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ESMA report on accounting for business combinations

  • ESMA (European Securities and Markets Authority) (dark gray) Image

16 Jun 2014

The European Securities and Markets Authority (ESMA) has published a report 'Review on the application of accounting requirements for business combinations in IFRS financial statements'. The report finds that some good business combination disclosures are provided in the annual financial statements of European companies but that there are also certain areas where improvements are needed.

The report is based on the review of IFRS 3 disclosures in the 2012 annual IFRS financial statements of a sample of 56 issuers in the European Union, covering 66 businesses combinations reported in these statements.

For the review ESMA selected the following topics that according to ESMA's experience most frequently result in enforcement issues or lead to diversity in practice:

  • intangible assets and contingent liabilities;
  • disclosure of fair value measurement techniques;
  • recognition and measurement of goodwill and bargain purchases;
  • mandatory tender offers;
  • contingent consideration;
  • definition of a business; and
  • adjustments to fair value amounts during the measurement period.

The report details the findings on each item and concludes each point with recommendations for issuers. Although ESMA found that some good business combination disclosures were provided, there were also areas where improvement is needed. Most significantly this was the case regarding the following items:

  • Recognition and measurement of goodwill and bargain purchase gains. Descriptions of the factors making up goodwill were often 'boiler plate', and in 24% of the business combinations analysed no intangibles were recognised separately from goodwill. One third of the issuers reporting a bargain purchase did not disclose an explanation of why the transaction resulted in a gain.
  • Intangible assets and contingent liabilities. In the summaries of the fair values of major assets and liabilities acquired, the level of aggregation of certain assets and liabilities often limited the usefulness of the information provided. Only 11% of the issuers reviewed recognised contingent liabilities arising from business combinations. Of these, very few gave the required IFRS 3 disclosures.
  • Disclosure of fair value measurement techniques. Some issuers referred to external valuations of intangible assets without providing details of the techniques and assumptions used to determine their fair value. Only 35% of the issuers reviewed disclosed how fair values were determined but even of these most disclosed the valuation technique but not the key assumptions.
  • General observations on disclosures. While IFRS 3 disclosures were generally provided, in some cases their understandability was impaired as the disclosures were not tailored to the specific circumstances of a transaction or were insubstantial. Some disclosures were also presented outside the financial statements.

ESMA urges national competent authorities to take action where material breaches of the IFRS requirements were identified during the review. In addition, ESMA hopes that the IASB will consider the findings of the report in its post-implementation review of IFRS 3 Business Combinations as ESMA believes that it will assist the IASB in identifying areas where the standard leads to divergence in practice or lack of comparability and where additional clarification or guidance would be helpful. ESMA has sent the IASB a letter to this effect.

Please click for access to the full report and a corresponding press release on the ESMA website.

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