Accounting developments

Flash Accounting developments New standards for business combinations and non-controlling interests In January 2009, the Accounting Standards Board (AcSB) of the Canadian Institute of Chartered Accountants (CICA) issued new Section 1582, Business Combinations, which replaces Section 1581 of the same title. At the same time, the AcSB also issued new Sections 1601, Consolidated Financial Statements, and 1602, Noncontrolling Interests, which replace Section 1600, Consolidated Financial Statements. These new Sections include significant changes with respect to accounting for business combinations, transactions with non-controlling interests (NCI) and transactions that result in a loss of control of a subsidiary. An example is presented at the end of this publication to illustrate some of the significant changes. The new standards were developed in conjunction with a joint project of the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) in the United States (U.S.) to harmonize substantially all guidance on accounting for business combinations. More specifically, for the most part, Sections 1582, 1601 and 1602 converge with Statement of Financial Accounting Standard (SFAS) No. 141(R), Business Combinations, and SFAS 160, Noncontrolling Interest in Consolidated Financial Statements An Amendment of ARB No. 51, issued in December 2007 by the FASB and with international financial accounting standards (IFRS) IFRS 3 (2008), Business Combinations, and IAS 27 (2008), Consolidated and Separate Financial Statements, issued by the IASB in January 2008. However, some U.S. and international guidance has not been included in Canadian generally accepted accounting principles (GAAP) to recognize that currently some Canadian standards are different. Section 1582 Objective The objective of new Section 1582 on business combinations is to improve the relevance, reliability and comparability of information about business combinations and their effects on financial statements. This new Section establishes principles and requirements for how an acquirer recognizes a business combination. It also determines information to disclose to enable users of the financial statements to evaluate the nature and financial effects of a business combination. Scope and definitions Section 1582 applies to a transaction or other event that meets the definition of a business combination. It does not apply to the formation of a joint venture, the acquisition of an asset or a group of assets that does not constitute a

business, a combination between entities or businesses under common control, a combination between not-forprofit organizations (NFPO), or the acquisition of a profit-oriented enterprise by an NFPO. The scope of Section 1582 is expanded as a business combination is now defined as a transaction or other event in which an acquirer obtains control of one or more businesses. Consequently, a business combination includes now situations where control is obtained other than by the acquisition of net assets or equity interests. The following events, for example, are business combinations as defined in Section 1582: Obtaining control of an enterprise on signing a contract, without the transfer of consideration; Redemption by an enterprise of a sufficient number of its own shares, thereby enabling an existing investor to obtain control. The definition of a business has also been expanded such that a greater number of transactions can be considered a business combination. Section 1582 defines a business as an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs or other economic benefits directly to investors or other owners, members or participants. While a business may generally have inputs, processes and outputs, Section 1582 states that outputs are not required for an integrated set to qualify as a business. Moreover, a business need not include all of the inputs or processes that the acquiree used in operating that business if market participants are capable of acquiring the business and continuing to produce outputs by integrating, for example, the business with their own inputs and processes. Since outputs are not required at the acquisition date, some enterprises in the development stage could now qualify as businesses, subject to the analysis of certain additional criteria included in Section 1582. Acquisition method As it was the case in Section 1581, Section 1582 requires that an entity account for all business combinations by applying the acquisition method, which includes the following steps: 1) Identifying the acquirer; 2) Determining the acquisition date; 3) Recognizing and measuring the identifiable assets acquired, the liabilities assumed and any NCI in the acquiree; and 4) Recognizing and measuring goodwill or a gain from a bargain purchase. 1) Identifying the acquirer For each business combination, one of the combining entities must be identified as the acquirer. This requirement of Section 1582 reiterates the guidance in Section 1581 on this subject. In this regard, the guidance in Section 1590, Subsidiaries, shall continue to be used to identify the acquirer, i.e. the entity that obtains control. 2) Determining the acquisition date As it was the case in Section 1581, Section 1582 requires that the acquirer identify the acquisition date, i.e. the date on which it obtains control of the acquiree. This date is generally the date on which the acquirer legally transfers the consideration, acquires the assets and assumes the liabilities of the acquiree. All pertinent facts and circumstances must be considered in identifying the acquisition date. 2

