While the international convergence of accounting standards is generally seen
as a good thing, the exposure draft for IFRS
combinations phase II released last year sparked widespread disapproval.
‘The comment letters on phase II were pretty much universally negative in at
least some aspects, although most people continue to say that convergence in
business combinations is a good thing,’ says Mary Dolson, a partner in global
accounting consulting services at PricewaterhouseCoopers.
Dolson says the International Accounting Standards Board (IASB) received more
than 200 letters criticising the draft. As a result, the board is now
deliberating again about many of the phase II proposals, along with its US
counterpart, the Financial Accounting Standards Board (FASB). Phase IIis the
first joint project between the two standard setters. A core aim of this phase
is to achieve convergence between IFRS and US GAAP.
The comment period is now closed and the IASB and FASB aim to put out a new
standard by June of next year.
But this schedule makes Nick Topazio, business and financial reporting
specialist at the Chartered Institute of Management Accountants (CIMA), somewhat
uneasy. ‘It doesn’t say new exposure draft or discussion paper, which is what I
would like,’ he says. CIMA’s view is that the current standard needs to be
substantially amended and then resubmitted for discussion.
Topazio agrees there is a need for further work in the area of business
combinations from an international point of view, but he is concerned that the
IASB is trying to move some concepts further forward within the business
combinations framework without looking at the wider issues.
He thinks some of the issues should be dealt with in the overall convergence
debate, rather than within business combinations. He also thinks the pace of
change is too fast to allow proper consideration of implied changes to the
fundamental concepts, and that the European accounting community has not been
given enough time to take it all on board.
‘Where we at CIMA think that the process is not working properly is in terms
of some fundamental concepts being addressed in phase II,’ Topazio explains.
‘Some of these concepts are wider than the business combinations area. These are
fundamentals of accounting that should be dealt with in a review of the
conceptual framework of accounting standards for example, the issue of the
valuation of liabilities.’
Topazio is also unhappy with some of the decisions the IASB has made on
accounting for mergers. ‘We are interested in the area of fresh-start
accounting, when two companies of relatively equal size merge,’ he says.
Under current law, only one company has to be identified as the purchaser and
have its assets revalued, but Topazio thinks both companies’ assets should be
revalued. ‘That is what we would like, but the IASB and FASB are not going down
that route. They maintain that you only need to identify the acquirer.’
Fresh-start accounting is a contentious area and one of the still outstanding
elements of phase II, but it is not part of the IASB’s active agenda.
Another area Topazio would like to see addressed in phase II is how
acquisition costs are treated. ‘This is about when you make an acquisition,
whether or not the costs of the acquisition are written off when they are
incurred,’ he explains.
‘We would prefer that acquisition costs are included in the purchasing cost,
but that is still up for debate and is not resolved.’ The IASB is proposing that
purchasing costs are written off as they are incurred.
There have been complaints that submissions to the IASB on the standards
during the consultation process have been largely ignored, although neither
Dolson nor Topazio believes that is the case. They both think the IASB has gone
through due process and point to its issuing and disseminating a 60-page
document, in conjunction with the FASB, summarising the responses made to them.
What remains to be seen is how phase II is amended once the the IASB/FASB
board have completed their deliberations for the second time. ‘Things have gone
quiet,’ says Dolson. ‘But that is normal at this period in the process.’
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