Post-implementation review: IFRS 3 business combinations

Comments from ACCA to the International Accounting Standards Board
28 May 2014


General comments

ACCA concurs with the broad scope of the PiR of IFRS 3, as indicated by the content of the questions in the RFI. We agree that the PiR is strengthened through encompassing relevant aspects of related Standards (principally on intangible assets and impairment).

In our view, some fundamental aspects of IFRS 3 and related Standards need to be reconsidered by the IASB as a result of the PiR:

  • Though we support in principle the impairment-only approach, we recognise that there are arguments for an amortisation approach. We believe that the IASB needs to consider the evidence provided as part of the responses to this PiR on that question. If the impairment-only model is retained, then some reconsideration of IAS 36 may be needed, not just of the disclosure requirements, but also of whether the subjective elements of the Standard are allowing impairments to be avoided.
  • The IASB needs also to revisit the cost/benefit assessment of whether certain intangible assets should continue to be recognised separately from goodwill. Intangibles such as brands and customer relationships may be difficult to separate from the business and the goodwill attached to it. They are often not considered separately during the commercial decision-making process which results in the acquisition, and are hard to value as a result. Furthermore, it is not clear that the requirement for separate recognition and valuation yields useful information to readers of the accounts. Some of these issues may be reflected in the disclosure shortcomings reported below.
  • While we support the separate treatment of business combinations from asset purchases, there are difficult borderline cases, where the differences in treatment may be influencing the categorisation. The IASB should review such differences, for example transaction costs and deferred tax, and assess whether they are merited in the light of the pressure that they put on the categorisation of transactions, and the consequent risk of manipulation of the financial statements.

In line with the breadth of the questions in the RFI, our specific comments below reflect a number of standpoints, taken across various issues. In some cases, we agree with the existing provisions in IFRS 3 (for example, step acquisitions – Qu. 7), though we continue to disagree with the treatment of negative goodwill (Qu. 4(c)). We have also attempted to provide comments which are practical, so that IFRS 3 might better reflect economic reality whilst retaining its principles (Qu. 3 in respect of fair value), or through a reasonable weighing-up of benefits and costs (for example, Qu. 10(b) – implementation). We have also raised issues which have wider implications than the Standards covered by this RFI (such as materiality – Qu. 9).

A similar scope to the RFI is adopted by the ACCA-sponsored report: ‘Accounting for, and information disclosed under, IFRS 3, IAS 36 and IAS 38 and the examination of compliance levels with the mandated disclosures and their determinants’. Due to its relevance to this PiR, we have enclosed a copy of the report with these responses, and we have taken the report’s findings into account when preparing our specific responses below. A brief synopsis of the report with respect to IFRS 3 is as follows:

The report finds that the Standard has not yet met its objective of reducing diversity in practice, although this may well not be due to its content. In this regard, the report sets out the following main findings:

  1. A lack of consistency in compliance across entities or jurisdictions. Causal factors may be an ambiguity in interpreting IFRS 3, or a stronger enforcement (and by implication, external audit) regime in certain jurisdictions, compared to others.
  2. Certain disclosure requirements in IFRS 3 are generally not as well complied-with as others. Examples of this are as follows:
    • a lack of disclosure on what intangibles are considered to have been acquired (this is referred to in our response 3 (b) & (c) below).
    • a noticeable number of companies do not disclose how a non-controlling interest is measured (this is referred to in our response 6 (b) below).
    • a lack of understanding may be evident in the widespread lack of any disclosure / meaningful disclosure regarding a ‘qualitative description of the factors making up goodwill’ (this is referred to in our response 4 (b) below).
  3. There are limitations to a survey of disclosure compliance which covers published financial statements, without also having an awareness of how the reporting entities sampled apply materiality. As users of the financial statements are likely to perceive a similar problem, we have mentioned in our response to Question 9 below the need to consider whether materiality should be more clearly explained in the financial statements, or else be readily ascertainable through the application of standard guidance.