3) Recognizing and measuring the identifiable assets acquired, the liabilities assumed and any NCI in the acquiree Recognizing and measuring the identifiable assets acquired and liabilities assumed Under Section 1582, as of the acquisition date, the acquirer shall recognize and measure at fair value, except for certain exceptions, the identifiable assets acquired and liabilities assumed of the acquiree. These assets and liabilities must now meet the definitions of assets and liabilities in Section 1000, Financial Statement Concepts, to qualify for recognition as part of a business combination. Accordingly, restructuring costs that the acquirer expects, but is not obliged, to incur in the future to effect its plan to exit an activity of an acquiree or to terminate the employment of or relocate acquiree's employees no longer represent liabilities assumed at the acquisition date. Section 1582 includes, in particular, the following recognition and measurement principles with respect to some identifiable assets acquired and liabilities assumed: Intangible assets As required by Section 1581, any identifiable intangible asset must be recognized separately from goodwill. An intangible asset is identifiable if it meets either the separability criterion or the contractual-legal criterion. Operating leases The acquirer should recognize an asset or a liability related to an operating lease in which the acquiree is the lessee when the operating lease terms are favourable or unfavourable. In such a situation, the acquirer should recognize an intangible asset if the terms of the lease are favourable relative to market terms and a liability if the terms are unfavourable. An identifiable intangible asset may also be associated with an operating lease where market participants are willing to pay a certain price for the lease even if it is at market terms. When the acquiree is the lessor in an operating lease, the acquirer should not recognize a separate asset or liability if the terms of the lease are favourable or unfavourable relative to market terms. In such a case, the acquirer should take into account the terms of the lease in measuring the acquisition-date fair value of an asset such as a building or a patent that is subject to an operating lease. Assets with uncertain cash flows (valuation allowances) The acquirer should not recognize a separate valuation allowance as of the acquisition date for assets acquired measured at fair value on the acquisition date because the effects of uncertainty about future cash flows are included in the fair value measure. For example, the fair value of acquired receivables must take into account receivables that are deemed uncollectible at that date. Assets that are not used or that are used in a way that is different from that of other market participants For competitive or other reasons, an acquirer may intend not to use an acquired identifiable asset (commonly called defensive asset ), for example, a trademark, or it may intend to use the asset in a way that is different from the way in which other market participants would use it. Section 1582 states that the acquirer should measure such asset at fair value determined in accordance with its use by other market participants and not in accordance with its expected use. 3

Classification and designation in a business combination The acquirer shall classify or designate the identifiable assets acquired and liabilities assumed by taking into account the contractual terms, economic conditions, its operating or accounting policies and other pertinent conditions as they exist at the acquisition date. This recommendation is needed since, in some situations, other CICA Handbook sections provide for different accounting depending on how an entity classifies or designates a particular asset or liability. This requirement does not apply, however, to the classification of lease contracts and contracts as insurance contracts which should normally be classified on the basis of the contractual terms and other factors at the inception of the contract. This requirement implies, in particular, that financial assets and financial liabilities be classified and embedded derivatives be identified in accordance with the requirements of Section 3855, Financial Instruments Recognition and Measurement. Moreover, the acquirer must reassess existing hedging relationships in the acquiree on the acquisition date to determine whether it wants to re-designate them as of the acquisition date, in accordance with Section 3865, Hedges. Section 1582 provides limited exceptions to the recognition and measurement principles on the acquisition date. Some of these exceptions are presented below: Contingent liabilities Contingent liabilities assumed from the acquiree as of the acquisition date shall be recognized if it is a present obligation that arises from past events and if its fair value can be measured reliably. Thus, contrary to the requirements of Section 3290, Contingencies, a contingent liability assumed is recognized in a business combination even if it is not likely that a future event will confirm that an asset had been impaired or a liability incurred before the date of the financial statements. After initial recognition and until the liability is settled, cancelled or expires, the acquirer should measure a contingent liability at the higher of: a) the amount that would be recognized in accordance with Section 3290; b) the amount initially recognized less, if appropriate, cumulative amortization recognized in accordance with Section 3400, Revenue. Income taxes As it was required under Section 1581, an acquirer shall recognize and measure a future income tax asset or liability arising from the identifiable assets acquired and liabilities assumed in a business combination in accordance with the requirements of Section 3465, Income Taxes. However, Section 1582 requires that the acquirer recognize as items acquired in a business acquisition only those income tax benefits of the acquiree that meet the recognition criteria of Section 3465 at the time of the business combination. The subsequent accounting for the acquiree s future income tax assets that had not been recognized at the acquisition date is however modified significantly. Under Section 1582, it is permitted to recognize future income tax assets during the measurement period (measurement period is defined below) if the recognition results from new information about facts and circumstances that existed as of the acquisition date, which results in an adjustment of goodwill recognized on the acquisition date. However, once the measurement period is finished, any future income tax asset recognized will affect earnings or other comprehensive income, as the case may be. This requirement modified the current guidance in Section 3465 which requires making adjustments to a business combination when a future income tax asset related to income tax benefits that existed at the acquisition date is recognized. 4

