assets acquired and liabilities assumed”; and guidance on contingent consideration in “Step 7—Measure the consideration transferred.”

Determining what is part of the business combination transaction

Transactions entered into by or on behalf of the acquirer or primarily for the benefit of the acquirer or the combined entity, rather than primarily for the benefit of the acquiree (or its former owners), before the combination, are likely to be separate transactions, not accounted for under the acquisition method. In applying the acquisition method to account for a business combination, the acquirer must recognise only the consideration transferred for the acquiree and the assets acquired and liabilities assumed in the exchange for the acquiree. IFRS 3 provides the following examples of separate transactions that are not to be included in applying the acquisition method:

1. A transaction that in effect settles pre‐existing relationships between the acquirer and acquiree;
2. A transaction that remunerates employees or former owners of the acquiree for future services; and
3. A transaction that reimburses the acquiree or its former owners for paying the acquirer's acquisition‐related costs.

The amount of the gain or loss measured as a result of settling a pre‐existing relationship will, of course, depend on whether the acquirer had previously recognised related assets or liabilities with respect to that relationship.

Contingent payments to employees or former owners of the acquiree. The acquirer is to assess whether arrangements to make contingent payments to employees or selling owners of the acquiree represent contingent consideration that is part of the business combination transaction or represents compensation for future services and a separate transaction to be excluded from the application of the acquisition method to the business combination. In general, the acquirer is to consider the reasons why the terms of the acquisition include the payment provision, the party that initiated the arrangement and when (at what stage of the negotiations) the arrangement was entered into by the parties. When those considerations do not provide clarity regarding whether the transaction is separate from the business combination, the acquirer considers the following indicators:

1. Post‐combination employment—Consideration is to be given to the terms under which the selling owners will be providing services as key employees of the combined entity. The terms may be evidenced by a formal employment contract, by provisions included in the acquisition documents, or by other documents. If the arrangement provides that the contingent payments are automatically forfeited upon termination of employment, the consideration is to be characterised as compensation for post‐combination services. If, instead, the contingent payments are not affected by termination of employment, this would be an indicator that the contingent payments represent additional consideration that is part of the business combination transaction and not compensation for services.
2. Duration of post‐combination employment—If the employee is contractually bound to remain employed for a period that equals or exceeds the period during which the contingent payments are due, this may be an indicator that the contingent payments represent compensation for services.
3. Amount of compensation—If the amount of the employee's compensation that is not contingent is considered to be reasonable in relation to other key employees of the combined entity, this may indicate that the contingent amounts represent additional consideration and not compensation for services.
4. Differential between amounts paid to employees and selling owners who do not become employees of the combined entity—If, on a per‐share basis, the contingent payments due to former owners of the acquiree that did not become employees are lower than the contingent payments due to the former owners that did become employees of the combined entity, this may indicate that the incremental amounts paid to the employees are compensation.
5. Extent of ownership—The relative ownership percentages (e.g., number of shares, units, percentage of membership interest) owned by the selling owners who remain employees of the combined entity serve as an indicator of how to characterise the substance of the contingent consideration. If, for example, the former owners of substantially all of the ownership interests in the acquiree are continuing to serve as key employees of the combined entity, this may be an indicator that the contingent payment arrangement is substantively a profit‐sharing vehicle designed with the intent of providing compensation for services to be performed post‐combination. Conversely, if the former owners that remained employed by the combined entity collectively owned only a nominal ownership interest in the acquiree and all of the former owners received the same amount of contingent basis on a per‐share basis, this may be an indicator that the contingent payments represent additional consideration. In considering the applicability of this indicator, care must be exercised to closely examine the effects, if any, of transactions, ownership interests and employment relationships, pre‐combination and post‐combination, with respect to parties related to the selling owners of the acquiree.
6. Relationship of contingent arrangements to the valuation approach used—The payment terms negotiated in many business combinations provide that the amount of the acquisition date transfer of consideration from acquirer to acquiree (or the acquiree's former owners) is computed near the lower end of a range of valuation estimates the acquirer used in valuing the acquiree. Furthermore, the formula for determining future contingent payments is derived from or related to that valuation approach. When this is the case, it may be an indicator that the contingent payments represent additional consideration. Conversely, if the formula for determining future contingent payments more closely resembles prior profit‐sharing arrangements, this may be an indicator that the substance of the contingent payment arrangement is to provide compensation for services.
7. Formula prescribed for determining contingent consideration—Analysing the formula to be used to determine the contingent consideration may provide insight into the substance of the arrangement. Contingent payments that are determined on the basis of a multiple of earnings may be indicative of being, in substance, contingent consideration that is part of the business combination transaction. Alternatively, contingent consideration that is determined as a pre‐specified percentage of earnings would be more suggestive of a routine profit‐sharing arrangement for the purposes of providing additional compensation to employees for post‐combination services rendered.
8. Other considerations—Given the complexity of a business combination transaction and the sheer number and girth of the legal documents necessary to effect it, the financial statements preparer is charged with the daunting, but unavoidable, task of performing a comprehensive review of the terms of all the associated agreements. These can take the form of non‐compete agreements, consulting agreements, leases, guarantees, indemnifications and, of course, the formal agreement to combine the businesses. Particular attention should be paid to the applicable income tax treatment afforded to the contingent payments. The income tax treatment of these payments may be an indicator that tax avoidance was a primary motivator in characterising them in the manner that they are structured. An acquirer might, for example, simultaneous to a business combination, execute a property lease with one of the key owners of the acquiree. If the lease payments were below market, some or all of the contingent payments to that key owner/lessor under the provisions of the other legal agreements might, in substance, be making up the shortfall in the lease and thus should be re‐characterised as lease payments and accounted for separately from the business combination in the combined entity's post‐combination financial statements. If this were not the case, and the lease payments were reflective of the market, this would be an indicator pointing to a greater likelihood that the contingent payment arrangements actually did represent contingent consideration associated with the business combination transaction.

