At a recent meeting, the IASB’s Capital Markets Advisory Committee discussed a few issues relating to goodwill and impairment.
In the accompanying agenda paper, staff indicated that they’re considering recommending some additions to the existing disclosure requirements in IFRS 3, focused on assisting users to better understand “the strategic rationale for and the key objectives of the business combination; and the factors identified at the date of acquisition that the acquirer will use to assess the extent to which those key objectives have been achieved.” For business combinations that occurred in previous reporting periods, additional disclosure might be provided to assist in assessing “the extent to which the key objectives of past business combinations have been achieved, as measured by the factors identified at the date of acquisition for assessing the extent of achievement of those objectives”
Here’s how the meeting report summarizes the ensuing discussion:
- CMAC members generally agreed that more detailed disclosures on the subsequent performance of the acquired businesses are needed. However, there is no specific information that would be needed for all acquisitions. One member stated that any information that helps users assess the post-acquisition returns would be useful. The exact information needed to make that assessment may vary from deal to deal. A few members also stressed that quantitative disclosures are preferred to boilerplate qualitative information.
- Although members generally agreed that additional disclosures on the subsequent performance of the acquired businesses or combined business would be useful, there were different views on how long and how frequently such information should be provided: (a) One member suggested such post-acquisition information is needed for only one financial period post-acquisition to enable users to establish a baseline for comparison. (b) One member stated that the information would be needed for as long as expected synergy arising from the original deal remains unconsumed.
- A few members agreed with the staff’s suggestion that disclosures relating to the subsequent performance of acquired businesses should be based on benchmarks used internally by management.
- A few members acknowledged that information on the subsequent performance of acquired businesses or combined business in routine acquisitions may not be traceable due to postacquisition integration of businesses, and that management may not monitor each acquisition separately. However, they would expect that management would at least monitor separately the performance of major acquisitions. Users would need additional disclosures about subsequent performance for these major acquisitions. One member commented that management should also be required to disclose how the subsequent performance of business acquisitions is monitored. If an entity does not monitor its subsequent performance, it should disclose that fact, and investors will be able to act accordingly. The member stated that requiring such disclosure would create an incentive for management to monitor business acquisitions more closely, promoting better corporate governance.
- A few members commented that information contained in segment reporting alone is insufficient in addressing the information needs of users relating to the subsequent performance of acquired businesses for the following reasons: (a) Segment information disclosed in financial statements is generally provided at a level higher than that of individual acquisitions. Information contained in segment reporting would not capture acquisition-specific information; and (b) IFRS 8 currently does not require the disclosure of some specific information for each segment, such as segment operating cashflow, capital expenditure, assets and liabilities.
It’s far too early to speculate on how much of this will lead anywhere. I’m recording the discussion here because several of the ideas mentioned there provide good food for current thought about improving disclosure, although perhaps as enhancements to the MD&A rather than to the statements. As we’ve mentioned here before, a clear majority of mergers and acquisitions fail to realize the promises made for them (a Harvard Business Review article stated that 60% of such transactions actually destroy shareholder value – other sources cite even higher numbers). In theory, recognizing the cost of an acquisition on the balance sheet, even if just as goodwill, allows a general basis for accountability to users about its subsequent performance (or at least, a better basis than would result from immediately writing off goodwill, as is still sometimes advocated). But of course management has lots of scope to add greater specificity to that.
As the discussion brings out though, it might be difficult to devise a set of mandated quantitative disclosures that can reasonably be provided in all situations, thus leading to the thought about what in other contexts might be called a “comply or explain” approach – that is, either disclose particular specified items, or else explain why you can’t. I suppose it might be true that such requirements “would create an incentive for management to monitor business acquisitions more closely, promoting better corporate governance.” On the other hand, sometimes it might just create the illusion of effective monitoring…
Anyway, the current expectation is that the IASB will discuss these ideas during the first quarter of 2019 and then proceed from there to develop a discussion paper.
The opinions expressed are solely those of the author