Has 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
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