Post-implementation review of IFRS 3 – it’s almost perfect!

The IASB recently completed its Post-implementation Review of IFRS 3 Business Combinations.

This is how the news release summed up the exercise:

  • “It shows general support for the accounting requirements in the Standard but identifies some areas where further research will be undertaken, including accounting for goodwill.
  • The IASB conducts Post-implementation Reviews (PIR) of its new Standards and major amendments two years after they become effective. The purpose of the review is to consider whether the new Standard is functioning as anticipated, has achieved its objectives and has improved financial reporting. Any issues identified by the review that require further action are subject to the normal processes and criteria for being added to the IASB’s agenda.
  • The scope of this review covered the whole Business Combinations project, including resulting consequential amendments to other Standards, such as IAS 36 Impairment of Assets.
  • The IASB based its review on information gathered from three main sources: a review of academic literature and other reports, feedback received from investors and other users of financial statements, and feedback received from preparers, auditors and regulators. Over 60 outreach meetings were organized with stakeholders around the world.
  • The review of academic literature provides evidence that generally supports the business combinations accounting requirements of IFRS 3 and related Standards, particularly in relation to the usefulness of reported goodwill, other intangible assets and goodwill impairment. However, investors expressed mixed views on aspects of the current accounting for goodwill, with some preferring a return to periodic amortization of goodwill.
  • Many preparers, auditors and regulators identified implementation challenges in the requirements, in particular applying the definition of a business, measuring the fair value of contingent consideration, contingent liabilities and intangible assets, and testing goodwill for impairment on an annual basis.
  • Taking into account all of the evidence collected through this post-implementation review, in February 2015, the IASB added two projects to its research agenda to explore further the key findings. These projects will focus on the following issues:
  • (a) the effectiveness and complexity of testing goodwill for impairment;
  • (b) the subsequent accounting for goodwill;
  • (c) challenges in applying the definition of a business; and
  • (d) identification and fair value measurement of intangible assets such as customer relationships and brand names.”

I think it’s fair to say the IASB might have been able to compile much of what’s in the report without ever gathering a single shred of feedback: that is, it merely reflects the issues that were always going to raise the greatest implementation challenges and/or the greatest doubts about the benefits of the standard. This doesn’t mean the exercise has no value, but it’s perhaps a confirmatory, sigh-inducing kind of value rather than a shining, new-road-ahead kind. Some of the matters noted (“many participants think that …intangible assets, such as brand names and customer relationships, are difficult to measure at fair value”) seem to have been with us almost as long as the atomic bomb, and seem unlikely to lead to much more than a few tweaks to the existing material.

More dramatic is the suggestion that the existing model for goodwill might be revisited:

  • “We could consider whether and how the costs of accounting for goodwill can be reduced without losing the information that is currently being provided by the impairment-only approach, and which our review of academic studies suggested was value-relevant. This could include considering:
  • (a) how improvements to the impairment-only approach (in particular to the impairment test) could address some of the concerns that have been raised; and
  • (b) whether a variation on an amortization and impairment model could be developed with an amortization method that does not undermine the information currently provided by the impairment‑only approach.”

There’s no doubt that IAS 36 allows ample opportunity for getting tangled up in technicalities and forgetting the object of the exercise, and could likely be made simpler (although, presumably, only at the cost of greater diversity in application). But on the bigger question: whatever exactly goodwill might represent in any particular instance (often, frankly, just a number falling out of the dynamics of a negotiation), it doesn’t seem to me like something that can usually be allocated on a systematic basis over a useful life in the way amortization theoretically achieves, and a goodwill amortization charge wouldn’t constitute any kind of useful information regarding the financial performance of any given year. And even if goodwill itself isn’t a particularly meaningful component of the statements – particularly given the outdated idiocy of the term itself (perhaps one day we’ll settle on a truer label for it) – at least a goodwill impairment charge conveys something meaningful about past decisions and how they relate to the entity’s present (bearing in mind that a huge percentage of business acquisitions fail to meet expectations).

On disclosure, the summary notes:

  • “Many investors think that once an acquisition has been completed, it is often hard to assess the subsequent performance of the acquired business. Consequently, they think that better disclosure is needed to allow them to do so. For example, it is important for them to know how much of the business has grown organically versus how much it has grown through acquisitions. They require clear information on the operating performance of the acquired business after the business combination; specifically, its revenues and operating profit.”

You can see the point, but will the IASB ever compel acquirers to keep on tracking revenues and operating profits of acquired businesses after they’ve been integrated into the organization, if the acquirer doesn’t do that for its own purposes, and/or if the information wouldn’t otherwise be reportable under IFRS 8? This seems to me like a case where, if investors don’t think an entity provides enough detail on a particular matter, they can express their dissatisfaction to management and factor the greater risk into their investment decisions. But maybe I’m just too used to settling for less from life…

The opinions expressed are solely those of the author

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