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Why M&A financial information for investors needs to be improved

2 minute read 23 Oct 2020
Related topics
Assurance
IFRS
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Proposals are being considered to provide investors with more relevant and useful information related to acquisitions.

Access to timely, relevant information about acquisitions is vital for investors, but a common criticism is that disclosures do not provide sufficient information to understand post-acquisition performance.

This is a crucial issue to address given the number of business acquisitions taking place each year and the amount of goodwill involved globally – amounting to many trillions of dollars.

The current accounting rules – under IFRS 3 Business Combinations and IAS 36 Impairment of Assets – require companies to use the impairment of goodwill model. This involves undertaking an annual impairment test to assess how an acquired business is performing.

Critics of this approach point out that problems are sometimes recognized late, while the impairment test can be complex and costly.

Before the introduction of IFRS 3, the requirement was for companies to adopt the amortization of goodwill model. This also has critics – based on suggestions that the amortization period is arbitrary – but there have been calls for the amortization of goodwill to be reintroduced.

In March 2020, the International Accounting Standards Board (IASB) published its preliminary views on these issues in a discussion paper Business combinations: disclosures, goodwill and impairment. This investigates whether entities can, at an acceptable cost, provide investors with more relevant and useful information about businesses that have been acquired, and about the subsequent performance of the entities making the acquisitions.

Access to timely, relevant information about acquisitions is vital for investors,
but disclosures do not always provide sufficient information to understand post-
acquisition performance. This is a crucial issue given the number of business
acquisitions each year and the trillions of dollars of goodwill involved globally.

How EY can help

Improved financial information would also help investors to hold management to account more effectively on their decisions to acquire businesses.

 

Stakeholders can submit comment letters to the IASB by 31 December 2020 giving their views on these topics. The IASB will then consider the comments received before deciding whether to advance to the exposure draft stage of the project.

 

The EY publication Applying IFRS – Business combinations: disclosures, goodwill and impairment summarizes the proposals in the discussion paper to improve disclosures for the subsequent performance of a business combination, to retain the impairment-only approach for goodwill, and to simplify the impairment test.

Summary

Investors are looking for better information about how acquisitions are performing to help them hold company management to account. Currently, investors suggest that disclosures do not provide sufficient information to understand post-acquisition performance. In response, the International Accounting Standards Board is seeking views on potential changes to accounting standards regarding business acquisitions. A new EY publication examines this issue and summarizes the IASB proposals.

About this article

Related topics
Assurance
IFRS
CFO agenda

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.