Contrary to Section 1581, recognizing the acquirer s income tax benefits as an item in a business combination is no longer permitted. They must now be recognized in earnings. Indemnification assets An indemnification asset is a contractual indemnification which the seller grants to the acquirer for the outcome of a contingency or uncertainty related to all or part of a specific asset or liability. For example, the seller may indemnify the acquirer against losses above a specified amount on a liability arising from a particular contingency. As a result, the acquirer obtains an indemnification asset. Under Section 1582, the acquirer shall recognize an indemnification asset at the same time that it recognizes the indemnified item, measured on the same basis as the indemnified item, for example a contingent liability, subject to the need for a valuation allowance for uncollectible amounts. At the end of each subsequent reporting period, the acquirer must continue to measure the compensatory asset on the same basis and derecognize it only when it collects the asset, sells it or otherwise loses the right to it. Reacquired rights A reacquired right is a right that an acquirer previously granted to the acquiree and it reacquires as a consequence of the business combination. For example, an acquirer may have previously granted to the acquiree the right to use the acquirer's trade name under a franchise agreement or the right to use the acquirer's technology under a technology licensing agreement. Under Section 1582, these reacquired rights are considered identifiable intangible assets to be measured at their fair value and recognized separately from goodwill. They shall then be amortized over the remaining contractual period of the contract without taking renewal periods into account. Section 1582 also provides guidance on the recognition or measurement of long-term employee future benefits, share-based payment awards and assets held for sale. Recognizing and measuring any NCI in the acquiree Although Section 1582 continues to require that NCI be measured on the acquisition date, the new recognition and measurement requirements for NCI are significantly different from those in Section 1581. Contrary to Section 1581, which required to measure an NCI on the acquisition date at the NCI s share of the acquiree's identifiable net assets measured at carrying amount, Section 1582 requires measuring an NCI either at fair value or at the NCI's proportionate share of the acquiree's identifiable net assets measured at fair value. This election shall be made for each business combination and is not considered a choice of accounting policy. The fair value of the NCI shall be determined on the basis of active market prices for the equity shares not held by the acquirer. If such a price is not available, the acquirer shall measure the fair value of the NCI using other valuation techniques. 4) Recognizing and measuring goodwill or a gain from a bargain purchase Once the identifiable assets acquired, the liabilities assumed and any NCI in the acquiree have been recognized and measured, the acquirer shall recognize and measure goodwill arising from the business combination on the acquisition date. Under Section 1582, goodwill represents the excess of (a) over (b) below: a) The aggregate of: i) the consideration transferred; ii) the amount of any NCI in the acquiree; and iii) in a business combination achieved in stages, the acquisition-date fair value of the acquirer's previously held equity interest in the acquiree; b) The net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. 5

