RSS feedsHas the International Accounting Standards Board finally proved it is not a lapdog of the US standard setting process? There had been a growing feeling among European FDs and auditors that the IASB in its keenness to realise its ambition for one global set of accounting standards would take on board wholesale the work and practices of the Financial Accounting Standards Board (FASB), regardless of the quality of the standards.
The IASB always denied it and now it may have produced the accounting standard which lays the accusation to rest. Early in 2008, the IASB, in conjunction with the FASB, produced new standards on business combinations and minority interests. The standards, in particular IFRS 3 Business Combinations, were seen as the first comprehensive test case of the robustness of the joint effort to achieve convergence between IFRS and US GAAP. And it is a test that the IASB says it has passed with flying colours.
In realising the degree of convergence achieved, it is the FASB that has made fundamental changes to its accounting for business combinations to bring US accounting into line with the new IFRS 3. To make that convergence, the FASB had to make changes to restructuring charges, the way non-controlling interests are classified as equity, the treatment of intellectual property and R&D. It even changed the date on which it recognised the date of the acquisition.
In contrast, the new international standard requires fewer changes for users of IFRS than for entities reporting under US GAAP.
However, the IASB has moved forward with the US in several areas for instance, getting rid of the six methods of accounting for a step acquisition. Another key change is that both the US and IASB standards now demand that with a contingent purchase there has to be an estimate of the value to the contingency part at the outset. At the moment that figure goes unrecorded.
But although the new standards mark a significant step towards consistency between US GAAP and IFRS, the US and the IASB standards are not identical. The US standard requires non-controlling interests to be measured at a full fair value in accounting for business combinations. This means that an acquirer will recognise the full goodwill of the acquiree, including goodwill relating to non-controlling shareholders. The IASB version allows the full fair value method, but companies also have an option to follow the current IFRS model, where goodwill relating to non-controlling shareholders is not recognised.
It is unusual for international accounting standards to have options: one of the main criticisms of the quality of the existing standards when the IASB started work was that a lack of consensus meant options had to be allowed. But options diminish the quality of financial reporting because they lead to a lack of consistency and hence a lack of clarity for users. But the IASB could not reach a consensus in this case, so an option remains.
Despite the limited changes to existing international standards, companies should not be lulled into a false sense of complacency. For instance, the new standards require purchases and sales of non-controlling shareholdings when control is retained to be accounted for fully as equity transactions. This will reduce the current diversity in accounting for such transactions.
Investors and analysts should also be aware that the changes will have an impact on reported profits. For example, any pre-existing interests in the acquired company will be re-measured to fair value at the acquisition date, with any gains or loss recognised in the income statement rather than directly in equity. Equally significant is the fact that many transaction costs including those of the investment banks and other advisers that are currently capitalised are now required to be recognised as an expense, instead. And we all know how eye-poppingly large those costs can be.
The third significant change is contingent consideration when the buyer agrees to a possible adjustment to the purchase price, usually based on post-acquisition performance. Contingent consideration will be measured at fair value at the acquisition date, with subsequent changes recognised in the income statement if the contingent consideration is classified as a liability rather than as an adjustment to the purchase price.
Despite the credit crunch, mergers and acquisitions are huge business, totalling $2.4 trillion across the globe last year, so accounting for such transactions is clearly of some relevance. The IASB believes that over the past decade, the average annual value of corporate acquisitions worldwide has been the equivalent of 8-10% of the total market capitalisation of listed securities. Now that accounting for mergers across the globe is so much more consistent, investors should get a better idea of what exactly is going on. That, plus the fact that the standard bears the stamp ‘made by the IASB’ may make IFRS 3 Business Combinations one of the standards that proves the IASB is succeeding in its objective of building high quality, independent, global accounting standards.
