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Goodwill and impairment

Date recorded:

Cover paper (Agenda Paper 18)

In September 2021, the Board decided to prioritise making tentative decisions about proposing disclosures about business combinations and perform further analysis of the feedback received on the subsequent accounting for goodwill.

In this meeting, the Board continued to make tentative decisions about the package of disclosures about business combinations.

Expected synergies from a business combination (Agenda Paper 18A)

In this paper, the staff set out their analysis of the feedback received in response to the Board’s preliminary view that an entity should be required to disclose quantitative information about expected synergies from a business combination.

Feedback raising practical concerns about the disclosure of such information will be analysed separately. The staff therefore considered four specific areas of feedback in this paper.

Some respondents have suggested that a definition of ‘synergies’ should be provided to prevent diversity of practice in identifying and disclosing synergies. The staff proposed a possible definition, but their recommendation is to not define synergies.

The Board were asked to vote if they agree with the staff recommendation to not define ‘synergies’.

The Board were also asked, if they decide to define synergies, if they agree with the definition suggested by the staff.

Some respondents have suggested it would be useful to distinguish between types of synergy, specifically distinguishing between cost and revenue synergies. Subject to further research on the practical concerns around the commercial sensitivity of such disaggregation, the staff recommended that entities are required to disclose quantitative information about synergies at the level below ‘total synergies’ – i.e. at the level of total revenue, cost, or other synergies.

The Board were asked to vote if they agree with the staff recommendation.

Some respondents requested clarification over the term ‘realised’ with respect to the Board’s preliminary view that an entity should be required to explain when expected synergies from a business combination are expected to be realised. As a result of this confusion, the staff recommended that instead entities are required to disclose information about when the benefits from synergies are expected to start, and the expected duration of those benefits.

The Board were asked to vote if they agree with the staff recommendation.

Other feedback from respondents covered areas such as the materiality of synergies, whether synergies should be quantified based on expectations at the initiation of an acquisition or at subsequent closing of the transaction, and whether other elements of goodwill should be explained. The staff recommended that no other changes are made to the preliminary view as a result of this feedback.

The Board were asked to vote if they agree with the staff recommendation.

Board discussion

With respect to the first recommendation, the Board generally agreed that ‘synergy’ should not be defined.

When asked to vote on the first recommendation, the Board voted 11 (out of twelve) in favour.

With respect to the second recommendation, some Board members expressed initial confusion at what the “level below” total synergies meant. Some were also concerned about aggregation risk, for instance non-disclosure of total revenue and total cost synergies if they are individually immaterial, but the sum total synergies are material.

Concerns were also raised around making tentative decisions regarding these disclosure requirements separately from any potential commerical sensitivity as some thought it was self-evident these disclosures will be commercially sensitive.

Many Board members observed that the proposal to issue example disclosures could result in useful feedback on the feasibility of any future requirements, in light of the above concerns.

As a result of the views raised, the second recommendation was rephrased to change it from a ‘tentative decision’ approving these requirements, to it being a ‘stepping stone’ to obtaining useful feedback on the suggested disclsoure requirements instead.

When asked to vote on the rephrased second recommendation, the Board voted 11 (out of twelve) in favour.

With respect to the third recommendation, members agreed in principle that the proposed requirement in the staff recommendation would be a useful investigative aid to obtain feedback and comments from stakeholders prior to formulating any future requirement to provide these quantitative disclosures, but had some concern that the information that may be required could be overly granular and difficult to estimate reliably.

Some were again concerned about the potential commercial sensitivty of such disclosures. Some also queried whether the implicit expectation that acquirers could estimate the expected duration of synergies on an acquisition meant by defintion goodwill could be given a useful life.

As a result of the above discussion, the third question for the Board was rephrased to differentiate instead  between synergies that are expected to provide ‘one-off’ benefits, and those that provide continuing benefits. When asked to vote on the third recommendation, the Board voted 11 (out of twelve) in favour.

