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, regardless of the quality of the
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
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
This article first appeared in the February edition of Financial
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