Cover paper (Agenda Paper 18)

In March 2020, the IASB published DP/2020/1 Business Combinations—Disclosures, Goodwill and Impairment. The comment period for the DP ended on 31 December 2020.

In 2021, the IASB discussed the feedback received in response to the DP and decided to prioritise, amongst other things, performing further work to make decisions on the package of disclosure requirements about business combinations and to then redeliberate its preliminary view that it should retain the impairment-only model to account for goodwill.

As part of the IASB’s work, the staff have performed further research on disclosures about business combinations.

The purpose of this meeting was to ask the IASB to make decisions on the way forward for the package of disclosure requirements about business combinations.

Background and alternatives to consider (Agenda Paper 18A)

This paper summarised the IASB’s preliminary views on the possible improvements to be made to the disclosure requirements of IFRS 3, namely:

• The introduction of more specific disclosure objectives
• Requirements to disclose information about the subsequent performance of a business combination
• Requiring additional quantitative information about expected synergies from a business combination

Almost all users agreed with the IASB’s preliminary views. However, respondents raised practical concerns regarding the information that would be required under the preliminary view, namely:

• The commercial sensitivity of the information
• That such information could be seen as ‘forward-looking’
• That an entity may be unable to disclose information that is representative of the business combination following integration of the acquired business in existing operations
• The auditability of the information

The IASB therefore discussed potential alternatives to the preliminary views to respond to the practical concerns, namely:

• Requiring an entity to disclose information prescribed in the preliminary views only for a subset of business combinations
• Exempting an entity from providing certain disclosures in specific circumstances
• Requiring only qualitative information
• Specifying which metrics an entity should disclose

In this paper, the staff considered if any of the above alternatives should not be considered and recommend that the IASB should not consider further requiring only qualitative information or specifying which metrics an entity should disclose.

The IASB was asked if they agree with the staff recommendation.

Board discussion

There was no significant discussion of this topic. The IASB agreed with the staff recommendation and unanimously voted in its favour.

Amending the IASB’s preliminary view (Agenda Paper 18B)

In this paper, the staff outlined their recommendations to the IASB that they should amend their preliminary views to:

• Include an exemption from disclosing management’s objectives for a business combination, the metrics and targets management will use to monitor those objectives, and quantitative information about the expected synergies arising from a business combination
• Not include an exemption from disclosing the strategic rationale for a business combination or disclosing actual performance in subsequent periods
• Design the exemption so that it applies if the disclosure of the information described in the first item would be seriously prejudicial to the entity’s objectives for the business combination, and supplement the exemption with application guidance
• Require an entity to disclose information about the strategic rationale and quantitative information about expected synergies for all ‘material’ business combinations
• Require an entity to disclose information about the objectives for a business combination, the metrics and targets the entity will use to measure achievement of those objectives, and the subsequent achievement of those objectives, for a subset of ‘material’ business combinations
• Describe and identify a subset of ‘material’ business combinations as those which are ‘strategically important’, which will be determined using a closed list of qualitative and quantitative thresholds
• Require an entity to disclose information about the subsequent performance of a business combination and expected synergies
• Require an entity to disclose information to help a user understand the benefits that an entity’s management expected from a business combination when agreeing the price to acquire a business and the extent to which the business combination is meeting management’s objectives

The IASB was asked if they agree with these staff recommendations.

Board discussion

Recommendations on exemption

IASB members generally supported the staff direction, agreeing that there is a need to compromise with a disclosure exemption in certain circumstances in order to otherwise require the proposed package of disclosures.

Some members expressed concerns about some of the terminology used, and what it meant for the exemption to not apply to disclosure of ‘actual performance’, if there is only a ‘general risk of weakening competitiveness’, or if the required information is ‘publicly available’, highlighting it may be unclear what those terms mean.

Some members also noted that in some cases, even explaining the reason for taking an exemption may implicitly disclose privileged or confidential information.

