The Measurement Period In Business Combinations – FAQ | IFRS

The measurement period in business combinations

The accounting for a business combination requires substantial effort and resources. The initial accounting often is incomplete at the end of the reporting period in which the business combination happens. This is because the acquirer has been unable to obtain all pertinent information necessary to evaluate the conditions that existed as of the acquisition date. As a result, the acquirer may have to record provisional amounts for certain assets or liabilities — for instance, independent valuations for intangible assets may not yet be finalised.

The measurement period in business combinations

The measurement period is intended to allow an acquirer sufficient time to obtain the information necessary to evaluate the conditions that existed as of the acquisition date. When the acquirer receives the necessary information, adjustments may be necessary either:

  • To revise the amounts recorded for assets and liabilities recognised at the time of the acquisition
  • To recognise new assets and liabilities that would have been recognised at the time of the acquisition if all facts and circumstances had been known at that time. [IFRS 3 45 – 50]

When an acquirer makes a measurement period adjustment, the acquirer usually records a corresponding debit or credit to goodwill.

An acquirer must not record a measurement period adjustment for either of the following:

  • The correction of an error. An acquirer must account for the correction of an error according to IAS 8 Accounting policies, changes in accounting estimates and errors. For example, an acquirer might record the wrong amount in its general ledger for an asset acquired due to a typo. The adjustment made to record the proper amount is accounted for as the correction of an error under IAS 8.
  • Events that happened after the acquisition date. These events must be accounted for in the periods in which they occur following relevant guidance in other IFRSs.

Consider this

Improper application of the guidance on the measurement period is a common cause of errors and misstatements in an acquirer’s financial statements. Some frequent pitfalls in applying this guidance are:

  • Presuming that the measurement period lasts for a full twelve months. Twelve months is the maximum time that the measurement period can remain open. The measurement period ends when the acquirer obtains the information necessary to evaluate the conditions that existed as of the acquisition date.
  • Failing to provide the required disclosures indicating the provisional items outstanding. If this happens, an acquirer cannot record an adjustment to goodwill. Instead, the adjustment is recognised through earnings.
  • Recording corrections of errors or events happening after the acquisition date as measurement period adjustments.

The measurement period in business combinations

So there are three possibilities in the one year measurement period in Business Combinations

The following illustration includes three scenarios. The scenarios show how slight changes in facts and circumstances might lead to a different conclusion about whether an adjustment to an environmental liability is a measurement period adjustment, the correction of an error or an event happening after the acquisition date. In all three scenarios, assume the following:

  1. For the March 31, 20X1 financial statements, the acquirer records an initial estimate of the environmental liability but is awaiting additional information to finalize the estimate — such as the results of soil and groundwater testing and independent evaluations by professionals specialising in the remediation of environmental contamination.

  2. On March 20, 20X1, an acquirer buys a small energy infrastructure company (the acquiree) in a business combination. The acquiree owns and operates pipelines and terminals that transport and store natural gas, petroleum products and crude oil.

  3. In the days leading up to the business combination, one of the acquiree’s crude oil tanks experiences a small leak that is suspected of causing low levels of contamination to nearby soil and groundwater. The acquirer assumes the acquiree’s environmental liability to clean up the damage.

Scenario 1

Scenario 2

Scenario 3

In its March 31, 20X1 financial statements, the acquirer discloses the business combination and provides all required disclosures about the measurement period. In particular, the disclosure indicates that the final valuation of the environmental liability is pending.

In July 20X1, the acquirer receives the rest of the information necessary to finalise its estimate of the environmental liability.

The acquirer records the adjustment to the environmental liability as a measurement period adjustment.

In its March 31, 20X1 financial statements, the acquirer discloses the business combination. The acquirer, however, fails to provide the required disclosures about the measurement period.

In July 20X1, the acquirer receives the rest of the information necessary to finalise its estimate of the environmental liability.

The acquirer records the adjustment to the environmental liability as to the correction of an error.

After the acquisition date, a different crude oil tank on the site springs a small leak.

The acquirer must increase its environmental liability for the cost to re-mediate the additional damage.

The increase is reflected in current period activity because it was triggered by an event happening after the acquisition date.

Once an acquirer finishes the initial accounting for a business combination, it generally must account for the assets acquired, liabilities assumed and non-controlling interest according to relevant guidance in other areas of IFRS 3. IFRS 3 54 – 58, however, provides specific rules for the subsequent measurement of several items, such as assets and liabilities from contingencies recorded as of the acquisition date, indemnification assets, reacquired rights, and contingent consideration.

The measurement period in business combinations The measurement period in business combinations The measurement period in business combinations The measurement period in business combinations

Leave a comment