Replacement awards—Acquirer share‐based payment awards exchanged for acquiree awards held by its employees. In connection with a business combination, the acquirer often awards share options or other share‐based payments (i.e., replacement awards) to the employees of the acquiree in exchange for the employees' acquiree awards. Obviously, there are many valid business reasons for the exchange, not the least of which is ensuring smooth transition and integration, retention and motivation of valued employees, and maintaining controlling interests in the acquiree.

IFRS 3 provides guidance on determining whether equity instruments (for example, share‐based payments awards) issued in a business combination are part of the consideration transferred in exchange for control of the acquiree (and accounted for in accordance with IFRS 3[R]) or are in return for continued service in the post‐combination periods (and accounted for under IFRS 2, Share‐Based Payment, as a modification of a plan).

Acquirer not obligated to exchange. Accounting for the replacement awards under IFRS 3 is dependent on whether the acquirer is obligated to replace the acquiree awards. The acquirer is obligated to replace the acquiree awards if the acquiree or its employees can enforce replacement through rights obtained from the terms of the acquisition agreement, the acquiree awards or applicable laws or regulations.

If the acquirer is not obligated to replace the acquiree awards, all of the market‐based measure of the replacement awards is recognised as remuneration cost in the post‐combination financial statements.

Goodwill

Goodwill represents the difference between the acquisition‐date fair value of the consideration transferred plus the amount of any non‐controlling interest in the acquiree plus the acquisition‐date fair value of the acquirer's previously held equity interest in the acquiree and the acquisition‐date fair values of the identifiable assets acquired and liabilities assumed. It is presumed that when an acquiring entity pays such a premium price for the acquiree, it sees value that transcends the worth of the tangible assets and the identifiable intangibles, or else the deal would not have been consummated on such terms. Goodwill arising from acquisitions often consists largely of the synergies and economies of scale expected from combining the operations of the acquirer and acquiree. Goodwill must be recognised as an asset.

The balance in the goodwill account should be reviewed at the end of each reporting period to determine whether the asset has suffered any impairment. If goodwill is no longer deemed probable of being fully recovered through the profitable operations of the acquired business, it should be partially written down or fully written off. Any write‐off of goodwill must be charged to profit or loss. Once written down, goodwill cannot later be restored as an asset, reflecting the concern that the independent measurement of goodwill is not possible and the acquired goodwill may, in the post‐acquisition periods, be replaced by internally generated goodwill, which is not to be recognised.

It should be noted that in acquisitions of less than 100% of the equity interests, IFRS 3 provides the acquirer with a choice of two options to measure non‐controlling interests arising in a business combination:

1. To measure the non‐controlling interest at fair value (also recognising the acquired business at fair value); or
2. To measure the non‐controlling interest at the non‐controlling interest's share of the value of net assets acquired.

Under the fair value approach to measure non‐controlling interest, the acquired business will be recognised at fair value, with the controlling share of total goodwill assigned to the controlling interest and the non‐controlling share allocated to the non‐controlling interest. Under the second approach to measure non‐controlling interest, while the net identifiable assets attributable to the non‐controlling interest are written up to the fair values implied by the acquisition transaction, goodwill will not be imputed for the non‐controlling share.

The fair value of inventory exceeded the corresponding book value because Euro Boiler had been using LIFO for many years to cost its inventory, prior to revised IAS 2's prohibiting this method, and actual replacement cost was therefore somewhat higher than carrying value at the date of the acquisition. The long‐term debt's fair value was slightly lower than carrying value (cost) because the debt carries a fixed interest rate and the market rates have risen since the debt was incurred. Consequently, Euro Boiler benefits economically by having future debt service requirements which are less onerous than they would be if it were to borrow at current rates.