The extent to which the IASB will, itself, ascertain the underlying reasons for problems in complying with IFRS 3 (and consequently how these might be addressed) will depend on the extent of the awareness amongst respondents to the RFI that omissions do occur, and why (for example, high compliance costs). We have wherever possible, attempted to provide answers to these questions.

Finally, ACCA welcomes the issue of a RFI, as part of the PiR process, before the IASB decides whether to propose changes to IFRS 3. In 2005, we expressed concern that no Discussion Paper was issued prior to the publication of proposed changes which were then reflected in the 2008 version of IFRS 3. We also note that this PiR process will not, this time, result in any changes so soon after a previous amendment (in contrast to the changes proposed in 2005).


Specific comments

Question 1
Please tell us:
(a)  about your role in relation to business combinations (i.e. preparer of financial statements, auditor, valuation specialist, user of financial statements and type of user, regulator, standard-setter, academic, accounting professional body etc).*
(b)  your principal jurisdiction. If you are a user of financial statements, which geographical regions do you follow or invest in?
(c)  whether your involvement with business combinations accounting has been mainly with IFRS 3 (2004) or IFRS 3 (2008).
(d)  if you are a preparer of financial statements:
· whether your jurisdiction or company is a recent adopter of IFRS and, if so, the year of adoption; and
· with how many business combinations accounted for under IFRS has your organisation been involved since 2004 and what were the industries of the acquirees in those combinations.
(e)  if you are a user of financial statements, please briefly describe the main business combinations accounted for under IFRS that you have analysed since 2004 (for example, geographical regions in which those transactions took place, what were the industries of the acquirees in those business combinations etc.).
*Type of user includes: buy-side analyst, sell-side analyst, credit rating analyst, creditor/lender, other (please specify).

(a)  We are an accounting professional body.

(b)  ACCA operates on a global basis. Our particular interest is in global accounting standards and the adaption of these, where required, by individual jurisdictions or regions.

(c)  We commented on the Exposure Drafts which resulted in both the 2004 and 2008 versions of IFRS 3.

(d)  Not applicable – our main function is not as a preparer of financial statements.

(e)  Not applicable – our main role is not as a user of financial statements.


Question 2
(a)  Are there benefits of having separate accounting treatments for business combinations and asset acquisitions? If so, what are these benefits?
(b)  What are the main practical implementation, auditing or enforcement challenges you face when assessing a transaction to determine whether it is a business? For the practical implementation challenges that you have indicated, what are the main considerations that you take into account in your assessment?

(a)  ACCA supports the principle of differing accounting treatments, as these distinguish, in the financial statements, a business combination from an asset acquisition. In our view, the distinction is appropriate, as business combinations incorporate the concept of goodwill and tend to be more complex transactions than an asset acquisition.

The scope of IFRS 3 excludes pooling-type arrangements which meet the definition of Business Combinations under Common Control (BCUCCs). Whilst such arrangements might be seen as a lower priority for accounting standards, since the overall control does not change, they occur quite frequently in practice. The IASB should therefore include, as part of its future work, separate provisions for BCUCCs within IFRS 3, on the basis that they are a separate form of BC to those in which there is an acquirer and acquiree generally acting at arm’s length.

(b)  Appendix B to IFRS 3 (Application Guidance) provides criteria which attempt to reduce uncertainty as to whether a transaction involves a business. We believe that whilst no guidance can be comprehensive for all situations, that provided in Appendix B is appropriate for making the necessary consideration of whether what is being acquired has the additional characteristics of a business, compared to an asset acquisition. In particular, it is appropriate for the guidance to be principles-based, in view of the scope for subjectivity in deciding whether a transaction involves a business.

One consideration in assessing the robustness of the criteria is whether any manipulation is likely to occur to achieve a desired accounting result (for example, with regard to the treatment of acquisition costs). We believe that this should not be a significant risk, if the criteria in Appendix B to IFRS 3 are considered fully by preparers. However it would reduce the significance of the distinction in these difficult cases, if the accounting consequences of the treatment as one or the other were reduced. The IASB as part of this review should reconsider these differences (other than goodwill), such as transaction costs and deferred tax.


