Business Combinations — Disclosures, Goodwill and Impairment

Date recorded:

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.

In December 2022, the IASB agreed to move the project from the research programme to the standard-setting work plan.

The IASB’s preliminary views required disclosure of information about the subsequent performance of ‘strategically important’ business combinations using what was described as a ‘management approach’—namely, disclosing the information the entity’s management (being at the level of the chief operating decision maker (CODM) as defined in IFRS 8) uses in assessing the subsequent performance of business combinations.

The purpose of this meeting was to ask the IASB to make decisions about this management approach.

The management approach (Agenda Paper 18A)

In the DP, the IASB’s preliminary views on the management approach would result in disclosures about the subsequent performance of only those business combinations reviewed by an entity’s CODM.

Respondent’s feedback was mixed regarding whether this was an appropriate level. Some respondents thought this was a practical, cost-effective approach, whilst others thought that using such a high level would result in some material information being omitted. Feedback also indicated that there is diversity in the frequency and type of information reviewed by CODMs between entities.

In this paper, based on concerns about the appropriateness of using CODM and the information that would be disclosed, the staff recommended that the IASB amends its preliminary view to specify that the information the entity is required to disclose about the subsequent performance of business combinations is that reviewed by entity management at the level of key management personnel (KMP) as defined in IAS 24.

IASB discussion

IASB members were generally supportive of the staff recommendation. Some IASB members noted that they would have continued to support CODM as the appropriate level but accepted broadening the level to KMP in line with the feedback received.

When asked to vote, the IASB voted unanimously in favour of the staff recommendation.

Other aspects of the management approach (Agenda Paper 18B)

In this paper, the staff provided analysis of feedback on other aspects of the management approach, namely:

  • How long information should be required for
  • Changing metrics used to monitor subsequent performance of a business combination
  • Use of ranges for entity’s targets
  • Whether information should be limited to that about key objectives

How long information should be required for

In the DP, the IASB’s preliminary view was that:

  • If management continues to monitor whether the objectives of a business combination are being met, an entity should disclose information about the subsequent performance of that business combination for as long as the information remains necessary for users of financial statements to assess whether the original objectives of a business combination are being met (referred to as the ‘core time period’)
  • If management does not monitor whether its objectives for a business combination are being met, the entity should disclose that fact and the reasons why it does not do so
  • If management stops monitoring a business combination before the end of the second full year after the year in which the business combination occurs, the entity should disclose that fact and the reasons why it stopped monitoring the business combination (referred to as the ‘overlay’).

The core time period

Some respondents to the preliminary view agreed with the suggested approach, while others suggested that there should be a specified time period. The staff suggested that using a specified time period would not be appropriate, as a fixed time period would be arbitrary, may require entities who have integrated a business combination within the time period to prepare additional information for the purposes of the requirement, and would not accommodate the fact that different entities review business combinations differently.

The staff proposed to clarify the core time period, explaining that an entity’s management is considered to be monitoring whether the objectives of the business combination are being met if the entity’s management is comparing actual performance in subsequent periods with the entity’s objectives (and targets) for the business combination it established when entering into the business combination.

The overlay

Some respondents also noted that, although management may stop monitoring the performance of the business combination against the business plan developed during the acquisition process, the performance of the acquired business may be monitored as part of the entity’s annual budgeting process.

In such circumstances, based on the preliminary view, an entity would be required to disclose only that management have stopped monitoring the business combination. Therefore, the staff suggested that the requirements could be expanded to require disclosure of information about actual performance using the metric set out in the year of acquisition if (and only if) information about actual performance using that metric is being received by the entity’s management.

The staff recommended that the IASB:

  • Proceed with the preliminary view to require an entity to disclose information about the subsequent performance of a business combination for as long as an entity’s management continues to monitor whether the objectives of the business combination are being met
  • Continue with the preliminary view that if an entity’s management does not monitor whether its objectives for a business combination are being met, the entity should disclose that fact and the reasons why it does not do so
  • Continue with the preliminary view that if an entity’s management stops monitoring whether its objectives for a business combination are being met before the end of the second full year after the year of the business combination, that fact and the reasons why it has done so
  • Propose an entity whose management stops monitoring the performance of a business combination before the end of the second full year after the year of the business combination be required to disclose information about actual performance using the metric set out in the year of acquisition if (and only if) information about actual performance using that metric is being received by the entity’s management

IASB discussion

IASB members were broadly supportive of the staff recommendation. However, there was some concern regarding how these requirements would apply in certain cases, such as an acquired business being very rapidly integrated and therefore not discretely monitored. There were also some observations regarding being clear what is meant by ‘monitoring’.

After this discussion, IASB members suggested that the Basis for Conclusions captures the thought process behind introducing the requirement to disclose information about actual performance using the metric set out in the year of acquisition. This requirement only applies if information about actual performance using that metric is being received by the entity’s management, and management stopped monitoring the performance of the business combination in the first two years after acquisition.

When asked to vote, the IASB voted unanimously in favour of the staff recommendation.

Changing metrics

In the DP, the IASB’s preliminary view was that an entity that changes the metrics by which it monitors the subsequent performance of a business combination should disclose:

  • That it made the change
  • The reasons for the change
  • The revised metrics

However, based on analysis of feedback, the staff believed that the circumstances giving rise to such a situation would be relatively narrow, and therefore thought it was not clear how beneficial such a requirement would be.

Therefore, the staff recommended that the IASB does not proceed with the preliminary view to require these disclosures.

IASB discussion

Some members of the IASB supported the recommendation. It was noted that other disclosure requirements, such as those of significant assumptions in the impairment test, will result in some information still being disclosed in this area. It was also noted that the objective of the project is to improve disclosures at a reasonable cost; removing this requirement would reduce complexity and cost.

However, there was some concern that asking for no information rather than amending the requirement would not resolve any of the concerns in the feedback and could result in less useful information. Furthermore, it was observed that the concerns did not form a significant part of the feedback.

It was suggested that the preliminary view could be maintained, and then further feedback sought from respondents, but there were mixed views on the appropriateness of such an approach.

When asked to vote, 7 of the 12 IASB members voted in favour.

Use of ranges

The IASB previously considered requiring an entity to disclose quantitative information about expected synergies, and previously noted that such information could be an ‘estimated amount or range of amounts’.

However, the DP did not specify whether information about targets could also be disclosed as a range rather than a point estimate.

The staff therefore recommended that an entity should be permitted to disclose information about targets for a business combination using a range or a point estimate.

IASB discussion

The IASB broadly supported the staff recommendation. When asked to vote, the IASB voted unanimously in favour.

Key objectives

A common concern of respondents is that some of the disclosure requirements may require disclosure of commercially sensitive information.

The staff thought that a factor contributing to this concern may have been the perception that disclose of detailed information about an entity’s objectives for a business combination are required.

The staff recommended that the IASB clarify that an entity would not be expected to disclose all objectives and targets for a business combination, and that information about an entity’s objectives and targets for a business combination should focus only on the key objectives, being those that are critical to the success of the business combination.

IASB discussion

The IASB broadly supported the staff recommendation. When asked to vote, the IASB voted unanimously in favour.

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