The IASB has published “a Discussion Paper on possible improvements to the information companies report about acquisitions of businesses to help investors assess how successful those acquisitions have been.”
This was issued on March 19, 2020, at the height of COVID-19 anxiety, and as such you might see it either as a heartening assertion of perseverance, or as being rather tone-deaf. It’s a certainty that current events will cause many business acquisitions to be less successful than they might have been otherwise, and so the initiative isn’t exactly mistimed in that sense. But of course, the main COVID-19-prompted wave of impairments will have hit the statements long before the discussion paper (on which comments are requested by September 15, 2020) come to anything, so any subsequent improvements may feel like messing with the stable door after, well, you know…
Here’s a summary:
- Better disclosures about acquisitions
- Acquiring another business is a common way for companies to grow. However, acquisitions do not always perform in subsequent years as well as management initially expected. Investors would like to know more about how an acquisition is performing in relation to such expectations, not least so that they can hold a company’s management to account for its acquisition decisions.
- In response to this feedback, the Board is suggesting changes to IFRS Standards that would require a company to disclose information about its objectives for an acquisition and, in subsequent periods, information about how that acquisition is performing against those objectives.
- Accounting for goodwill
- The Board has also considered whether to change how a company accounts for goodwill. Companies must test goodwill for impairment annually, but stakeholders have mixed views about whether this test is effective. Some argue that the impairment test informs investors about an acquisition’s performance. Others say that the test is costly and complex, and that impairment losses on goodwill are often reported too late.
- The Board tried to identify a better impairment test—one that would require a company to report at an earlier date if its goodwill had lost value. The current test provides information to investors, but it tests a broader set of assets than just goodwill. The Board has concluded that there is no alternative that can target goodwill better and at reasonable cost. It expects that the new disclosure requirements would provide investors with the information needed on the performance of an acquisition.
- Some stakeholders have suggested that the Board should reintroduce amortization—the gradual write-down of goodwill over time, which was the requirement in IFRS Standards until 2004. But, having considered the pros and cons of amortization, the Board’s preliminary conclusion is that it should retain the impairment-only approach, because there is no clear evidence that amortizing goodwill would significantly improve the information that companies report to investors.
Focusing for this time on the disclosure piece, the IASB’s preliminary views are that it should require the following disclosures:
- (a) management’s objectives for an acquisition;
- (b) the metrics that management will use to monitor whether the objectives of the acquisition are being met;
- (c) the extent to which management’s objectives for the acquisition are being met in subsequent reporting periods, using those metrics; and
- (d) other information, reflecting possible targeted improvements to the disclosure objectives and disclosure requirements of IFRS 3 (among other things, this would include more description of the synergies expected from combining the operations of the acquired business with the company’s business, including the estimated amount or range of amounts of the synergies and the estimated cost or range of costs to achieve them).
Some of this certainly sounds like the traditional territory of MD&A or management commentary – for instance the board’s expectation that “the description of the strategic rationale would link the rationale for the acquisition to the company’s overall business strategy.” The paper comments that “not all companies produce a management commentary and not all management commentaries may be available to investors on the same terms as the financial statements. The Board takes the view that all companies should provide this information on the same terms.” That’s fair as far as it goes, but may only add to the patchwork nature of current reporting. To take a random example, the financial statements don’t impose a requirement for an entity to discuss strategic considerations that affected a change in its revenue mix during the year: this would be addressed in the entity’s MD&A, assuming it prepares one. And yet, for some entities, the information contained in such a discussion could be every bit as important as the information about the strategy underlying its acquisitions. Rather than eliminate the MD&A/financial statement barrier on a case by case basis, maybe we should be seriously thinking at this fraught point in time about dissolving it altogether? Because, basically, it might take a lot for future investors to feel comfortable about making any sort of long-term investing decision.
Anyway, I expect we’ll look at other aspects of the discussion paper in the future (if only because I don’t think every post between now and September should be about COVID-19…)
The opinions expressed are solely those of the author