Question 3
(a)  To what extent is the information derived from the fair value measurements relevant and the information disclosed about fair value measurements sufficient?* If there are deficiencies, what are they?
(b)  What have been the most significant valuation challenges in measuring fair value within the context of business combination accounting? What have been the most significant challenges when auditing or enforcing those fair value measurements?
(c)  Has fair value measurement been more challenging for particular elements: for example, specific assets, liabilities, consideration etc.?
*According to the Conceptual Framework information is relevant if it has predictive value, confirmatory value or both.

(a)  ACCA supports the use of fair values in business combination accounting where these reflect what the parties to the combination will actually have in mind (for example, in the case of liabilities). Consequently, we believe that recognition at fair value, and consequently the disclosure of fair value information, are not relevant to the same extent as is set out in the current Standard. Further detail of this point of view is provided in sub-sections (b) & (c) below.

With respect to disclosures around fair values, para B64 of IFRS 3 principally requires numerical disclosures. In establishing fair values, entities may well encounter complexity, and need to make judgements. Para B64 should draw attention to the need for adequate narrative disclosures in these situations. On a broader point, where a requirement in the Standard is found to result in complexity and the need for judgement, we would support a review of whether the resultant costs are justified by the benefits of the information provided.

(b)  Entities will face particular challenges in establishing fair values for items which are not viewed in this way during the actual business combination. For example, with respect to consideration, the parties will see the transaction as having an agreed price, as opposed to a notion of agreed fair values. There is furthermore, a risk of insufficient or incorrect recognition and disclosure where entities lack an understanding of what is required. The ACCA-sponsored report, submitted along with our responses, concludes that there are general deficiencies in disclosure, including with regard to the fair values given to the actual intangible assets acquired (page 6, column 2, para 2).

(c)  As indicated in (b) above, intangible assets are likely to be the main area where fair value measurement presents a particular challenge. For example, whilst an entity’s particular customer list will be a factor in a decision to acquire, it is unlikely that a fair value will be established separately for the list as part of making that decision. As a consequence, the fair value exercise for annual reporting purposes imposes a high implementation cost compared to its commercial worth (as indicated in (a) above).

Whilst lack of knowledge is not in itself, a reasonable excuse for non-compliance, there is a case for a review by the IASB of the costs of compliance with the fair value requirements in IFRS 3, compared to the relevance and benefits of those requirements.

It may, however, be difficult for the IASB to conclude on the extent of implementation issues with respect to the fair value requirements in IFRS 3 without a wider examination of fair value. This examination would be partly in response to economic conditions in recent years, as noted in section 3 of the RFI.


Question 4
(a)  Do you find the separate recognition of intangible assets useful? If so, why? How does it contribute to your understanding and analysis of the acquired business? Do you think changes are needed and, if so, what are they and why?
(b)  What are the main implementation, auditing or enforcement challenges in the separate recognition of intangible assets from goodwill? What do you think are the main causes of those challenges?
(c)  How useful do you find the recognition of negative goodwill in profit or loss and the disclosures about the underlying reasons why the transaction resulted in a gain?

The ACCA-sponsored report, submitted along with these responses, confirms that intangible assets form a large proportion of the total assets of companies involved in business combinations, but that compliance with disclosure requirements is inadequate (page 7, para 4). One explanation for this might be that the total for intangibles is, to some extent, a residual category which cannot be precisely analysed. Our responses to Qu. 4 have been prepared in the light of this finding.

(a)  We believe that intangible assets acquired in a business combination should be recognised separately from goodwill where they meet the recognition and measurement criteria of IAS 38. As noted in the preceding paragraph above, intangible assets can represent a large proportion of total assets: where they meet the IAS 38 criteria, it will consequently be relevant to the business, and is likely to be expected by users of the financial statements, to recognise these separately from goodwill.

