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 the reaction to a few aspects of the paper. Another of its key notions is that “Investors have said that companies typically do not provide enough information to help investors understand the subsequent performance of an acquisition. Investors cannot assess whether management’s objectives for the acquisition are being met—for example, whether the synergies management expect from an acquisition are being realized.” To this end the Board’s preliminary view is that it should develop proposals to require a company to disclose the strategic rationale for undertaking an acquisition and management’s objectives for the acquisition; in the year in which an acquisition occurs, the metrics that management will use to monitor whether the objectives of the acquisition are being met; the extent to which management’s objectives for the acquisition are being met using those metrics, for as long as management monitors the acquisition against its objectives; if management changes the metrics it uses for that purpose, the new metrics and the reasons for the change; and various other things.
Some commentators agreed with the proposals with little or no comment. However, there was also a fair amount of opposition. MNP LLP was among them:
- We do not believe that the proposal to require disclosure of management’s objectives for a business acquisition, and how the acquisition subsequently performs against those objectives, would result in better information being provided to financial statement users. Management’s objectives are often subjective, therefore, even if management’s historical objectives for the subsequent performance of the acquisition were met, an investor may not be able to conclude that the acquisition was successful. Many factors affect the subsequent performance of an acquired business, including macroeconomic factors which are outside of management’s control e.g. domestic and world demand, commodity prices, inflation, foreign exchange rates and interest rates. The amount of purchase consideration for a business acquisition is also dependent on other factors, such as revenue and earnings multiples, which are also subject to change over time.
The Australian Accounting Standards Board opposed the proposals on very basic conceptual grounds: “We note that the objective of the financial statements as proposed in the IASB’s Exposure Draft General Presentation and Disclosures is to help ensure that the financial statements provide “relevant information that faithfully represents an entity’s assets, liabilities, equity, income and expenses”. The AASB questions whether the proposed subsequent performance disclosures are required to meet this objective, or whether this information is better addressed by (management commentary) We further note that no similar information is required for internally developed intangible assets, even though users would have a similar interest in the success, or not, of such projects.” They also noted, among other things, “concerns about management’s ability to manipulate which metrics are disclosed in the financial statements and the ability to change the metrics from period-to-period to potentially mask poor performance.”
FAR, the Institute for the Accountancy Profession in Sweden weighed in along similar lines:
- For a large listed company with hundreds of subsidiaries, it is difficult to understand why there should be a disclosure requirement that only focuses on how well a few acquired subsidiaries develops over time while the majority of subsidiaries, that may represent a substantial part of the performance/profit of the business, is not commented on at all. In addition, there will be no balance between disclosures provided by a company that grow organically and a company that grow through acquisitions in such a case.
Another common concern raised by FAR was “the auditability and enforceability of the proposed disclosure requirements. Metrics that will be provided are non-GAAP measures and such information could be difficult to audit. In addition, acquired business may be fully integrated with other businesses and this will potentially make it even more difficult to audit the information.”
The Swedish Financial Reporting Board, in also opposing the proposals, expressed the view that “if users find it difficult to follow up companies’ performance and capability of handling business combinations successfully, they should together with auditors and regulators put more pressure on companies to disclose information and also to handle optimism and shielding in line with IAS 36 in the year of acquisition.”
Others, such as the Institute of Chartered Accountants in England and Wales, also cited that age-old issue of the dividing line between financial statements and MD&A: “In our view, some of the proposed disclosures, for example those on the strategic rationale and the objective of an acquisition, provide information that would be better placed within the narrative section of an annual report, ie, the management commentary. Requiring this information in the financial statements appears to introduce too much ‘through the eyes of management’ analysis and commentary which will lack comparability.”
I have to admit that I quite like the disclosure proposals, on the whole, but it wouldn’t be a surprise if a lot of it did indeed end up as a management commentary proposal…
The opinions expressed are solely those of the author