Q An entity has a 31 December 2009 year end and has chosen not to early adopt IFRS 3 ‘Business Combinations’ (revised) - instead they will adopt IFRS 3 (R) in 2010.  In September 2009 the entity had incurred due diligence costs in respect of an acquisition of an 80% shareholding in Subco.  The acquisition of Subco is expected to complete in 2010. 

How should the tranaction costs associated with the acquisition be accounted for in the 2009 financial statements?

A The transaction costs should ultimately be expensed to the income statement as the actual business combination will be accounted for under IFRS 3 (R).  In the absence of specific guidance in IFRS 3 (R), the entity could account for the transaction costs as follows:

Option A
Capitalise the transaction costs in the statement of financial position under IFRS 3 (2004) and then record a prior period adjustment in the 2010 financial statements restating the 2009 financial statements with the costs written off.

Option B
Write off the transaction costs to the income statement as this is the treatment IFRS 3 (R) will require which will ultimately apply to the business combination.