Accordingly, goodwill continues to be a residual amount. However, this difference now represents the difference between the overall fair value of the acquiree and the amounts assigned to identifiable assets acquired and liabilities assumed in connection with the business combination. Consequently, the acquirer shall now include the full value of amounts assigned to identifiable assets acquired and liabilities assumed regardless of the percentage of equity interest acquired, as it was required in Section 1581, and of the manner in which control is obtained. The logic for this is based on the fact that since the acquirer obtains control of the acquiree on the acquisition date, from that date, the acquirer becomes responsible and is required to account for all of the assets and liabilities of the acquiree, regardless of its percentage of equity interest in the acquiree. Consideration transferred Section 1582 indicates that the overall fair value of the acquiree includes, in particular, the consideration transferred. This is a new terminology that replaces the term acquisition cost used in Section 1581. The consideration transferred is the fair value of the items transferred between the acquirer and the seller to acquire the acquiree and includes the sum of the fair values of the following: a) The assets transferred by the acquirer; b) The liabilities incurred by the acquirer to former owners of the acquiree; c) The equity interests issued to the former owners; and d) Any contingent consideration. Under this new definition, certain items that were included in the acquisition cost under Section 1581 are no longer included under Section 1582. Moreover, the valuation method of certain items that are part of the consideration transferred has also been changed. Examples of these items include: Equity interests issued Under Section 1582, the fair value of the equity interests issued by the acquirer to effect a business combination is measured according to the market price of the shares on the acquisition date. Section 1581 required the use of the market prices a few days before and after the date the terms of the business combination were agreed to and announced. Accordingly, the fair value of the equity interests issued is now measured on the same date as the identifiable assets acquired and liabilities assumed. Contingent consideration A contingent consideration which is only to be transferred if specified future events occur or if certain conditions are met shall now be measured and recognized at fair value on the acquisition date in accordance with prevailing circumstances and forecasts on that date. Under Section 1581, a contingent consideration was generally only recognized when the condition had been fulfilled. Changes in the fair value of a contingent consideration can occur after the acquisition date. Section 1582 indicates that the amount of the consideration transferred shall be adjusted for any change attributable to additional information obtained after that date about facts and circumstances that existed at the acquisition date, provided such new information is obtained within the measurement period (measurement period is defined below). Otherwise, the acquirer shall recognize changes in fair value as follows: a) Contingent consideration classified as equity shall not be remeasured and its subsequent settlement shall be accounted for within equity; b) Contingent consideration classified as an asset or a liability that: i) is a financial instrument and is within the scope of Section 3855 shall be measured at fair value, with any resulting gain or loss recognized either in net income or in other comprehensive income in accordance with that Section; ii) is not within the scope of Section 3855 shall be measured at fair value, with any resulting gain or loss recognized in net income. 6

Acquisition-related costs Acquisition-related costs are costs the acquirer incurs to effect a business combination. They are, for example, advisory, accounting, valuation and other professional or consulting fees. Under Section 1582, the acquirer shall recognize these costs as expenses in the periods in which they are incurred and the services are received. Therefore, they are no longer included in the consideration transferred. The costs to issue debt or equity securities are the exception to this rule and shall be recognized in accordance with the recommendations of Section 3610, Capital Transactions, and Section 3855. Amount of any NCI in the acquiree As previously mentioned, it is possible to choose between two methods to measure the NCI on the acquisition date, i.e. at fair value or at the NCI's proportionate share of the acquiree's identifiable net assets measured at fair value. This choice necessarily results in two different measurements of the NCI. Accordingly, the valuation method selected will result in a different goodwill amount being recognized. This principle is illustrated in the example presented at the end of this publication. Fair value of any previously owned interest (business combination achieved in stages) If the acquirer already owns an interest in the acquiree on the acquisition date, it shall remeasure that interest at the acquisition-date fair value to determine the overall fair value of the acquiree. Any resulting gain or loss shall be recognized in earnings on the acquisition date. In applying this principle, Section 1582 requires that goodwill be measured only once, that is when control is initially obtained. Once control has been obtained, the goodwill amount calculated cannot be changed following the acquisition of additional interests. This is a significant change from the principle in Section 1600 which dealt with acquisitions achieved in stages. Under Section 1600, the cost of each acquisition was considered as a separate component of the acquisition cost, such that goodwill was measured for each additional interest acquired. Gain from a bargain purchase A gain from a bargain purchase, formerly called negative goodwill, occurs when the fair value of identifiable assets acquired and liabilities assumed is greater than the overall fair value of the acquiree. Section 1582 changes how negative goodwill is recognized by requiring its recognition as a gain in earnings on the acquisition date. In contrast to the requirements in Section 1581, it is no longer permitted to eliminate this amount by allocating it as a pro rata reduction of the amounts of certain long-term assets before recognized any excess as a gain in earnings. Section 1582 however requires that the procedures used to identify, recognize and measure any items included in the negative goodwill measurement be carefully reassessed before recognizing a gain in earnings. The acquirer may only recognize a gain in earnings once the acquirer has performed this assessment, the purpose of which is to ensure that the measurements appropriately reflect consideration of all available information as of the acquisition date. Other topics covered by Section 1582 Measurement period Section 1582 defines the measurement period of a business combination as the period after the acquisition date during which the acquirer may adjust the amounts provisionally recognized. The measurement period ends as soon as the acquirer receives the information it was seeking about facts and circumstances that existed as of the acquisition date or learns that more information is not obtainable. However, this period cannot exceed one year from the acquisition date. Any adjustment subsequent to the measurement period shall be recognized in earnings. 7

