CA ANZ, CPA Australia resist expanded M&A reporting rules

New rules requiring companies to disclose more information about their acquisitions by the International Accounting Standards Board (IASB) have fallen flat with Australian accounting bodies who say they could expose commercially sensitive information and have a "counter-productive effect" on deals.

In a joint submission to the IASB, CA ANZ and CPA Australia said the organisation’s proposed changes to business combinations failed to strike “the right balance” between improved disclosure for investors and the costs and risks to companies.

“[The changes] do not justify the implementation costs, come with several practical challenges, including commercial sensitivity and auditability, and may create an expectation gap,” they said in a statement last week.

The proposal comes from an exposure draft on accounting standards IFRS 3 and IAS 36, released this month following a discussion paper in 2020.

IFRS 3 contains requirements for how companies account for business combinations, with IASB changes seeking to improve the information companies report about acquisitions to help investors.

Meanwhile, the IASB’s proposed amendments to IAS 36 (asset impairments) seek to maintain the impairment-only model for goodwill, with some simplifications and clarifications.

But the joint bodies said the IASB had failed to address concerns they raised in response to the earlier discussion paper.

“Our joint submission does not support the business combination disclosures in IFRS 3 business combinations as currently proposed in the exposure draft,” they said, adding “We do not believe the proposed amendments [to the impairment test] adequately address the main issue that the IASB investigated in the discussion paper”.

“The practical challenges that we and many other submitters raised in response to the discussion paper remain a concern."

Business combination disclosures

CA ANZ and CPA Australia warned that the IASB’s proposal to force companies to reveal detailed performance targets and expected synergies from acquisitions could expose commercially sensitive information and potentially hamper deal execution.

They also flagged worries about the auditability of forward-looking disclosures and the potential for creating an “expectation gap”.

“We are not convinced that the financial statements are the appropriate place for some of the proposed disclosures,” their submission said. “We do not believe the proposed disclosures would achieve their intended purpose.”

“Investors might incorrectly believe that the auditor has assured the achievability of these objectives and targets.”

They also pushed back against the proposal to force companies to disclose information about the performance of strategic business combinations, a subset of business combinations where not meeting the specific objectives would compromise the acquiring company’s business strategy.

The IASB also proposed quantitative and qualitative thresholds for identifying strategic business combinations in IFRS 3.

The joint bodies said quantitative thresholds would be too low and may lead to unintended or excessive disclosures. Qualitative thresholds also tended to be too ambiguous, they said.

“While we agree with the principle behind the proposed exemption, we do not believe that it goes far enough to fully alleviate the concerns around the disclosure of commercially sensitive information.”

Impairment test

The submission pushed back on proposed changes to goodwill impairment testing, calling instead for a "fundamental review" of the current accounting standard on asset impairment.

In its exposure draft, the IASB said it voted to retain the impairment-only approach for goodwill rather than reintroduce amortisation to address issues of management over-optimism and shielding – the understatement of the non-goodwill assets of a cash-generating unit.

The IASB also proposed changes to the value-in-use calculation, including removing constraints on including future cash flows from restructurings or asset enhancements and eliminating the requirement to use pre-tax cash flows and discount rates.

But CA ANZ and CPA Australia said some members still supported the amortisation model and raised concerns about the “unintended consequences” of doing away with value-in-use.

“The removal of the restriction on uncommitted future cash flows from future asset enhancements and restructurings could result in very different interpretations by preparers,” their submission said.

“There are concerns around enforceability and auditability when establishing the new boundaries, and increased compliance costs without corresponding benefits.”

They said that many users of financial statements sought to eliminate the impact of impairment testing and goodwill before undertaking their analysis due to the current approach’s complexity and subjectivity.

“This means what is often the greatest effort and cost investment each year in financial reporting and auditing worldwide yields very few benefits for users of financial statements.”

However, a hybrid approach combining impairment testing in the initial years post-acquisition with amortisation in later periods could provide users with more relevant and reliable information in later years.

“[A hybrid approach] can address the challenge of providing relevant and reliable information to users in later years by requiring the amortisation of goodwill that may have been contaminated by shielding from headroom and over-optimistic cashflow forecasts.”