Early last year, the IASB 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.”
We already looked at some of the reaction to the paper’s discussion on potentially reintroducing amortization of goodwill, and on some of its disclosure proposals. The discussion paper also considers the current IFRS 3 requirement to disclose the revenue and profit or loss of the combined entity for the current reporting period as though the acquisition date had been at the beginning of the annual reporting period (sometimes called pro forma information). The paper cites some of the problems identified by stakeholders in implementing this requirement: “the information is not useful because it is hypothetical; there is a lack of guidance on how to prepare the information and therefore companies prepare the information in different ways; and information about the revenue and profit of the acquired business before the acquisition is not always readily available.” However, after considering this, and weighing up possible alternatives, the paper concludes: “Investors continue to say that the pro forma information is important to them even with its limitations. Therefore, the Board’s preliminary view is that it should retain the requirement to disclose pro forma information.” It adds: “The Board could provide specific guidance for companies about how to prepare the pro forma information required by IFRS 3, or the Board could require companies to disclose how they have prepared the pro forma information. The Board will consider these possibilities once it has reviewed the feedback on this Discussion Paper and has understood better the information investors need and how best to provide that information.”
Based on my quick and incomplete review of the comment letters received, there was general support for the proposal to keep the requirement, although often of a rather lukewarm nature. For example, the Australian Accounting Standards Board pointed out various issues before concluding: “On balance, however, while the pro-forma information currently required by IFRS 3 may be considered to be flawed and incomplete, our view is that it provides a useful baseline for users to judge the future performance of an acquisition and it should therefore be retained.” The pivot within the same sentence from labeling something “flawed and incomplete” to concluding that it’s useful could give you vertigo.
Rounding up the big four accounting firms, Deloitte agreed with the conclusion, adding: “We observe that in many jurisdictions regulators have additional requirements for pro forma information on business combinations. To avoid an entity having to prepare pro forma information using different bases of preparation for regulatory and financial statements purposes, we do not suggest that the Board develops further requirements. However, we believe that it is important for entities to disclose the basis of preparation of pro forma information to aid investors’ analysis.” Ernst & Young went a little further: “further guidance on the basis of preparing the pro-forma adjustments and significant pro-forma adjustments themselves would be helpful to reduce that diversity and to ensure that comparable, useful and relevant information is provided.” KPMG fell into the same general camp. By comparison, PricewaterhouseCoopers sounded quite indifferent: “Pro forma information is non-GAAP information, and so it should not be a priority for the Board. In some jurisdictions, other authorities or organizations already provide guidance on the preparation of pro forma information. However, we believe that information about the judgement applied in the preparation of the pro forma information would be useful if such a disclosure requirement is retained.”
For my own part, writing on regulatorily required pro forma statements a while ago, I questioned whether pro forma financial statements accomplish enough to make the exercise worthwhile, and went on:
- In theory, a company might address the anticipated benefit of a major acquisition by providing a careful narrative explanation of the expected incremental impact, by setting out the possible impact on one or more key performance measures, or by other means. In each such situation, investors can choose how much weight to put on the company’s assertions about the acquisition, and how much weight to put on the things it leaves unaddressed. But by mandating a particular form of pro forma statements as a necessary element of full, true and plain disclosure in various designated situations, securities regulations implicitly assert that these pro forma statements in the way they’re constituted are a vital reference point for investors. But considered rationally and logically, it’s just plain that they’re not. As such, the whole thing might often end up feeling like an abstracted, self-defined game, more than a meaningful exercise in communication.
And the disembodied pro forma information required by IFRS 3 is, if you ask me, even less useful than that. But nevertheless it looks like it’s here to stay.
The opinions expressed are solely those of the author