Conversely, of course, the fair value of the lender's note receivable has declined since it now represents a loan payable at less than market rates. Finally, the fair values of Euro Boiler's receivables have also declined from their carrying amount, due to both the higher market rates of interest and to the greater risk of non‐collectibility because of the change in ownership. The higher interest rates impact the valuation in two ways: (1) when computing the discounted present value of the amounts to be received, the higher interest rate reduces the computed present value, and (2) the higher interest rates may serve as an incentive for customers to delay payments to Euro rather than borrow the money to repay the receivables, with that delay resulting in cash flows being received later than anticipated thus causing the present value to decline.

Euro Boiler's customer list has been appraised at €1.4 million and is a major reason for the company's acquisition by Oman Heating. Having been internally developed over many years, the customer list is not recorded as an asset by Euro Boiler, however. The patents have been amortised down to €2.4 million in Euro Boiler's accounting records, consistent with IFRS, but an appraisal finds that on a fair value basis the value is somewhat higher.

Similarly, property, plant and equipment has been depreciated to a book value of €38.5 million but has been appraised at a sound value (that is, replacement cost new adjusted for the fraction of the useful life already elapsed) of €52.4 million.

A key asset being acquired by Oman Heating, albeit one not formally recognised by Euro Boiler, is the IPR&D, which pertains to activities undertaken over a period of several years aimed at making significant process and product improvements which would enhance Euro Boiler's market position and will be captured by the new combined operations. It has been determined that duplicating the benefits of this ongoing R&D work would cost Oman Heating €8.6 million. The strong motivation to make this acquisition, and to pay a substantial premium over book value, is based on Euro Boiler's customer list and its IPR&D. Euro Boiler has previously expensed all R&D costs incurred, as required under IFRS, since it conservatively believed that these costs were in the nature of research, rather than development.

Euro Boiler had guaranteed a €1.5 million bank debt of a former affiliated entity, but this was an “off‐the‐books” event since guarantees issued between corporations under common control were commonly deemed exempt from recognition. The actual contingent obligation has been appraised as having a fair value (considering both the amount and likelihood of having to honour the commitment) of €75,000.

Thus, although Euro Boiler's statement of financial position reflects a shareholders' deficit (including share capital issued and outstanding, and accumulated deficit) of €9.1 million, the value of the acquisition, including the IPR&D, is much higher. The preliminary computation of goodwill, excluding deferred tax, is as follows:

Under IFRS 3, the fair value allocated to IPR&D must be expensed unless it is separately identifiable, is a resource that is controlled, is a probable source of future economic benefits and has a reliably measurable fair value. Oman Heating determines that €1,800,000 of the cost of IPR&D meets all these criteria and supports capitalisation. All other assets and liabilities are recorded by Oman Heating at the allocated fair values, with the excess consideration transferred being assigned to goodwill. The entry to record the acquisition (for preparation of consolidated financial statements, for example) is as follows:

Note that, while the foregoing example is for a share acquisition, an asset and liability acquisition would be accounted for in the exact same manner. Also, since the debt is recorded at fair value, which will often differ from face (maturity) value, the differential (premium or discount) must be amortised using the effective yield method from acquisition date to the maturity date of the debt, and thus there will be differences between actual payments of interest and the amounts recognised in profit or loss as interest expense. Finally, note that property, plant and equipment is recorded “net”—that is, the allocated fair value becomes the “cost” of these assets; accumulated depreciation previously recorded in the accounting records of the acquired entity does not carry forward to the post‐acquisition financial statements of the consolidated entity.

Deferred income tax—fair value adjustments

IFRS 3 will require an acquirer to account for temporary differences between the fair value of the acquiree's assets and liabilities and their tax base. The fair value of an acquiree's net assets are often higher than the depreciated historic cost adopted in the acquiree's own financial statements, and additional liability is recorded in the consolidated financial statements, increasing goodwill. The deferred tax asset or liability should be calculated using tax rates enacted or substantially enacted at the end of the reporting period.

Impairment of goodwill

Assume that an entity acquires another entity and that goodwill arises from this acquisition. Also assume that, for purposes of impairment, it is determined that the acquired business comprises seven discrete cash‐generating units. A cash‐generating unit is the smallest level of identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets (not larger than an operating segment). The goodwill recorded on the acquisition must be allocated to some or all of those seven cash‐generating units. If it is the case that the goodwill is associated with only some of the seven cash‐generating units, the goodwill recognised in the statement of financial position should be allocated to only those assets or groups of assets.

Three steps are required for goodwill impairment testing. First, the recoverable amount of a cash‐generating unit which is the higher of the cash‐generating unit's fair value less costs to sell (net selling price) and its value in use, which is the present value of the estimated future cash flows expected to be derived from the cash‐generating unit, must be determined. Secondly, the recoverable amount of the cash‐generating unit is compared to its carrying value. If the recoverable value exceeds the carrying value, then there is no goodwill impairment, and the third testing step is not required.

