Post-implementation review of IFRS 3

Date recorded:

Summary of comments received

The Project manager introduced the agenda paper which summarised the information received in response to the IASB’s Request for Information Post-implementation Review: IFRS 3 Business Combinations (the 'RFI'). He mentioned that the IASB had received 93 comment letters and that staff had conducted 30 outreach activities. He highlighted the following areas from the result of those activities:

  • Definition of a business. Most participants believed that there were benefits of having separate accounting treatments for business combinations and assets acquisitions. However, many users believed that, sometimes, it was difficult to assess whether an asset acquisition was related to a business because the definition of a business was too broad. Some users had requested more guidance on the definition of a business and also requested removing some of the existing differences between assets and business acquisition.
  • Fair value measurement. Users believed that fair value was the best approach for measuring the assets acquired and the liabilities assumed but still found that some intangible assets were difficult to measure. In relation to contingent considerations, users found it difficult to estimate the probability of occurrence.
  • Goodwill. Many users challenged the usefulness of the split between goodwill and intangible assets in a business combination. Some investors believed that the information provided by the separation of certain intangible assets was useful because it allowed them to understand why an entity acquired another entity. On the other hand, many users did not rely on the valuation placed on certain intangible assets.
  • Negative Goodwill. Users considered that the recognition of negative goodwill was not part of the performance of a company; however, there were no concerns about the accounting treatment for negative goodwill as long the gain was clearly disclosed in the financial statements. Users suggested that the gain should be recognised in other comprehensive income.
  • Non-amortisation of goodwill. Some users supported the current requirement because it allowed them to assess whether management had overpaid an entity acquired, or whether the acquisition was successful. Some users believed that goodwill should be amortised because the impairment testing was not being effective. Many users believed that the impairment testing was complex and time-consuming.
  • Non-controlling interests. Most users supported the current accounting for NCI. However, they did not support the current measurement choice. Some users would prefer the proportionate method; other users would prefer the fair value method, and again others did not have a preference. Many users believed that measurement of NCI at fair value was challenging.
  • Step acquisitions. Many users believed that the gain or loss on the remeasurement at fair value of the previously held interest was a non-recurring gain (or loss) that was not part of the performance of the entity. Consequently, such gains (or losses) were not considered in their valuation models. Some users believed that previously held interest in an entity should not be remeasured and suggested recognising such gains (or losses) in other comprehensive income.
  • Disclosures. Many users asked for disclosures that would allow them to track the subsequent performance of the entity.
  • Contingent consideration. Many respondents believed that the IASB should reconsider the subsequent accounting for contingent considerations.

The project manager concluded that the staff believed that they had obtained sufficient information to prepare a Feedback Statement and to provide recommendations of areas for which agenda proposals should be prepared. The staff would provide their analysis at future Boards meetings.


Academic literature review

Professor Ann Tarca introduced the agenda paper which was prepared based on published studies on business combinations (28 studies were cited in the paper). She explained that she had grouped the studies in the paper in order to provide answers for questions 3, 4, and 5 of the PIR (i.e. fair value measurement, separate recognition of intangible assets from goodwill, and non-amortisation of goodwill). The summary table (page 20 of the agenda paper) was divided in Panel A, B and C. Panel A related to the usefulness of measures of goodwill, identifiable intangible assets, and goodwill impairment; Panel B analysed implementation issues, and Panel C analysed auditing and enforcement decisions. Ms. Tarca indicated that the studies focused on information obtained from databases, hand-collected data and surveys.

Professor Tarca referred to Panel A of table 1, which listed relevant studies that showed that goodwill and other intangible assets were positively associated with share prices while impairment expense was negatively associated. The evidence indicated that these items were valued relevant under IFRS 3 and also showed that the value relevance of other intangible assets had improved. Those studies were pre- and post-IFRS 3, and focused on single as well as on multiple countries. The fourth column of the table showed some comments related to goodwill; in those studies there was evidence to suggest that there was an association between goodwill data and share price, which would mean that the market was using the information provided by IFRS 3. Ms. Tarca also concluded that the impairment information was being priced (meaning that the market was using this information), and by comparing studies pre- and post-IFRS 3, it could also be concluded that goodwill and impairment expense under IFRS 3 provided better valued information. She acknowledged that there was less evidence from those studies on the identifiable intangible assets derived from a business combination, so it was not possible to conclude whether those items provided valuable information.

Further, Professor Tarca referred to Panel B which analysed the implementation of IFRS 3. Many studies pointed out that there was significant discretion (i.e. income smoothing, big bath) by management as regards impairment recognition; still she concluded that there was useful information provided by impairment recognition. However, she noted that some studies suggested that impairment was not being recognised timely.