Although the definition of the measurement period is comparable to that in current Canadian GAAP, its application differs. In contrast to current Canadian GAAP that require adjustments to be recognized prospectively, Section 1582 requires that the acquirer retrospectively adjust the amounts provisionally recognized at the acquisition date and revises comparative information for prior periods presented including, among others, any change in depreciation expense. Transactions recognized separately from the business combination To qualify for recognition as part of applying the acquisition method, the identifiable assets acquired and liabilities assumed must be part of what the acquirer and the acquiree exchanged in the business combination transaction rather than results from separate transactions. Section 1582 provides the following examples of transactions that shall not be recognized as components of a business combination: A transaction that in effect settles pre-existing relationships between the acquirer and acquiree; A transaction that remunerates employees or former owners of the acquiree for future services; and A transaction that reimburses the acquiree or its former owners for paying the acquirer's acquisition-related costs. Section 1582 also provides guidance on accounting for reverse acquisitions and business combinations achieved without the transfer of consideration. Disclosures Section 1582 requires more disclosures, compared to Section 1581, in the acquirer s financial statements to enable users of the financial statements to evaluate: the nature and financial effect of a business combination that occurs either during the current reporting period or after the end of the period, but before the financial statements are completed; and the financial effects of adjustments recognized in the current reporting period that relate to business combinations that occurred in the current period or previous reporting periods. Appendix B of Section 1582 provides a detailed description of the required disclosures about business combinations that is considerably more extensive than that in Section 1581. For example, Section 1582 requires the following additional disclosures: The primary reasons for the business combination and a description of how the acquirer obtained control of the acquiree; A qualitative description of the factors that make up the goodwill recognized (expected synergies from combining operations of the acquiree and the acquirer, intangible assets that do not qualify for separate recognition, etc.); For each business combination in which the acquirer holds less than 100 percent of the equity interest in the acquiree, the amount of the NCI recognized at the acquisition date and the measurement basis for that amount; For transactions that are recognized separately, a description of these transactions, how the acquirer accounted for them, and their impact on the financial statements; and The amounts of revenue and net income of the acquiree since the acquisition date included in the consolidated statement of comprehensive income for the reporting period and the revenue and net income of the combined entity for the current reporting period as though the acquisition date for all business combinations that occurred had been as of the beginning of the annual reporting period. 8