IAS 36 requires that if the recoverable amount is less than the carrying value, an impairment write‐down must be made. In this third step in goodwill impairment testing, the recoverable value of the cash‐generating unit as of the testing date is allocated to its assets (including intangible assets) and liabilities, with the remainder (if any) being assigned to goodwill. If the amount of goodwill resulting from this calculation is less than the carrying amount of goodwill, then the difference is impaired goodwill and must be charged to expense in the current period.

An impairment loss is first absorbed by goodwill, and only when goodwill has been eliminated entirely is any further impairment loss credited to other assets in the group (on a pro rata basis, unless it is possible to measure the recoverable amounts of the individual assets). This is perhaps somewhat arbitrary, but it is also logical, since the excess earnings power represented by goodwill must be deemed to have been lost if the recoverable amount of the cash‐generating unit is less than its carrying amount. It is also a conservative approach and will diminish or eliminate the display of that often misunderstood and suspiciously viewed asset, goodwill, before the carrying values of identifiable intangible and tangible assets are adjusted.

Reversal of previously recognised impairment of goodwill

In general, under IFRS, reversal of an impairment identified with a cash‐generating unit is permitted. However, due to the special character of this asset, IAS 36 has imposed a requirement that reversals may not be recognised for previous write‐downs in goodwill. Thus, a later recovery in the value of the cash‐generating unit will be allocated to assets other than goodwill. (The adjustments to those assets cannot be for amounts greater than would be needed to restore them to the carrying amounts at which they would be currently stated had the earlier impairment not been recognised—i.e., at the former carrying values less the depreciation that would have been recorded during the intervening period.)

IFRIC 10, Interim Financial Reporting and Impairment, addresses conflicts between the requirements of IAS 34, Interim Financial Reporting, and those in other standards on the recognition and reversal in the financial statements of impairment losses on goodwill and certain financial assets. In conformity with IFRIC 10, any impairment losses recognised in an interim financial statement must not be reversed in subsequent interim or annual financial statements.

Gain from a bargain purchase

In certain business combinations, the consideration transferred is less than the fair value of the net assets acquired. These are often identified as being “bargain purchase” transactions. This difference has traditionally been referred to as “negative goodwill.” IFRS 3 suggests that, since arm's‐length business acquisition transactions will usually favour neither party, the likelihood of the acquirer obtaining a bargain is considered remote. According to this standard, apparent instances of bargain purchases giving rise to a gain from a bargain purchase are more often the result of a measurement error (i.e., where the fair values assigned to assets and liabilities were incorrect to some extent) or of a failure to recognise a contingent or actual liability (such as for employee severance payments). However, a gain from a bargain purchase can also derive from the risk of future losses, recognised by both parties and incorporated into the transaction price. (One such example was the case of the sale by BMW of its Rover car division to a consortium for €1. It did indeed suffer subsequent losses and eventually failed.)

IFRS 3 requires that, before a gain from a bargain purchase is recognised, the allocation of fair values is to be revisited, and that all liabilities—including contingencies—are to be reviewed; the consolidation transferred is reviewed and for a business combination achieved in stages, the acquirer's previously held interest in the acquiree is also revisited. After this is completed, if indeed the fair values of identifiable assets acquired net of all liabilities assumed exceeds the total consideration transferred, then a gain from a bargain purchase will be acknowledged. The accounting treatment of negative goodwill has passed through a number of evolutionary stages beginning with the original IAS 22, which was later twice revised with major changes to the prescribed accounting treatment of negative goodwill.

Under IFRS 3, a gain from a bargain purchase is taken immediately into profit. Essentially, this is regarded, for financial reporting purposes, as a gain realised upon the acquisition transaction and accounted for accordingly.

Business combinations achieved in stages (step acquisitions)

A step acquisition is a business combination in which the acquirer held an equity interest in the acquiree prior to the acquisition date on which it obtained control. In some instances, control over another entity is not achieved in a single transaction, but rather after a series of transactions. For example, one entity may acquire a 25% interest in another entity, followed by another 20% some time later, and then followed by another 10% at yet a later date. The last step gives the acquirer a 55% interest and, thus, control. The accounting issue is to determine at what point in time the business combination took place and how to measure the acquisition.

IFRS 3 requires the acquirer to remeasure its previous holdings of the acquiree's equity at acquisition‐date fair value. Any gain or loss on remeasurement is recognised in profit or loss on that date.

If the acquirer had previously recognised changes in the carrying value of its equity interest in the acquiree in other comprehensive income (e.g., because the investment was classified as fair value with changes in fair value classified through other comprehensive income), that amount is to be reclassified and included in the computation of the acquisition date gain or loss from remeasurement.