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. Those “most important” acquisitions would be the so-called strategic acquisitions, those “for which failure to meet any one of an entity’s acquisition-date key objectives would put the entity at serious risk of failing to achieve its overall business strategy.” More specifically, a business combination is a strategic business combination if:

• (a) in the most recent annual reporting period before the acquisition date:
  • (i) the absolute amount of the acquiree’s operating profit or loss is 10 per cent or more of the absolute amount of the acquirer’s consolidated operating profit or loss; or
  • (ii) the acquiree’s revenue is 10 per cent or more of the acquirer’s consolidated revenue;
• (b) the amount recognized as of the acquisition date for all assets acquired (including goodwill) is 10 per cent or more of the carrying amount of the total assets recognized in the acquirer’s consolidated statement of financial position as at the acquirer’s most recent reporting period date before the acquisition date; or
• (c) the business combination resulted in the acquirer entering a new major line of business or geographical area of operations.

The IASB acknowledged that the quantitative thresholds (somewhat derived from ones used in other areas of IFRS, such as in identifying a reportable operating segment) are to some extent inherently arbitrary, and  KPMG was among those pointing out likely application challenges, such as “whether the acquiree’s most recent revenue and operating profit or loss should be based on IFRS Accounting Standards, which could be costly if the acquiree applies a different GAAP.” The IASB also considered including other qualitative thresholds, but decided not to, to reduce the cost of applying the proposed requirements. Regardless, the Austrian Financial Reporting Advisory Committee said this proposed definition “fails to capture strategic rationales like buying-up competitors that do not exceed the thresholds or buying a small start-up with highly synergistic key technologies…AFRAC believes that the proposed threshold approach considerably fails to reflect the idea of what is deemed to be a strategic business combination.” They propose to set out the requirement as “a rebuttable presumption. The thresholds derived from IFRS 8 and the criterion derived from IFRS 5 would then not be prima facie evidence but could be disproven by an entity, which considers (a business combination outside those limits) to be a strategic one and vice versa.”

This is from the Association of Chartered Certified Accountants:

• We are supportive of using the qualitative threshold…In addition, we suggest the IASB consider expanding the quantitative and qualitative thresholds to include non-financial thresholds. Acquisitions may be driven by non-financial objectives like managing the entity’s climate-related risks or other sustainability-related risks or opportunities (SRROs) which may include reducing pollution (air, water, soil, etc) that result from the entity’s activities. Therefore, we suggest using a principles-based approach in identifying strategic business combinations. Using a set of principles in conjunction with thresholds as guidelines, rather than solely thresholds, would be consistent with the management approach to disclosure and cater to a broader range of circumstances.

France’s Autorite des normes comptables  also considered that the “quantitative criteria should be indicative and non-binding in order to leave room for judgement.” They went on: “The natures of the aggregates, i.e. consolidated operating profit or loss, or consolidated revenue, or consolidated assets, to which the 10% quantitative threshold applies, were reviewed and are considered as relevant, except for the consolidated operating profit or loss which is too volatile, or could be low in some industries, and therefore could lead to capture too small business combinations. The ANC proposes that the operating profit or loss threshold be removed. However, to ensure that this proposal does not result in too short a list of indicators and to provide a useful basis for identifying strategic business combinations, the ANC suggests opening the possibility of using other indicators.. if the indicators used give an abnormal result or are not appropriate for the entity.”

Overall, it may seem insufficiently bold to allow an assessment to be limited by cost considerations, when (as the above submissions indicate) it’s fairly easy to think of omitted fact patterns which would be no less “strategic,” and no less worthy of a higher level of disclosure, than those specified…

The opinions expressed are solely those of the author.