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, the staff have performed further research on disclosures about business combinations.

The purpose of this meeting was to provide the IASB with additional research and analysis in response to comments by IASB members in the April 2022 meeting.

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

Further research on dicslosures about business combinations (Agenda Paper 18A)­

This paper summarised the additional research and analysis performed by the staff in response to the IASB members’ comments in the April 2022 meeting.

The staff’s research explored the following areas:

• The information needs of users of financial statements
• Requiring information for only a subset of business combinations
• Exempting entities from disclosing some information in specific circumstances
• Existing disclosure requirements

Needs of users of financial statements

In the April 2022 meeting, the IASB requested further information to help understand users’ priorities with regard to the information disclosed about business combinations.

The staff summarised users’ feedback in this area and identified that nearly all respondents identify that better information in subsequent years about actual performance is needed, and therefore that this information, and the targets for a business combination to contextualise this subsequent performance, should be the highest priority information to require.

Requiring information for only a subset of business combinations

In the April 2022 meeting, the staff suggested that the preliminary view be amended to require disclosures only for ‘significant’ business combinations, as a way to balance the information needs of users, and the preparers’ concerns about disclosing that information.

With this in mind, the staff performed further research to help identify an appropriate subset of business combinations. This work included research to understand the characteristics of such business combinations, and whether the IASB should use a factor-based approach to identify that subset.

Characteristics of business combinations

The staff performed additional research into preparers—especially those who expressed concerns about the commercial sensitivity of the proposed required information yet provided similar disclosures outside financial statements for some business combinations.

These preparers said that in these instances, they would be penalised by the market for not making such disclosures for their ‘significant’ business combinations, identifying a mixture of reasons, including the quantitative or qualitative significance of the transaction, or local regulatory requirements such as listing rules.

The staff performed further research on possible quantitative thresholds, using factors such as a percentage of total revenue, profit, or net assets. The impact of these thresholds on the proportion of business combinations that would be captured by the proposed requirements in the preliminary view was then compared to the proportion of disposals for which disclosures about discontinued operations under IFRS 5 are provided.

Using a factor-based approach to identify the subset of business combinations

At the April 2022 meeting, the IASB suggested that a factor-based approach, similar to that applied in IAS 21, could be applied in identifying the subset of business combinations that should be within the scope of the requirements set out in the preliminary view.

Based on the research so far performed, the staff identified a series of potential factors that could help identify the subset of business combinations.

Exemption from disclosure in specific circumstances

The staff performed research into available exemptions from disclosures available to entities, either from IFRS Accounting Standards or local regulations.

The staff particularly considered disclosure exemptions available in IFRS 3 and IAS 37, noting that the exemption in IAS 37 from disclosing information that would be ‘seriously prejudicial’ is taken more frequently than the exemption in IFRS 3 from disclosing information about the contribution of an acquired business if doing so is ‘impracticable’.

The staff also noted that a proposed disclosure exemption for ‘competitive harm’ in IFRS 8 was rejected by the IASB for being too broad, and therefore recommended that any proposed exemption should be similar to that in IAS 37 and linked to a specific transaction.

Existing disclosure requirements

The staff performed research on the existing disclosure requirements about business combinations, to understand the usefulness of existing disclosure requirements, whether these existing requirements can be improved to meet users’ needs, and whether any requirements can be removed to reduce the burden on preparers.

The staff found that some of the disclosure requirements, such as the contribution of an acquired business and information about the assumptions used in impairments testing, is useful to users, but others, such as segmental reporting, is insufficient to meet users’ needs.

The staff received feedback from some stakeholders suggesting improvements to existing disclosure requirements but noted that drawbacks to this approach identified in past research from 2018 remain relevant.

The staff will present a full analysis of research into reducing the requirements at a future IASB meeting but highlighted that the suggested reductions would not result in significant cost reductions or material information loss.

IASB discussion

IASB members welcomed the research on users’ priorities. Although not definitive, some IASB members felt understanding the information users would prioritise could inform whether the information need justifies the increased preparation cost.

IASB members had mixed views on requiring the information for only a subset of business combinations. Some observed that stakeholder feedback made it clear disclosures would not be required for every business combination; others noted that requiring disclosures only for a subset of business combinations would reduce the cost of preparation. However, some noted that requiring the disclosures only for a subset would not reduce the risk of litigation or prevent the disclosure of potentially commercially sensitive information.

Most IASB members noted that care should be taken in setting the thresholds or factors to determine the subset of business combinations that would require disclosures. It was also noted that ‘roll-up’ requirements should be considered for smaller business combinations.

The IASB also had mixed views on the introduction of exemptions. Some felt that any proposed exemption should be quite broad, to address concerns around commercial sensitivity and litigation, whilst others felt there should be a high bar to be able to take any exemption.

Most IASB members felt that sufficient research had been done for a tentative proposal to brought to the September meeting that members could decide on, observing that there is unlikely to be additional information that would lead to people changing their general views.