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Commission Regulation (EC) No 1725/2003 of 29 September 2003 adopting certain international accounting standards in accordance with Regulation (EC) No 1606/2002 of the European Parliament and of the Council.

Content

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Business combinations - classification either as acquisitions or unitings of interests

Paragraph 11 of IAS 1 (revised 1997), presentation of financial statements, requires that financial statements should not be described as complying with International Accounting Standards unless they comply with all the requirements of each applicable standard and each applicable interpretation issued by the Standing Interpretations Committee. SIC interpretations are not intended to apply to immaterial items.

Reference: IAS 22 (revised 1998), business combinations(49).

ISSUE

1. In order to classify a business combination, IAS 22 (revised 1998) ("IAS 22") contains both general definitions in paragraph 8 and additional guidance in paragraphs 10 to 12 for acquisitions and in paragraphs 13 to 16 for unitings of interests. IAS 22 is clear that it will be possible to identify an acquirer in virtually all cases and hence unitings of interests are expected to occur in exceptional circumstances only. However, the standard does not provide explicit guidance on the interaction between the definitions and the two sections containing guidance on acquisitions and unitings of interests.

2. The issues are:

(a) how the definitions and the additional guidance in IAS 22 are to be interpreted and applied in classifying a business combination; and

(b) whether a business combination under IAS 22 might be classified as neither an acquisition nor a uniting of interests.

3. This interpretation does not deal with transactions among enterprises under common control.

Consensus

4. A business combination should be accounted for as an acquisition, unless an acquirer cannot be identified. In virtually all business combinations an acquirer can be identified, i.e. the shareholders of one of the combining enterprises obtain control over the combined enterprise.

5. The classification of a business combination should be based on an overall evaluation of all relevant facts and circumstances of the particular transaction. The guidance given in IAS 22 provides examples of important factors to be considered, not a comprehensive set of conditions to be met. Single characteristics of a combined enterprise such as voting power or relative fair values of the combining enterprises should not be evaluated in isolation in order to determine how a business combination should be accounted for.

6. IAS 22.15(a), (b) and (c) describe the essential characteristics of a uniting of interests. An enterprise should classify a business combination as an acquisition, unless all of these three characteristics are present. Even if all of the three characteristics are present, an enterprise should classify a business combination as a uniting of interests only if the enterprise can demonstrate that an acquirer cannot be identified.

7. All business combinations under IAS 22 are either an "acquisition" or a "uniting of interests".

Date of consensus: January 1998.

Effective date: This interpretation becomes effective for business combinations given initial accounting recognition in periods beginning on or after 1 August 1998.

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