With respect to the fourth staff recommendation, the Board generally agreed with the staff recommendation not to make changes. When asked to vote on the fourth recommendation, the Board voted 11 (out of twelve) in favour.

Contribution of the acquired business (Agenda Paper 18B)

In this paper, the staff set out their analysis of the feedback and recommendations received regarding the Board’s preliminary view that entities should disclose information about the revenue and profit or loss of an acquired business from the acquisition date, and pro forma information of the combined entity for the reporting period as if the acquisition date had been at the beginning of the reporting period.

In its analysis, the staff noted that they have received consistent feedback from users of financial statements that such pro forma information would be useful. Indeed, many respondents agreed with the Board’s preliminary view.

In this paper, the staff recommended that the Board:

  • Recommendation 1—Retains the requirement to disclose pro forma information
  • Recommendation 2—Explains the objective of pro forma information and not provide guidance on how to prepare this information
  • Recommendation 3—Does not add an explicit requirement for an entity to disclose the basis used to prepare the information
  • Recommendation 4—Replaces the term ‘profit or loss’ in paragraph B4(q) of IFRS 3 with operating profit or loss (which would be defined as part of the Primary Financial Statements project)
  • Recommendation 5—Does not add a requirement to disclose information about cash flows arising from operating activities for the acquired or combined entity

The Board were asked to vote on whether they agreed with each of these recommendations.

Board discussion

The Board generally agreed with the staff recommendations, observing that the suggested disclosures would provide information that serves a useful purpose to investors and other users.

It was, however, noted that there may be nuances in setting a ‘threshold’ for disclosing the required information for certain entities, for instance entities who are highly acquisitive.

It was also noted that some jurisdictions already prescribe certain disclosures labelled as ‘pro forma information’, and therefore the Board may need to be mindful of using this term when assessing if any future requirements will conflict with these.

There was some disagreement on whether an explicit requirement for an entity to disclose the basis used to prepare the information should be added, as some thought this was sufficiently covered in other IFRS Standards (such as IAS 1 and IAS 8), while others thought a specific requirement to disclose these bases should be included if there are no explicit requirements on how this information should be prepared.

As a result of this discussion, the third staff recommendation was amended so that the Board were instead asked to vote on whether the basis of preparation for pro forma information should be explicitly identified as an accounting policy choice, and therefore is within the scope of the disclosure requirement of IAS 8, and whether a cross-reference should be made to those requirements of IAS 8.

When asked to vote, the Board voted as follows on each of the staff’s recommendations:

  • Recommendations 1, 2 and 4—11 in favour, 1 absentee
  • Recommendation 3—9 in favour, 1 absentee
  • Recommendation 5—10 in favour, 1 absentee

Liabilities arising from financing activities and defined benefit pension liabilities (Agenda Paper 18C)

In this paper, the staff set out their analysis of feedback received in relation to the Board’s preliminary view to develop proposals that specify liabilities arising from financing activities and defined benefit pension liabilities are ‘major classes of liabilities’.

The staff set out the feedback, which was broadly in agreement with the preliminary view, but noted some disagreement. The staff agreed with a respondent who identified that the preliminary view sets a specific requirement, which is inconsistent with the principles-based approach generally used in IFRS Standards.

Accordingly, the staff recommended that the Board revises its preliminary view and instead proposes amendments to paragraph B64(i) of IFRS 3 to remove the term ‘major’ from the requirement to disclose major classes of assets acquired and liabilities assumed and to paragraph IE72 of Illustrative Examples accompanying IFRS 3 to include financing and pension liabilities as classes of liabilities assumed.

The Board were asked to vote on whether they agree with the staff recommendation.

If the Board decides to proceed with the preliminary view, they will also be asked whether they agree with the staff recommendation to not specifically require separate disclosure of other items some might consider similar to financing liabilities.

Board discussion

The Board generally agreed with the staff recommendation, with some small editorial amendments suggested in the discussion.

When asked to vote, the Board members present voted unanimously in favour of the staff recommendation, subject to the edits suggested in the discussion. The Board therefore did not discuss the second question.

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