In principle, ACCA would support similar recognition criteria as between the  intangibles acquired in a business combination, and other intangibles.

(b)  Our response in (a) above deals with the business-relevance of the separate recognition of intangible assets. However, the report referred to above does indicate that in practice, there are implementation challenges, such as the time and costs involved in separate recognition, especially where the acquirer did not, in practice, consider the intangibles separately from goodwill during the negotiations for the business combination.

The report noted that the disclosure requirement in para B64(e) for the factors that make up goodwill is poorly complied with (page 6, column 1, para 5). This appears to be a difficult disclosure, as goodwill often simply represents a difference. Perhaps preparers should simply be asked to disclose any special factors inherent in the particular combinations that have taken place. 

More broadly, a practical solution to reconciling the points made in (a) and (b) above could be to allow (or even encourage)  a more generalised approach to the disclosures providing explanations about intangible assets, as well as to the recognition which takes place in practice. Paras 36 and 37 of IAS 38 do provide an element of relaxation by allowing complementary or interdependent intangibles to be recognised together (though still separately from goodwill).

It may be possible to provide a further relaxation by grouping together assets with similar characteristics and useful lives, together with a supporting explanation as to what these are. It may also be relevant to give a confirmation in some cases that in practice, the dividing line between goodwill and other intangibles is arbitrary to a certain degree, due to the judgment involved.

Overall, this amended approach is likely to reflect better an entity’s perceptions of the assets, when making the decision which resulted in the BC.

(c)  ACCA still does not support the recognition of negative goodwill in profit or loss. We have previously expressed the view to the IASB that where positive goodwill exists, then any negative goodwill should be netted against that amount. If that is not possible, then any balance of negative goodwill should be a separate category, included with liabilities.

This negative goodwill would not strictly meet the definition of a liability, though it might represent unrecognised obligations or future costs inherent in the valuation of the assets of the business. We do agree that the valuation of the assets and liabilities acquired should be reconsidered very carefully if it appears that their fair value exceeds the consideration paid for them, bearing in mind the expectation that negative goodwill will arise rarely.

With regard to the disclosures around negative goodwill, we note that the requirement set out in para 64 (n)(ii) of IFRS 3 (regarding the reasons for it arising) are very briefly stated. ACCA believes that it would be helpful for the requirement to be made more specific, for example by explaining whether the negative goodwill reflects economic reality, such as a forced sale, or whether it arises from the measurement methods adopted in IFRS 3 (para 35 of IFRS 3 makes such a distinction). Negative goodwill can arise for very specific economic reasons, such as when an entity is forced to leave a particular market quickly, or makes the decision to do so on the grounds of a perceived longer-term benefit.


Question 5
(a)  How useful have you found the information obtained from annually assessing goodwill and intangible assets with indefinite useful lives for impairment, and why?
(b)  Do you think that improvements are needed regarding the information provided by the impairment test? If so, what are they?
(c)  What are the main implementation, auditing or enforcement challenges in testing goodwill or intangible assets with indefinite useful lives for impairment, and why?

Our responses to this question are primarily based on the concepts and issues around impairment reviews and amortisation.

i)      In our view, the main issue is to ensure that relevant information is provided by the annual impairment review process, particularly as impairments now tend to be recognised more frequently than in the past.

ii)    Annual impairment reviews do ensure regular scrutiny of assets which otherwise might remain indefinitely on the balance sheet, with the danger of insufficient further consideration by management. Additionally, preparers of the financial statements will be aware, when preparing the related disclosures, that the recognition of a material impairment charge is likely to be of interest to users.

iii)   On the other hand, impairment reviews involve subjective judgement, and with time, it is likely to become more difficult to compare current circumstances with those at the time of the business combination. Annual reviews run the risk of a standardised approach and disclosures, year-on-year. They are also likely to entail higher compliance costs than if amortisation is adopted.

iv)   If an impairment alternatively occurs whilst there is a policy of amortisation, on the occurrence of one or more clearly-defined indicators within IFRS, there is the chance of more informative disclosure. This is because work on the impairment concerned is a unique identifiable event, rather than an annual exercise.

v)     However, whilst amortisation may also be a better reflection of how a company views the related assets over time, users of the financial statements often take a different view and adjust back a charge which lacks significance to them.


