RegulationAccounting StandardsAccounting for M&As “poorly applied” by companies, warns watchdog

Accounting for M&As "poorly applied" by companies, warns watchdog

Business finding M&A accounting a struggle; investors unhappy with the subsequent results, says the FRC

Improvements must be made to the way businesses account for merger and
acquisitions, warns the profession’s watchdog.

Businesses have “poorly applied” accounting rules for business combinations,
a study by the
Financial Reporting
Council
(FRC) found.

Their unfamiliarity with the international financial reporting standard on
business combinations is a likely reason for costly and difficult accounting for
M&As, and their subsequent lack of usefulness to investors.

The findings come as
M
&A activity is expected to increase in 2010
, after a barren two
year-period since the credit crunch.

“A step change is needed in the quality of the information about M&A
transactions given in annual reports and accounts. Improvements should result,
in part, from new fair value guidance and more practical experience of
estimating fair values for intangible assets,” said Ian Wright, director of
corporate reporting at the FRC.

“In addition, recent amendments to IFRS 3 ‘Business combinations’ mean that,
in future, more intangibles will be recognised for accounting purposes. This may
help ensure a greater degree of consistency between what is disclosed about
acquisitions in the accounts and the rationale for acquisitions set out in
business reviews.”

Further interviews with stakeholders and investors will take place in 18
months to assess whether the situation has improved – while dialogue will
continue to gauge whether the cost of compliance is changing.

Further reading:

M
&A’s rise from the dead

Signs
of mid-market M&A recovery in 2010

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