Effective date and transition Section 1582 shall be applied prospectively to business combinations for which the acquisition date is in the first annual reporting period beginning on or after January 1, 2011. Earlier application is permitted. If an entity applies the Section 1582 before January 1, 2011, it must disclose that fact and apply Sections 1601 and 1602 at the same time. The new standard does not require restatement of assets and liabilities resulting from business combinations occurring before the effective date. However, it includes details about the subsequent recognition of future income tax assets for business combinations in which the acquisition date was before the application of Section 1582. Entities that will be adopting IFRS in 2011 should consider early adoption of Section 1582 as of the beginning of their fiscal year beginning on or after January 1, 2010 since they will be required to show comparative information for any business combinations completed during the preceding fiscal year measured and presented in accordance with IFRS 3 (2008) and IAS 27 (2008). This will minimize the effect of making the transition to IFRS. Sections 1601 and 1602 New Section 1601 replaces and modifies Section 1600 by removing: guidance on accounting for NCI that are now included in new Section 1602; guidance on the preparation of consolidated financial statements at the date of a business combination since they are now included in Section 1582; and illustrative examples, since IFRS and U.S. GAAP contain examples that are considered appropriate for purposes of applying Canadian GAAP. New Section 1602 addresses accounting for NCI in consolidated financial statements subsequent to the business combination and defines an NCI as the equity in a subsidiary not attributable, directly or indirectly, to a parent. This Section provides the following guidance: NCI shall be presented in the consolidated statement of financial position within equity, separately from the equity of the owners of the parent, rather than as liabilities or as a mezzanine item between liabilities and equity; Net income and each component of other comprehensive income are attributed to the owners of the parent and to the non-controlling interests. Total comprehensive income is attributed to the owners of the parent and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance; Any acquisitions or dispositions of an NCI that do not result in a change of control in a subsidiary shall be accounted for as equity transactions and presented in equity. No gain or loss shall therefore be recognized in consolidated net income; Consolidation is discontinued on the loss of control of a subsidiary. If an investment is retained in the former subsidiary, it is measured at its fair value on the date control is lost. A gain or a loss on a transaction resulting in the loss of control of a subsidiary shall be measured and recognized in accordance with the guidance included in Section 1602; Provisions are included to determine if multiple transactions resulting in a loss of control should be accounted for as a single transaction. The purpose of these provisions is to prevent that a planned disposal of a controlling interest in a subsidiary be structured in multiple steps to maximize reported gains or minimize reported losses, since the accounting treatment for the transactions differs depending on whether or not there is a loss of control. 9

Effective date and transition Sections 1601 and 1602 apply to interim and annual consolidated financial statements relating to fiscal years beginning on or after January 1, 2011. Section 1602 is to be applied retrospectively subject to certain exceptions. Earlier adoption is permitted as of the beginning of a fiscal year. Since Sections 1582, 1601 and 1602 are to be adopted at the same time, an entity wishing to early adopt one of these sections must apply the other two simultaneously. Example of the application of Section 1582 The following example illustrates how the requirements of Section 1582 related to the accounting for business combinations will impact the financial statements of entities. On January 1, 20X9, ABC Inc. (ABC) acquires an 80% equity interests in XYZ Inc. (XYZ) for 100,000 shares of ABC and a contingent consideration payable in cash. The contingent consideration agreement indicates that if XYZ s earnings in 2X10 are greater than $110,000, its former owner will receive $15,000 on March 31, 2X11. The acquisition was announced on November 15, 20X8 and the average quoted price of the shares on that date was $1.50. The shares were trading at $1.55 on the date ABC acquires control. Before January 1, 20X9, ABC did not have any interest in XYZ. Since XYZ is a private company, the quoted price of its shares is not available. The fair value of the NCI in XYZ was determined to be $34,700 using a valuation technique. The fair value of the identifiable assets acquired (including identifiable intangible assets) is $210,000 and the fair value of the liabilities assumed is $60,000, including a liability relating to a lawsuit contingency fair valued at $5,000. The carrying amount of XYZ s net assets is $145,000 on the acquisition date. ABC incurred direct costs of $7,000 with respect to the acquisition. At the acquisition date, ABC obtained information about XYZ s historical profitability and prepared projected cash flows and future profitability with respect to XYZ based on its assessment of economic conditions, XYZ s prospects and its plans for XYZ. Based on this information, the acquisition-date fair value of contingent consideration liability is valued at $5,300. Following the business combination, ABC plans to restructure XYZ s activities and expects to incur costs of $25,000 for this purpose. ABC also expects it will be able to realize its own unused tax losses as a result of the business combination. The related future income tax asset is valued at $9,000. 10