Question 6
(a)  How useful is the information resulting from the presentation and measurement requirements for NCIs? Does the information resulting from those requirements reflect the claims on consolidated equity that are not attributable to the parent? If not, what improvements do you think are needed?
(b)  What are the main challenges in the accounting for NCIs, or auditing or enforcing such accounting? Please specify the measurement option under which those challenges arise.
To help us assess your answer better, we would be grateful if you could please specify the measurement option under which you account for NCIs that are present ownership interests and whether this measurement choice is made on an acquisition-by-acquisition basis.

(a)  ACCA agrees that Non-Controlling Interests do not constitute a liability of the overall group, and consequently are more fairly presented in equity. With regard to the valuation basis, we note that the choice allowed to preparers results from insufficient consensus being reached by the IASB (para BC210 of IFRS 3). ACCA supports the fair value method, and hopes that feedback received by the IASB during the PiR project will now enable the one valuation method to be prescribed in IFRS 3.

(b)  The fair value measurement of NCIs may well involve more time and cost compared to other areas of the financial statements. We note that the IASB has not, however, found the cost to be generally excessive, compared to the relevance of the information provided, and it appears that this is the case whether or not the fair value is readily ascertainable, such as through trading on a public market (paras BC213 - 214 of IFRS 3).

The ACCA-sponsored report submitted along with our responses reports a lack of compliance with the requirement to disclose the method of valuation of the NCI (page 6, column 1, final para). Should the cause of this problem be an unwillingness by preparers to draw attention to their lack of knowledge of how to apply fair value techniques to the NCI, we would hope that this, along with any other areas of difficulty, would become apparent in the responses received by the IASB.


Question 7
(a)  How useful do you find the information resulting from the step acquisition guidance in IFRS 3? If any of the information is unhelpful, please explain why.
(b)  How useful do you find the information resulting from the accounting for a parent’s retained investment upon the loss of control in a former subsidiary? If any of the information is unhelpful, please explain why.

(a)  ACCA concurs that the current version of IFRS 3 provides useful information on the acquisition of a controlling interest as a result of a step process. We agree that it is relevant to reassess the fair values of all assets and liabilities at the date control passes, and to calculate goodwill accordingly. The process of looking overall at the entity is also likely to be more understandable to users of the financial statements.

We also agree that the passing of control constitutes a significant economic event which, in this case, has consequences for profit or loss.

(b)  We believe that the accounting for the loss of a control of a subsidiary should be similar to that when control is gained. Consequently, we view as relevant the approach required by IAS 27 (now IFRS 10) for this significant economic event.


Question 8
(a)  Is other information needed to properly understand the effect of the acquisition on a group? If so, what information is needed and why would it be useful?
(b)  Is there information required to be disclosed that is not useful and that should not be required? Please explain why.
(c)  What are the main challenges to preparing, auditing or enforcing the disclosures required by IFRS 3 or by the related amendments, and why?

(a)  & (b) ACCA believes that the required disclosures, principally in para 64 of IFRS 3, mostly adequately reflect the recognition and measurement provisions in the Standard. In certain of our responses above, we have pointed to changes which would also be made to disclosure requirements, should our underlying comment be agreed by the IASB (ans. 3(a) and 4 (b)).

In addition, we recommend that the IASB considers whether useful additional disclosures would include the risks involved in the BC activities undertaken by an entity, and an indication of an acquiree’s likely future earnings. The nature of these disclosures indicates that they may be better-placed in Other Information (the ‘front-end’ of the Annual Report), rather than in the annual financial statements.

