Cover paper (Agenda Paper 18)

In March 2020, the IASB published DP/2020/1 Business Combinations—Disclosures, Goodwill and Impairment. The comment period for the DP ended on 31 December 2020. In 2021, the IASB discussed the feedback received in response to the DP and decided to prioritise, amongst other things, performing further work to make decisions on the package of disclosure requirements about business combinations and to then redeliberate its preliminary view that it should retain the impairment-only model to account for goodwill. As part of the IASB’s work on the package of disclosure requirements, the staff have performed further research on the practical concerns raised by stakeholders on the IASB’s preliminary views to require entities to disclose information about the subsequent performance of business combinations and quantitative information about synergies expected from business combinations.

The purpose of this meeting was to provide the IASB with a summary of the staff research. The agenda paper also provided information about the project plan and how this research is relevant to that plan.

The IASB were not asked to make any decisions during this session.

Feedback from additional outreach on disclosures (Agenda Paper 18A)^­

This paper summarised the feedback from the staff’s research.

Many preparers expressed concern about the commercially sensitive nature of the information they would be required to disclose applying the preliminary views. Some preparers said disclosing information at the level illustrated in the staff examples would generally not be commercially sensitive but highlighted specific information within those examples that they viewed as being commercially sensitive. Users of financial statements generally said they could accept information at the level illustrated in the staff examples—that information would provide useful information while addressing concerns about the commercially sensitive nature of the information.

Some stakeholders view some of the information that would be required applying the preliminary views as being forward-looking. The staff also understand that some of that information might be considered forward-looking applying regulatory frameworks in some jurisdictions. A few jurisdictions have legislation that provides ‘safe-harbour’ protection in respect of forward-looking information disclosed outside financial statements—the entity is protected from litigation by investors for forward-looking information disclosed outside financial statements when those disclosures are made in good faith. For those jurisdictions that provide such ‘safe harbour’ protection, preparers expressed concerns about the potential for additional litigation that could result from disclosing ‘forward-looking’ information in financial statements. However, other stakeholders including regulators, did not consider the lack of ‘safe harbour’ protection to be a barrier to disclosing in financial statements the information illustrated in the staff examples.

Both preparers and users expressed concerns about an entity’s ability to disclose the required information when an acquired business is integrated into the acquirer’s existing operations. Many preparers said it would be difficult to assess whether the performance of a combined business results from a specific business combination. Many users also said they would like more information about a series of acquisitions undertaken to achieve a single strategic objective.

Some preparers were concerned about auditors’ ability to audit information about targets, the achievement of those targets and information about expected synergies. Almost all auditors said the information would be auditable but at an additional cost.

Board discussion

The IASB were asked for any comments or questions on the feedback received, whether any feedback is unclear, and if there were anything they would like the staff to research further.

The IASB welcomed the detailed research conducted by the staff. The overall message was that there is a need to balance the legitimate concerns around the quality and level of information to be provided with the concerns that continue to be raised regarding the commercial sensitivity of the proposed disclosures, and the detrimental impact this may have on the value of a company, and therefore to existing shareholders, if such information were provided to competitors.

It was also mentioned that introducing requirements for ‘forward looking information’ may put directors legal duty to comply with IFRS Accounting Standards with their fiduciary duties in law. Some members queried the extent to which litigation risk from the disclosure of potentially ‘forward looking information’ can be mitigated by inclusion of the required disclosures in management commentary rather than the financial statements. However, other members noted that management commentary is not subject to audit in all jurisdictions which may reduce reliability and comparability of the information across jurisdictions. Furthermore, the staff confirmed that respondents would generally prefer such information to be within one financial statement disclosure rather than disaggregated into other documents.

The staff were also asked whether additional research could be conducted to determine the extent to which the disclosure exemption currently available if disclosure of any of the information required by IFRS 3:B64 is impracticable, and what reasons are used when taking this exemption.^­

Possible ways forward (Agenda Paper 18B)

This paper explored possible ways forward for the IASB’s preliminary views to require entities to disclose information about the subsequent performance of business combinations and quantitative information about synergies expected from business combinations.

Preliminary views in the DP

Subsequent performance of business combinations

IFRS 3:B64D requires an entity to disclose, amongst other things, the primary reason for a business combination. The DP notes that this requirement may result in entities providing some information about management’s objectives, but that information is unlikely to be specific enough to help users assess the subsequent performance of a business combination.

For this reason, the IASB’s preliminary view is that it should:

• Replace that requirement with a requirement to disclose:
  • The strategic rationale for a business combination
  • Management’s objectives for the business combination
• Add a requirement to disclose:
  • In the year in which a business combination occurs, the metrics management will use to monitor whether the business combination’s objectives are being met
  • In subsequent periods, the extent to which management’s objectives for that business combination are being met using those metrics for as long as management monitors the business combination against those objectives

Expected synergies

IFRS 3:B64(e) requires an entity to disclose, in the year in which a business combination occurs, a qualitative description of the factors that make up the goodwill recognised, such as expected synergies from the business combination. Users said this requirement often results in entities providing an unhelpful generic description. Users said the information they want is not about goodwill itself, but information that helps them better understand why an entity paid the price it did for the acquired business.

For this reason, the IASB’s preliminary view is that it should require an entity to disclose, in the year in which a business combination occurs:

• A description of synergies expected from combining the operations of the acquired business with the entity’s business
• When the synergies are expected to be realised
• The estimated amount or range of amounts of those synergies
• The estimated cost or range of costs to achieve those synergies

In response to concerns that synergies are often difficult to quantify, the DP notes the IASB’s expectation that management would have estimated expected synergies in agreeing the price for a business. An entity would not be required to provide a single point estimate but could provide a range.

Staff analysis

The staff concluded that the IASB should consider the costs and benefits of applying the preliminary views in determining whether to proceed with those preliminary views. The IASB could proceed with the preliminary views, not require entities to disclose information similar to that described in the preliminary views, or proceed with an amended version of the preliminary views.

The paper also discussed the following alternative approaches:

• Disclosing information about only ‘significant’ business combinations
• Comply or explain
• Not require quantitative disclosures in the year of acquisition
• Specifying metrics

Questions for the IASB

The staff asked IASB members whether they have:

• A preference as to whether to focus on the population of business combinations or the information disclosed about each business combination
• Comments or questions on the possible alternatives (or combination of possible alternatives) discussed in the paper
• Suggestions for alternatives the staff have not considered
• Any other comments or questions

Board discussion

Many IASB members opined that a combination of the alternatives set out in the staff paper would be the best way forward, as a way to maximise the provision of information in the disclosures and minimise impact the concerns of respondents.

Some members suggested that a ‘comply or explain’ approach could be a possible way forward, with the requirement to provide an explanation of why information is omitted breed discipline in preparers, ensuring that quality information is still provided. Other members were less in favour of this approach, and instead suggested the requirements set out limited circumstances in which it is acceptable to not provide the required information, with these circumstances being set at a high bar.

It was suggested abandoning the requirement to provide information about subsequent performance may be a way to mitigate the risk of commercially sensitive or ‘forward looking’ information being required, with the impairment test disclosure requirements instead being strengthened.

One member also suggested that it may be useful to perform further outreach to determine where the greatest information need is with users, so that requirements can be prioritised if necessary.

Staff examples (Agenda Paper 18C)

This paper contains staff examples illustrating what the staff expect an entity might disclose if the IASB were to make its preliminary views in the DP a requirement in IFRS Accounting Standards.

Agenda Paper 18C was not discussed in the meeting.