When asked to vote on each question, the IASB voted:

• Unanimously for providing a disclosure exemption from disclosing management’s objectives for a business combination, the metrics and targets management will use to monitor those objectives, and quantitative information about the expected synergies arising from a business combination
• Unanimously for not including an exemption from disclosing the strategic rationale for a business combination
• Unanimously for not including an exemption from disclosing actual performance, with respect to disclosure of actual performance only, in subsequent periods
• 5:6 against not including an exemption from disclosing actual performance, with a comparison to the forecast performance, in subsequent periods
• Unanimously for designing the exemption so that it applies if the disclosure of the information described in the first item would be seriously prejudicial to the entity’s objectives for the business combination, and supplement the exemption with application guidance

Recommendations on a subset

IASB members were generally supportive of requiring certain disclosures only for a subset of business combinations. Most members preferred the idea of a closed list of thresholds, as proposed by the staff, to improve comparability across entities. Some members also suggested that 10% of revenue should be included as a quantitative threshold in the closed list.

When asked to vote on each question, the IASB voted:

• Unanimously for disclosing information about the strategic rationale and quantitative information about expected synergies for all ‘material’ business combinations
• Unanimously for disclosing information about the objectives for a business combination, the metrics and targets the entity will use to measure achievement of those objectives, and the subsequent achievement of those objectives, for a subset of ‘material’ business combinations
• 10:1 for identifying the subset of ‘material’ business combinations as those which are ‘strategically important’, and that shall be determined using a closed list of qualitative and quantitative thresholds

Requiring additional disclosures about business combinations

IASB members were supportive of the staff recommendations. When asked to vote on each question, the IASB voted:

• Unanimously for disclosing information about the subsequent performance of a business combination and expected synergies
• Unanimously for disclosing information to help a user understand the benefits that an entity’s management expected from a business combination when agreeing the price to acquire a business and the extent to which the business combination is meeting management’s objectives

Exemption from disclosure requirements (Agenda Paper 18C)

In Agenda Paper 18B, the staff recommended that the IASB’s preliminary view be amended to include an exemption from some of the disclosure requirements when disclosure of the required information would be seriously prejudicial to the entity’s objectives for the business combination.

In this paper, the staff analysed how to design such an exemption and application guidance on applying such an exemption.

How to design an exemption

The staff suggested that the exemption should be designed to allow an entity not to disclose a particular item of information in situations in which disclosing that item of information can be expected to prejudice seriously any of the entity’s objectives for the business combination.

Application guidance on applying the exemption

The staff suggested that the IASB should supplement the exemption with application guidance, including requiring an entity to:

• Consider whether it is possible to disclose information at an aggregated level to resolve concerns while still meeting the objective of the disclosure requirements
• Disclose the reason for applying the exemption separately for each item of information
• Assess in future periods whether the circumstances leading the application of the emption still exist.

The application guidance should also specify situations in which the exemption would not be permitted, including:

• A general risk of potential weakening of competitiveness due to disclosure is not, on its own, sufficient to apply the exemption
• The exemption should not be applied to avoid disclosing information only because that information may not be considered favourably by the market
• The information is disclosed in other publicly available material
• If competitors are already likely to have access to the information from public or non-public documents or other sources or would be unable to act on the information in a manner that can be expected to prejudice seriously any of the entity’s objectives for the business combination

Board discussion

The analyses in this paper were discussed together with Agenda Paper 18B.

Identifying a subset of business combinations (Agenda Paper 18D)

In Agenda Paper 18B, the staff recommended that the IASB’s preliminary view be amended to require certain disclosures for only a subset of business combinations. In this paper, the staff analysed how to describe such a subset, and how to identify that subset of business combinations.

Describing the subset of business combinations

The staff suggested that, if some disclosure requirements should be required for only a subset of business combinations, that subset should be described as those which are ‘strategically important’ business combinations: business combinations for which not meeting the objectives would seriously put at risk the entity achieving its overall business strategy.

Identifying ‘strategically important’ business combinations

The staff suggested that ‘strategically important’ business combinations should be identified using a closed list of thresholds, for which meeting any one of the thresholds would require an entity to disclose information for that business combination. The staff suggest using a mixture of quantitative and qualitative thresholds.

Board discussion

The analyses in this paper were discussed together with Agenda Paper 18B.