1) Goodwill Under Section 1581 and Section 1582, goodwill is determined as follows: Section 1581 Acquisition cost: Fair value of the consideration paid calculated on business combination announcement date, i.e. November 15, 2008: 100,000 $150,000 shares at $1.50 Direct acquisition costs 7,000 $157,000 Less: ABC s share in amounts assigned to identifiable assets acquired and liabilities assumed [80% of $155,000 (i.e. $210,000 less $55,000 1 )] $124,000 Acquirer s future income tax assets as a result of the acquisition 9,000 Restructuring liability (25,000) 108,000 Goodwill $49,000 1 $60,000 - $5,000 Section 1582 (Option 1: NCI measured at fair value) Sum of the following: Fair value of consideration transferred, composed of: 100,000 shares at $1.55, i.e. the quoted share price on the acquisition date $155,000 the fair value of the contingent consideration 5,300 Fair value of NCI 34,700 $195,000 Less: 100% of amounts assigned to identifiable assets acquired and liabilities assumed (i.e. $210,000 less $55,000 1 ) $155,000 Fair value of the contingent liability (5,000) 150,000 Goodwill $45,000 1 $60,000 - $5,000 11

Section 1582 (Option 2: NCI measured according to the NCI's proportionate share of the acquiree's identifiable net assets measured at fair value) Sum of the following: Fair value of consideration transferred, composed of: 100,000 shares at $1.55, i.e. the quoted share price on the acquisition date $155,000 the fair value of the contingent consideration 5,300 NCI measured according to the NCI's proportionate share of the acquiree's identifiable net assets measured at fair value [20% of $150,000 (i.e. $210,000 less $60,000)] 30,000 $190,300 Less: 100% of amounts assigned to identifiable assets acquired and liabilities assumed (i.e. $210,000 less $55,000 1 ) $155,000 Fair value of the contingent liability (5,000) 150,000 Goodwill $40,300 1 $60,000 - $5,000 As shown, when the NCI is measured at its fair value, goodwill represents the portion attributable to the acquirer and the portion attributable to the NCI. When the NCI is measured at the NCI's proportionate share of the acquiree's identifiable net assets, goodwill represents the amount attributable solely to the acquirer. 2) Non-controlling interest Section 1581 Under Section 1581, the value of the NCI is equal to $29,000, i.e. 20% of the carrying amount of XYZ net assets of $145,000. Section 1582 (Option 1: NCI measured at fair value) Under Section 1582, the fair value of the NCI is $34,700 and was determined using a valuation technique. Section 1582 (Option 2: NCI measured according to the NCI's proportionate share of the acquiree's identifiable net assets measured at fair value) When the NCI is measured at the NCI's proportionate share of the acquiree's identifiable net assets measured at fair value, the value of the NCI is therefore equal to $30,000, i.e. 20% of $150,000 ($210,000 - $60,000). 12

3) Summary of assets acquired and liabilities assumed The following table summarizes the value of identifiable assets acquired, liabilities assumed and goodwill on the acquisition date in accordance with Sections 1581 and 1582. Section 1582 (NCI measured as per Option 1) $ Section 1582 (NCI measured as per Option 2) $ Section 1581 $ Current assets 40,000 40,000 40,000 Property, plant and equipment 154,000 155,000 155,000 Intangible assets 14,000 15,000 15,000 Future income tax assets Acquirer 9,000 - - Goodwill 49,000 45,000 40,300 Total assets acquired 266,000 255,000 250,300 Current liabilities (55,000) (60,000) (60,000) Restructuring liability (25,000) - - NCI (a) (29,000) - - Total liabilities assumed (109,000) (60,000) (60,000) Net assets acquired 157,000 195,000 190,300 (a) The NCI is now presented in equity, as it was mentioned in the section on Sections 1601 and 1602. This bulletin provides a summary of recent publications from standardization and regulatory organizations. It is intended to keep readers informed about recent developments in accounting. Readers should, however, refer to the original publication before making any decisions on the basis of these developments. Translation. In case of discrepancy, the original French text shall prevail. 13