M&A rule bites chunk out of company profits

Companies will be forced to reveal fees paid to advisers on major mergers and
acquisitions in their earning figures.

The move, announced by the International Accounting Standards Board today,
would seriously dent the profits of corporates engaged in major transactions,
with bills for advisers sometimes running to hundreds of millions of pounds.

The change is likely to alienate companies, with accounts preparers telling
Accountancy Age that they did not believe the move made sense.

Currently, both UK and US companies book advisers’ fees, paid to the big
investment banks but also to accountants for due diligence work, as part of the
‘goodwill’ figure resulting from a transaction.

But in an attempt to increase transparency, standards-setters have opted to
require companies to book the charges incurred in a transaction as expenses,
putting them through the profit and loss account.

Ken Lever, chairman of The Hundred Group of FD’s financial reporting
committee, said advisers’ costs were a part of the assessment of the value of a
purchase, and should thus be included in goodwill. ‘The new accounting treatment
does not really reflect the way in which an investment will be appraised,’ he

But the likely increased transparency of advisers’ fees will please some, who
will pore over the huge sums paid to City banks and others.

Lever also said the move would see companies producing new profit breakdowns,
including a ‘profits prior to the expenses associated with acquisitions’ figure
for the first time in an effort to convey a sense of the company’s underlying

The IASB has disagreed with preparers on the issue. ‘The board did not accept
that fees paid in relation to an acquisition are an asset or part of an asset,’
said Alan Teixeira, senior project manager at the board.

Companies do reveal advisers fees in some cases, Moody’s analyst Trevor
Pijper said. But the inclusion of the costs in the profit and loss account will
give an added incentive for companies to detail the figures in order to explain
underlying earnings.

Companies will have to implement the rules from July 2009.

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Fiona Westwood of Smith and Williamson.