Post-implementation review of IFRS 3

Date recorded:

Reconciling constituent feedback with academic research findings

Having presented an academic literature review to the Board in September, Professor Ann Tarca, Research Fellow with the IASB, presented a paper whose purpose was to link academic evidence to constituent feedback received on the Request for information on IFRS 3. Although she cautioned Board members that the evidence presented is, to a certain degree, jurisdiction-specific (as most studies surveyed U.S. companies), there seemed to be support for two key aspects: Firstly, the recognition of intangible assets separately identifiable from goodwill that is mandated by IFRS 3 seems to yield information that is perceived as being valuable; Professor Tarca caveated this by saying that the support differed according to the jurisdiction analysed. Secondly, the impairment-only approach seemed to lead to the conclusion that although some managers might use their discretion in performing the impairment test, the information produced under the model is still regarded useful. Professor Tarca summed up her presentation by saying that, overall, the model seemed to work, though improvements to the model could be made. The enforcement differed between jurisdictions, but seemed to yield a high level of compliance with the standard. She then turned it to the Board for questions.

A Board member referred to the association between impairments booked and share prices evidenced by some studies. Specifically, he was interested in whether impairments caused share prices to react of whether a decrease in share prices was leading to impairment charges. Professor Tarca said that the studies showed that impairments lagged price movements and that the time span was more pronounced the weaker the enforcement regime. This triggered the Chairman to comment that if that was true, it meant that the model was dysfunctional as managers would only make impairment charges when they could no longer avoid it. Professor Tarca replied that if both the impairment charge and the share price movement occurred in the same period, it could still mean that the model was working, even though the time lag was more profound in some jurisdictions.

Another Board member wondered whether there the recent calls for amortising goodwill meant that the old model gained new support. Professor Tarca cited a U.K. study that amortisation was not value relevant whereas impairments were. This led a fellow Board member ask the question as to whether there was any evidence as to the cost associated with either model (i.e. amortisation and impairment-only). Professor Tarca replied that they had not specifically looked at amounts, but some studies seemed to suggest that the information produced under the impairment-only approach – while costly – was still perceived useful.

A Board member had a question regarding the manageability of impairment charges as CGU could be changed in composition following an acquisition. Professor Tarca responded that some studies suggested that management had incentives to influence the timing and occurrence of impairment charges. These studies were focussed more on U.S. GAAP rather than IFRSs though. The Chairman suggested this could be due to U.S. contracts being more related to performance. Professor Tarca agreed.

Another Board member stated that she found it extremely useful to have the academic evidence next to the feedback from constituents. It showed that allowing for some time before a post-implementation review was done was important in order to allow meaningful research to be carried out. She then raised a question regarding compliance: She recalled from the research forum held in November in Oxford that preparers and auditors were said to be looking at a disclosure list only and that compliance was assumed met if all disclosure requirements had been met. She wondered where materiality came into play as no-one seemed to assess whether the disclosures were meaningful or not and what this meant for compliance. Professor Tarca said that she did not remember the study but would follow up on it.

The previous Board member came in again on the impairment-only approach. He said that a big advantage of amortising goodwill was that comparability with entities that grew organically would be improved. This was one of the reasons why preparers came out so strongly in favour of amortisation and against impairment-only.

The Chairman thanked Professor Tarca for her presentation and asked her, based on the findings presented, what she would advise the Board to do. Professor Tarca said that whilst she understood the criticisms and reservations vis-à-vis the current model, on balance it seemed to work and provide useful information. She suggested sticking to the impairment-only approach, but simplifying/improving its implementation. Further, she noted that she would advise the IASB to talk to the FASB on any future steps as IFRS 3 was a converged standard. She understood that in the U.S., the FASB had come under pressure to reintroduce an amortisation approach; based on the feedback received and the studies surveyed, however, she had not seen any new arguments that had not been discussed at the time when the standard had been developed, so she did not see an obvious reason to change it.


Findings of the post-implementation review

The project manager presented a paper summarising the key areas of IFRS 3 that, in the staff’s view, had attracted the majority of the feedback and warranted a consideration for potential follow-up by the Board. In the accompanying paper the staff had included a table containing the areas raised and comparing the feedback received from investors, preparers, auditors, regulators and the ASAF. It also showed whether and what the FASB was proposing to do anything. Lastly, it contained an assessment of the significance of the areas mentioned.

A Board member kicked off the discussion by saying that he found the table very helpful and agreed with the assessment and ordering of the issues. That being said, he believed there to be an inconsistency in that the Board concentrated on the accounting for impairments without looking at the performance of the acquiree. This had been an area that he had commented on in his former role at the CFA Institute, saying that disclosure about the performance of an acquired company following an impairment was of utmost importance. This should now be rectified and added to the list.

A fellow Board member agreed with the staff's assessment. However, he said he would give the highest weightings to the issues recommended for follow-up by ASAF, given that this advisory group shows a good representation of how the issues are being seen around the globe. If the staff wanted to pursue some areas on the list short- to medium-term, he wondered how this would come into play with the upcoming agenda consultation. The Director of Implementation Activities replied that some of the items listed were already on the FASB's agenda, so it would make sense to at least monitor what the FASB were doing, though his preference was to deal with the same issues at the same time. As regards the remainder of the issues in the table, he suggested that the Board would decide whether or not they should be included in the agenda consultation. The Vice-Chairman stepped in saying that the Board did not have a proper process for dealing with issues that came out of a PiR (i.e. whether they should be reviewed first or go on the agenda straight away).

A Board member commented on the issue of amortisation vs. impairment-only and stated that if he had to decide, he would probably opt for keeping the current model and working on the impairment model to simplify it. Nonetheless, he agreed with his colleague who had raised the point before that an impairment-only approach was discriminating entities with organic growth. He also believed that intangibles played an important part in some acquisitions, so it made sense to separately recognise them even if it proved to be challenging for the acquirer.

A fellow Board member wondered why the staff had ranked NCI as of lower priority. He would prefer to give it a higher rank. Another Board member said that he generally agreed with the list but was concerned about the treatment of step acquisition. The fair value measurement involved in these cases proved to be a real challenge for preparers. A further Board member felt that the disclosures in relation to impairment testing were weak and required beefing up. Hence, they should be given a higher priority. The project manager responded saying that staff had subsumed the disclosures in the area of impairment. He wondered whether the disclosures were giving the information that user sought. Another Board member wondered whether there was an issue with the standard or with the enforcement of applying the standard. The former Board member thought it was both. Another Board member agreed that disclosures needed to be made more meaningful.

The Chairman asked the Director of Implementation Activities as to the next steps. The Director responded that staff would provide the information in a formal feedback statement that is planned to be issued in March 2015. As regards the way forward, the staff would need to work on the next steps following the PiR and bring back a paper at another meeting. This would also include the table updated for the comments received in this session.

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