Cover paper (Agenda Paper 18)

In September 2021, the Board decided to prioritise making tentative decisions about proposing disclosures about business combinations, and perform further analysis of the feedback received on the subsequent accounting for goodwill. At this meeting, the Board will began making these tentative decisions around the package of disclosures about business combinations.

Conceptual concerns on the location of information (Agenda Paper 18A)

In this paper, the staff set out their analysis on whether the information entities would disclose as part of the package of disclosures about business combinations could be required in financial statements.

Although the Board held a preliminary view that these disclosures should be required in financial statements, many respondents provided feedback disagreeing with this view. The staff analysed and categorised this feedback into three areas: that the information is not directly related to the elements of the financial statements; that the information is forward-looking in nature; and that the information is non-financial in nature.

The staff recommended that the Board confirm that the information about the benefits an entity’s management expect from a business combination can be required in the financial statements.

The Board were asked to vote on whether they agree with this recommendation.

Board discussion

Board members were generally supportive of the analysis and conclusions presented by the staff.

Some observations were raised which emphasised the importance of clearly defining whether some of the information to be required could be considered forward-looking or commercially sensitive in nature, and how the conclusion to this may interact with elements of the Conceptual Framework such as the concept of stewardship.

Related concerns were raised identifying that, even if the Board agree that elements of required disclosures are not forward-looking in nature, they should be sensitive to stakeholders and regulators who may disagree with this conclusion.

In response to this, it was explained that the aim of the project plan is to provide a conceptual basis in the first instance, prior to considering specific practical concerns.

When asked to vote, 9 of the 12 Board members voted in favour of the recommendation.

Practical challenges—forward-looking information (Agenda Paper 18B)

In this paper, the staff set out their research, and analysis thereof, of the practical concerns raised by respondents with regard to the proposed package of additional disclosures about business combinations in financial statements.

These concerns included the commercial sensitivity of the information, the potentially forward-looking nature of the information, the auditability of the information, and the integration of the information. This paper has a particular focus on information which may be considered forward-looking.

Many respondents were concerned by challenges which may arise if information that may be considered forward-looking is required in financial statements, including the limitational risk.

The staff highlighted and analysed the following alternatives to the Bard’s preliminary view that such information could be required in financial statements:

• Permitting an entity to incorporate information disclosed elsewhere by cross-reference in the financial statements
• Incorporating the required information into management commentary
• Not requiring quantitative disclosure of management’s objectives
• Offering exemptions from requiring particular disclosures in specific circumstances
• Developing an objective-based approach

The Board were asked for any further questions or comments on the additional outreach performed, and the alternatives highlighted by the staff. They were asked if there is any additional information they would like to know before making a decision on the practical challenges of including the proposed information in financial statements.

The Board were not asked to make any decisions with respect to this paper.

Board discussion

Mixed views were expressed by Board members, both more broadly on the concept of ‘forward-looking information’ and the associated regulatory and litigation risks, and on the suggested alternatives specifically.

Most Board members expressed a preference not to permit cross-reference to information outside the financial statements as, with respect to the “safe-harbour” concept, this would bring the information back into scope as if it were directly in the financial statements, thereby not eliminating litigation risk. Some members, however, noted that the changing nature of corporate reporting may mean that cross-referencing and connectivity between the financial statements and other areas of annual reports may be a feature which becomes more prominent and should therefore not be prohibited.

Most Board members were also against disclosures being made instead in management commentary, as this could be seen to dilute the rigour and reliability of the information, though some thought this could be an acceptable compromise as a last resort.

Views were mixed with respect to the alternatives to not require quantitative disclosure of management’s objectives, or to offer exemptions from certain disclosures in specific circumstances, particularly on a ‘comply or explain’ basis. Some found these attractive as they said it would maximise the information available to be disclosed.

However, others expressed subsequent disclosure of actual performance of an acquired business would have limited meaningfulness without being contextualised by quantified objectives at initial acquisition.

It was also identified that offering exemptions in certain circumstances would impair the ‘level playing field’ concept if some entities were required to make equivalent disclosures to another entity, who had explained why they cannot.

The idea of an objective-based approach was supported by some Board members, however there were some concerns that this may offer too much flexibility to preparers, as well as broader concerns about adopting an approach that may require significant amendment dependent upon responses to the Exposure Draft Disclosure Requirements in IFRS Standards—A Pilot Approach.