With the IASB proposing amendments to IFRS 3, Business Combinations, board member Zach Gast discussed with FM why these changes are important and how they will benefit investors, stakeholders, and companies.
The proposals respond to stakeholder feedback that reporting on acquisitions poses difficulties for investors who lack sufficient and timely information about acquisitions and post-acquisition performance, the IASB said, as well as the risks of disclosing commercially sensitive information for companies.
“Transparency … benefits companies that do acquisitions really well because there will be more information on the market of ‘Here’s how much capital we took, here’s what we thought we could achieve, and here’s how we achieved it,'” Gast said in the interview.
The IASB also proposed related amendments to IAS 36, Impairment of Assets, to make targeted improvements to the impairment test.
“More transparency about acquisitions is critical to investor confidence,” Andreas Barckow, chair of the IASB, said in a news release. “In developing this package of proposals, the IASB has maintained an active dialogue with all stakeholders. Our aim is to ensure a balanced approach to enhancing the information companies provide to investors about acquisitions, while also considering the risks and costs to companies.”
The IASB will consider feedback on the exposure draft and decide whether to proceed with the proposals. Comments are required by 15 July and can be submitted online.
Below is an edited version of the interview with Gast:
Are there specific areas that are causing stakeholder or investor concern at the moment?
Zach Gast: What investors really want to be able to do is assess companies’ acquisitions. Commonly, people think the impairment test is a tool to do that. However, that is not what it is designed to do. So there is an expectations gap, and that is linked to why people think that impairments take place too little, too late. We also heard that companies found the test complex.
We did an assessment of ways we could adapt or change the impairment test to solve that complexity problem. Then the second string looked at critiques that the impairment test was “too little, too late”, so it was coming too late. People weren’t seeing the real connection to the acquisitions that they viewed as being assessed in that impairment test.
[Looking at “too little, too late”,] we had to be careful that we were also explaining where there was probably an expectations gap between regulators, investors, and auditors, and accountants who were using the impairment test of goodwill as a direct assessment of the success of the acquisition.
Going back to the impairment test, you went into some detail about how the board is planning to improve that test. What are the expected benefits of those enhancements?
Gast: The IASB is proposing some clarifications to the impairment test that aim to make the impairment test more effective. The clarifications respond to two reasons the IASB identified for impairment losses potentially being recognised too late — so-called “shielding”, which arises from testing goodwill together with other assets, and management over-optimism.
Companies said they were doing two budgets — one that included uncommitted future restructuring or asset enhancements and one that did not. They said: “Can you remove that restriction so that we can take those actions and just use one unified set of budgets in order to do the assessment? That will strip out a lot of costs for us on that.”
There’s [also] a requirement … [that] you have to use pre-tax discount rates. For most companies, [alternating between pre- and post-tax discount rates] adds a lot of complication. It didn’t seem like something that was really necessary and was just generating complications.
On the updates to Business Combinations, how will these proposals help the companies, or will they?
Gast: It’s that initial assessment by investors of the price paid being adequate. And if it’s borne out, you build up this level of trust with the investment community where they believe in what you’re doing and that you’re going to pay the right price for the right acquisitions in order to grow and generate future cash flows.
Is there anything else you think is important to raise and mention?
Gast: Some of the feedback we got was that there would be circumstances where [the disclosures] were too costly or they might reveal confidential, commercially sensitive information.
We did two things to mitigate that. One is we actually narrowed the universe of companies that would be subject to the significantly increased disclosure requirements to what are called strategically significant acquisitions.
Then the second thing is we did build in an exemption to the proposals that said that if disclosure of a piece of information would seriously prejudice your ability to achieve the objectives of the acquisition, then you wouldn’t be required to disclose that.
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