Lastly, Professor Tarca presented Panel C which related to disclosure, compliance and enforcement matters. She explained that some matters related to disclosure were mostly related to IAS 36 Impairment of Assets and not to IFRS 3. Some studies concluded that disclosures had improved under IFRS 3, but some studies pointed out that they had found mostly boilerplate disclosures. She explained that she did not find concluding evidence for compliance matters. However, she noted that the effect of the standard differed between countries but there was no significant difference between industries. She noted differences between countries in terms of enforcement of the standard. She mentioned that there were two additional papers that referred to US literature.

One Board member asked if she could explain the conclusion from the Chalmers study which reflected underlying investment opportunities. Ms. Tarca referred to paragraph 29 of the agenda paper which stated that they constructed their own measurement to determine the economic opportunities that a company could provide, i.e. the future prospects of the company.  

The Chairman asked if the fact that there was more valuable information found under IFRS 3 could be derived from the fact that there was no amortisation of goodwill. Professor Tarca indicated that it was possible to draw that conclusion; the studies found that goodwill plus impairment was better than goodwill with amortisation. She mentioned that one example was the Chalmers paper based on studies on the Australian market; she explained that Australian GAAP did not allow pooling of interest before IFRS 3, so Australian GAAP was similar to IFRS 3. She indicated that in other countries it was difficult to draw this conclusion because there were too many differences between pre- and post-IFRS 3. The Chairman then mentioned that if a company impaired its goodwill it would provide a clear signal to the market that something was wrong, but it would not had necessarily implied that non-amortisation of goodwill was the right thing to do. Ms. Tarca indicated that those studies could not answer this fundamental question about which method was better.

One Board member mentioned that it would not be necessary to focus on the section about compliance unless there was a clear message from the studies or the feedback obtained that the standard was not clear. Professor Tarca responded that the study was beyond the standard because it focused on implementation; she just found two studies that mentioned disclosure matters; one of them suggested the need to change the disclosure of pre-tax rates and post-tax rates. The Board member then asked whether the information provided by the studies that covered the period of the global financial crisis (particularly 2008-2009) found that the information from non-amortisation of goodwill plus impairment was as expected given that it was a period of extreme stress in the economy. The Ms. Tarca indicated that the academics had expected to find more impairments during that period than what was actually found.

Another Board member asked in relation to the findings pre- and post-IFRS 3 what the relevance for the PIR was, since findings pre-IFRS 3 would not be relevant for their objective. He then mentioned that although IFRS 3 and US GAAP were not fully converged, they were mostly converged, and he understood that there were studies conducted in the US market. He asked whether they would be provided with US data which would be very useful for the Board. Professor Tarca responded that they had decided to analyse the full period because there was not much information that covered the post-IFRS 3 period only. The Director of Implementation Activities responded that the US review was confidential. However, they had been speaking to FASB staff, and he would provide some feedback on that later during this meeting.

Another Board member commented in relation to the finding that there were a number of users saying that it was difficult to separate identifiable intangible assets. Ms. Tarca believed that one of the reasons the Board had implemented that change was to drive a better identification of acquired intangibles assets. However, based on the feedback obtained it appeared that users were divided on this issue. She asked whether users’ views had changed, or whether the input was taken from different groups of users. The Director of Implementation Activities indicated that he was surprised by the feedback they had obtained, because he found mixed views from users on the usefulness of the split between goodwill and identifiable intangible assets. The Board member added that the separation of goodwill and identifiable intangible asset were expected to allow more timely identification of impairment. The Director of Implementation Activities then added that in terms of the Feedback statement it would be important to understand the different messages received from different sources. He wondered whether it would be necessary to request more information.

Another Board member mentioned, in relation to the impairment model vs impairment plus amortisation model, that there was no information that could be derived from the studies to conclude which model was better. He believed that it would also be very difficult to obtain this information, even by conducting a specific study given that economic conditions varied. The Director of Implementation Activities responded that the Australian and Portuguese studies could provide useful information. The Board member responded that the economic conditions in the periods covered by those studies were very different because they included pre- and post-crisis information. Another Board member indicated that the differences in economic conditions would not preclude deriving conclusions on the usefulness of the information for a particular period.

The Director of Implementation Activities asked whether the Board believed that the information that had been gathered so far was enough to prepare a Feedback statement. He indicated that they planned to identify potential areas for future work, whether that would mean narrow-scope amendments or something broader. As regards the review conducted in the U.S. market, the FASB Board had added two projects on their agenda: One project would be related to clarifying the definition of a business (they found similar feedback from the one obtained during the PIR review). A second project would be related to the accounting for goodwill; however, this project was postponed pending the outcome of the PIR. He suggested that the staff should complete their analysis and should continue their dialogue with FASB staff so that the existence convergence could be maintained.

The Chairman concluded that the information obtained so far was sufficient and confirmed that the staff could go ahead with the Feedback statement.


Related Topics

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.