The IASB issued a Request for Information (RFI) in January 2014 seeking comments from stakeholders to identify whether IFRS 3 'Business Combinations' provides information that is useful to users of financial statements; whether there are areas of IFRS 3 that are difficult to implement and may prevent the consistent implementation of the standard; and whether unexpected costs have arisen in connection with applying or enforcing the standard.

The ACCA indicate that it is “very supportive of the PIR as an essential element of the due process of developing global accounting standards” and comments that as a result of the PIR, “some fundamental aspects of IFRS 3 and related standards need to be considered”.

The ACCA highlight three main “fundamental” areas for reconsideration by the IASB in their comment letter:

• Whilst supporting the principle that goodwill acquired in a business combination is assessed for impairment on an annual basis, the ACCA also “recognise that there are arguments for an amortisation approach”.  The ACCA comment that “if an impairment-only model is retained then some reconsideration of IAS 36 may be needed” in relation to its disclosure requirements and also the more “subjective elements of the standard” which may be “allowing for impairments to be avoided”.
• Consistent with the views of the Financial Reporting Council (FRC), the ACCA would like the IASB to “reconsider the cost/benefit assessment of whether certain intangible assets should continue to be separately recognised from goodwill”.  The ACCA highlights that “intangibles, such as brands and customer relationships may be difficult to separate from the business and the goodwill attached to it” and are also hard to value.  It mentions that “it is not clear that the requirement for separate recognition and valuation yields useful information to readers of the accounts”.
• The ACCA highlights that there are “difficult borderline cases” in determining whether there has been an asset purchase or a business and comments that “differences in treatment may be influencing the categorisation”.  It would like the IASB to review such differences “and assess whether they are merited in the light of the pressure that they put on the categorisation of transactions and the consequent risk of manipulation of the financial statements”.

Alongside the comment letter, the ACCA has also published the results of a research report ‘Worldwide application of IFRS 3, IAS 38 and IAS 36, related disclosures and determinants of noncompliance’.  This had a similar scope to the IASB RFI and looked at the accounting for, and the information disclosed under, IAS 36 Impairment of Assets, IAS 38 Intangible Assets and IFRS 3 Business Combinations and the levels of compliance with disclosures required by the standards.   The report looked at a sample of 544 large non-financial companies across the world preparing IFRS financial statements.  The research report highlights “significant disparities” in the levels of disclosure provided by companies about business combinations, intangible assets and impairment testing.  The research report also highlights differences in the levels of compliance with the mandatory requirements of the standards.  Some of the key findings related to each of the standards were as follows:

Disclosures about business combinations (IFRS 3)

• For 280 companies that had business combinations some of the companies only disclosed “selected information” that was mandated by IFRS 3.  Some reported actual price/consideration transferred for completing the business combinations but not all.
• Only 101 companies of the 280 disclosed acquisition-related expenses incurred and expensed in the income statement.
• 258 out of 280 companies disclosed that they recognise goodwill but only 61 disclosed a qualitative description of the factors that made up the goodwill.  The research report indicates that this could be due to “a lack of guidance” on what is expected.
• A number of companies where the acquisitions involved between 50% and 99% remained silent on how the non-controlling interest was measured.

The ACCA comment that “without specific guidance on when and how items should be disclosed, companies provide significantly disparate information about business combinations, resulting in a lack of comparability”.  The ACCA indicate that it is unclear whether the disparity is because “firms do not view their acquisitions as material, do not understand the mandated requirements and/or simply do not follow the standard to the letter”.

Application of IAS 38 and related disclosures

• Although “other intangibles” were highlighted as a separate class of intangible assets in the statement of financial position for 453 of 517 companies that had at least one type of intangible asset other than goodwill, disclosure regarding these assets was varied.
• A “large proportion of the sample” did not disclose whether the useful lives of intangible assets were indefinite or finite and, if finite, the useful lives or the amortisation rates used.  Many did not disclose the line item(s) in the income statement in which the amortisation of intangible assets was included.
• Out of 151 companies that had intangible assets with an indefinite useful economic life, only 58 per cent disclosed the reasons supporting that assessment.

Application of IAS 36 and related disclosures

• A large number (92) of the companies used post-tax discount rates during the impairment testing process although IAS 36 requires the use of pre-tax discount rates.  The ACCA highlights that this is an area that requires improvement.
• Approximately 102 companies (out of 485 that disclosed some information about cash flow estimations) did not disclose the growth rate used to extrapolate cash flow projections beyond the period covered by the most recent budgets/forecasts as is required by IAS 36.
• The ACCA comment that their analysis “illustrates disparities between companies in the amounts and types of information actually provided”.  It would like the ACCA to review “the disclosures mandated by IAS 36” and provide “specific guidance on when this information is expected”.

The findings of the research report have been used to inform the detailed responses to the IASB which can be found in the full comment letter on the ACCA website.

Click for:

• Press release (link to ACCA website).
• ACCA full comment letter (link to ACCA website).
• ACCA-sponsored research report (link to ACCA website).
• UK Accounting Plus story on the FRC comment letter.
• UK Accounting Plus story on the IASB's RFI on the Post implementation review of IFRS 3.
• UK Accounting Plus project page on Post-implementation review of IFRS 3.