(c)  The ACCA-sponsored report submitted along with our responses reports a lack of compliance with the requirement in para B65 (q) of IFRS 3 to make disclosures about the contribution of the acquiree to group performance, or else the reasons why it is impractical (page 6, column 2, para 3 – referred to as ‘pro-forma information’). This apparently clear lack of compliance is a concern. Where it arises from an implementation challenge, we would anticipate that preparers, and maybe external auditors, would provide an explanation in their responses to the IASB.

For example, in the absence of a disclosed explanation of the impracticality of providing the information, cost or a lack of knowledge may be issues. We also draw attention to our comments on materiality under Qu 9 below.


Question 9
Are there other matters that you think the IASB should be aware of as it considers the PiR of IFRS 3?
The IASB is interested in:
(a)  understanding how useful the information that is provided by the Standard and the related amendments is, and whether improvements are needed, and why;
(b)  learning about practical implementation matters, whether from the perspective of applying, auditing or enforcing the Standard and the related amendments; and
(c)  any learning points for its standard-setting process.

Business combinations potentially have a great impact on the performance and prospects of a group, and IFRS 3 sets out detailed requirements in order that users of the financial statements may understand that impact. In this, and other accounting areas, it will be important to understand an entity’s assessment of the level of materiality, and how it is applied. The reason for the exclusion of expected information would then be clearer to a user: either the information is judged immaterial, or there has been an error or deliberate omission.

The impact of the lack of knowledge of materiality is described in the ACCA-sponsored report submitted along with our responses (page 6, column 2, para 4).

As this issue of materiality goes beyond the subject of business combinations, we suggest that the IASB considers it as part of a broader project within its work programme. We note that the current Exposure Draft ED/2014/1 (Disclosure Initiative – Proposed amendments to IAS 1) does not specifically tackle the above concerns. For example, it does not include a requirement to disclose how an entity assesses the materiality threshold applied in the preparation of its financial statements, and it does not propose to preclude the disclosure of information solely on the grounds that the information is immaterial.

The ACCA-sponsored research report also highlights shortcomings in compliance with IAS36 and 38, which may need to be considered. If the impairment-only approach of IFRS3 is to be continued, then IAS36 may need to be re-assessed – not only its disclosure requirements, but also the issue of whether the judgmental issues in the Standard have contributed to the avoidance of impairments over the last few years, which have coincided with a period of recession in many economies.


Question 10
From your point of view, which areas of IFRS 3 and related amendments:
(a)  represent benefits to users of financial statements, preparers, auditors and/or enforcers of financial information, and why;
(b)  have resulted in considerable unexpected costs to users of financial statements, preparers, auditors and/or enforcers of financial information, and why; or
(c)  have had an effect on how acquisitions are carried out (for example, an effect on contractual terms)?

(a)  ACCA supports the IASB’s aim, as set out in the RFI, of global convergence to a common high and enforceable standard in respect of BCs.

However, the attached ACCA-sponsored report indicates that this benefit has not yet been achieved (page 6, column 2, para 4).

(b)  Respondents may indeed question the IASB’s view, in section 10 of the RFI, that IFRS 3 provides guidance which is ‘not unduly complex’, and if so, this would have consequences for the costs of implementation of the Standard. We have pointed out above (in our responses 3(a) to (c) and 4 (b)) areas in which IFRS 3, at present, may well not appropriately reflect the circumstances of a BC, for the benefits of users of the financial statements.

However, the reported lack of consistency between preparers may not be due to the Standard itself: for example, varying standards of enforcement between jurisdictions may be a factor. We hope that overall, the responses submitted by preparers and auditors will clarify what the underlying causes are.

(c)  ACCA is not aware that in general, IFRS 3 has undue influence on the way in which transactions are conducted in practice, rather than being appropriately limited to reflecting them fully and accurately. In our response 2(b) above, we have raised the possibility that the treatment of acquisition costs, for example, may provide an incentive for an entity to try to manipulate a transaction so that it qualifies as an acquisition (or otherwise). As set out in our responses to Qu. 2 above, we do generally support differing accounting treatments for BCs, compared to asset acquisitions, in respect of goodwill, but note that reducing other differences may be advantageous.