Question

1, what is the tokyo agreement? (200 words)

2,how is goodwill measured in a business combination with a non controlling interest? (200 words)

Answer 1

1)Ikuo Nishikawa, Chairman of the Accounting Standards Board of Japan (ASBJ), and Sir David Tweedie, Chairman of the International Accounting Standards Board (IASB), jointly announced today an agreement (known as the Tokyo Agreement) to accelerate convergence between Japanese GAAP and International Financial Reporting Standards (IFRSs), a process that was started in March 2005.

As part of the agreement the two boards will seek to eliminate by 2008 major differences between Japanese GAAP and IFRSs (as defined by the July 2005 CESR assessment of equivalence), with the remaining differences being removed on or before 30 June 2011. Whilst the target date of 2011 does not apply to any major new IFRSs now being developed that will become effective after 2011, both boards will work closely to ensure the acceptance of the international approach in Japan when new standards become effective (see the attached copy of the agreement).

Commenting on the agreement, Mr Ikuo Nishikawa said:

We have reaffirmed our commitment to convergence and are pleased to have an opportunity to increase the significant involvement of the ASBJ and Japan more generally in the international standard-setting process. It is expected that this agreement will enable Japanese companies to publish financial statements prepared under Japanese accounting standards without any remedies continuously in the EU and other capital markets using IFRSs.

Sir David Tweedie said:

We are delighted that the ASBJ, representing the interests of the second largest economy in the world, has agreed to accelerate convergence between Japanese GAAP and IFRSs and look forward to its active participation in shaping the future direction of international financial reporting standards.

2)

When we acquire another company, we might pay the company more than the acquired share of the net assets of the company being acquired. For example, when we see future prospects of the company. In this case goodwill will arise and this is covered by IFRS 3 Business Combinations which is business acquisition accounting.

Hence, Goodwill is an asset representing the future economic benefits arising from other assets in a business combination that are not individually identified and separately recognized. This will arise on the acquisition of a subsidiary at acquisition date.

Goodwill is calculated as the purchase consideration we pay to buy the subsidiary plus the Non-controlling interest (Subsidiary) value at acquisition less the fair value of the net assets of subsidiary at acquisition.

Purchase Consideration

This is the amount we pay to acquire the controlling interest in the subsidiary. This may take the form of Cash, Shares, Contingent Consideration, Deferred Consideration.

Shares consideration means we pay another company our shares as consideration for the acquisition of that company. For example, A company acquire B company by issuing 1 share in A company for every 2 shares in B company. This is valued using the market price at the acquisition date.

Contingent consideration means sometimes we might say another company to be acquired that we will pay certain amount now and certain amount in future if the company to be acquired meets the certain criteria. This is the contingent consideration and should be included in the purchase consideration based on the present value if payment is for more than one year.

Previously, Contingent consideration was only recognized when its probable that the consideration will actually be paid. However, under new rules, Contingent consideration must be recognized in purchase consideration whether or not it is probable the consideration will actually be paid.

Deferred cash consideration means cash is payable at a later date. Hence, this is also similar to contingent consideration and should be measured at present value at the acquisition date.

Non-Controlling Interest NCI Valuation

IFRS 3 allows one of two methods for measuring NCI at acquisition; NCI Percentage share of Net assets and Fair value method.

It is not compulsory to use same method for every acquisition. Company can use one of two methods for every acquisition.

Fair value of net assets of subsidiary at acquisition

The net assets of the subsidiary need to be valued at acquisition. This is normally gained from the due diligence report made by the accountancy firms where the subsidiary net assets have been valued for acquisition purpose by the acquirer.