As we discussed here, in March 2024 the IASB published for comment the Exposure Draft Business Combinations—Disclosures, Goodwill and Impairment.

As we previously covered, the exposure draft rejected some of the more ambitious ideas mooted in the past, such as reintroducing amortization of goodwill, focusing instead on fine-tuning the methodology for impairment testing and introducing additional disclosure requirements. These would include requiring companies to report the objectives and related performance targets of their most important acquisitions, including whether these are met in subsequent years, and to provide information about the expected synergies for all material acquisitions.

Although the disclosure proposals represent something of a compromise, and are based on years of consultation and consideration, they don’t seem to have been particularly well-received, based on my unscientific review of the first batch of comment letters. For example, the German Insurance Association expressed concern regarding “whether the attempt to launch the additional information to be provided in case of business combinations will ultimately improve the effectiveness of financial reporting at large and whether it will really be beneficial for investors and other users of financial statements. We are indeed concerned that they would be often without a significant incremental value for users, while causing considerable efforts and audit costs to reporting entities. On top of that, the risk of the disclosure overload is apparent. Specifically, in context of business combinations with a direct and swift integration process afterwards (‘case of a swift integration’) not a success of the business combination in isolation is of interest for the management, but the performance of the whole entity at large. In such cases the relevant information is already provided by reporting entities and hence there is no need to introduce additional duplicating disclosure requirements beyond the existing ones.”

MNP LLP made the following points, among others:

• We do not believe that the proposal to require an entity to disclose information about the performance of a strategic business combination in its financial statements, such as 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, a user of the financial statements may not be able to conclude that the acquisition was successful, or whether this information would assist stakeholders with holding management accountable for acquisition decisions.
• We question whether financial statement users, particularly for mid-market entities, would find this information decision useful to perform analysis of business combinations and assess management’s decisions.
• For entities in emerging industries and early-stage growth entities, acquisitions can be opportunistic and, as a result, the benefits of acquisitions may take several years to be realized. We have concerns that the targets disclosed could also be overly optimistic and misleading to financial statement users. Reporting entities may not have sufficient knowledge or experience of the acquired business at the time of the acquisition to disclose such information that is relevant and reliable. Additionally, disclosure of management’s acquisition- date key objectives and related targets may have limited value since project milestones and objectives can change significantly, often soon after the acquisition.

The Australian Accounting Standards Board also had various objections:

• These disclosures may better fit in management commentary rather than in the financial statements, given that the aim of management commentary is to provide primary users of financial reports with information that is useful in assessing management’s stewardship of the entity’s economic resources.
• Similar information is not required for other assets (e.g. purchase of new inventory or new property, plant and equipment, or investment in intangible assets, to initiate a new revenue stream), even though users would have a similar interest in the success, or not, of such projects.
• It would be difficult, and costly, to provide assurance that attributes an improvement in performance to the acquisition and not to other factors in the rest of the business when integration has occurred, and the acquisition-date targets are based on the integrated operations.
• There is a difference between the auditor opining that acquisition-date objectives and targets faithfully represent management’s view, versus the objective and target being a true and fair view. This could contribute to the user expectation gap of what an audit does or does not cover.

On the other hand, the European Federation of Financial Analysts Societies Commission on Financial Reporting said it “supports the changes proposed to the disclosure’s requirements in IFRS 3 and agrees that the proposal attempts to balance the benefits and costs of requiring an entity to disclose additional information…We agree with the IASB proposal that companies should provide information about an entity’s acquisition date, key objectives, and related targets when entering into an acquisition. This information is relevant to better understand the rationale of a company to enter into the transaction and the potential contribution of additional cash flow to the performance of the company and in return the expected improvement in valuation.” It remains to be seen whether such pockets of user support will be sufficient to overcome what looks like fairly consistent opposition from preparers and auditors…

The opinions expressed are solely those of the author.