TAKEAWAYS
In the post-implementation review of the International Financial Reporting Standard (IFRS) 3 Business Combinations, stakeholders raised concerns that investors are not receiving sufficient information about the subsequent performance of acquisitions1. As a result, some users resort to using the information provided by the impairment test of goodwill as an indicator of the performance of a business combination. However, there appears to be a delay between the impairment incurrence and impairment recognition2. Investors must receive information on a timelier basis to assess management’s acquisition decisions. On 14 March 2024, the International Accounting Standards Board (IASB) issued an Exposure Draft Business Combinations – Disclosures, Goodwill and Impairment: Proposed amendments to IFRS 3 and IAS 36 (ED), with proposed amendments to increase disclosures to help investors assess the subsequent performance of a business combination.
However, increased information disclosures come with increased costs. To balance the costs and benefits of providing these disclosures, IASB proposes that these additional disclosures be required for only a subset of material business combinations, otherwise known as strategic business combinations. This article discusses these additional proposed disclosure requirements for strategic business combinations3.
“An SBC would be one for which failure to meet any one of an entity’s acquisition-date key objectives would put the entity at serious risk of failing to achieve its overall business strategy.” (ED, p. 9)
SBC is a new concept introduced in the ED. ED paragraph B67C provides the qualitative and quantitative thresholds to identify an SBC. Qualitatively, suppose the business combination results in the acquirer entering a new major line of business or geographical area of operations (ED paragraph B67C(c)), or quantitatively, a 10% threshold defined in terms of the acquiree’s operating profit or loss as a percentage of the acquirer’s consolidated operating profit or loss (ED paragraph B67C(ai)), or revenue (ED paragraph B67C(aii)), or assets (ED paragraph B67C(b)) is exceeded, then this business combination is identified as an SBC.
Using Keppel Corporation’s (Keppel) acquisition of M1 Limited (M1) on 15 February 2019 as an example, we assess the quantitative threshold approach listed in paragraph B67C(aii)4. Based on the announcement of its financial results for the year ending 31 December 2018, M1’s revenue was $1,094.7 million. Keppel’s consolidated revenue for the year ending 31 December 2018 was $5,964.781 million. The former is more than 10% of the latter. Hence, based on this threshold, Keppel’s acquisition of M1 would be considered an SBC. Next, we assess the quantitative threshold approach listed in paragraph B67C(b). We compute the amount of all assets acquired (including goodwill)5 on the acquisition date, that is, $2,865.105 million. This also marginally exceeds 10% of the carrying amount of the total assets6 recognised in Keppel’s consolidated balance sheet as at 31 December 2018. Hence, Keppel’s acquisition of M1 would be considered an SBC.
The ED proposes additional information for an SBC to be disclosed as follows:
Using Keppel’s acquisition of M1 as an example7, Keppel would need to elaborate on how M1 will contribute to Keppel’s “mission as a solutions provider for sustainable urbanisation”, as well as how M1 will “complement and augment” Keppel’s current suite of solutions with specific objectives under the proposed amendments. In addition, Keppel would also need to complement these objectives with targets by disclosing, for example, increased revenue and/or operating profit targets and/or decreased cost targets in the year of acquisition. For the year of acquisition and subsequent financial reporting periods, Keppel would need to present actual performance as well as issue a statement as to whether the expectations are being met.
ED paragraph B67B proposes that the acquirer discloses information specified in paragraph B67A(b) for as long as its key management personnel “review the actual performance of the strategic business combination against its acquisition-date key objectives and the related targets”. Where the key management personnel have not started to review and do not plan to review the performance, the acquirer should disclose so and the reasons for not doing so. Where the key management personnel stop reviewing the performance before the end of the second annual reporting period after the year of acquisition, the acquirer should disclose so and the reasons for stopping to do so.
The proposed amendment responds to the call that indicated a lack of disclosures on the subsequent performance of acquisitions and reinforces the disclosure objective stated in ED paragraph 62A(b), that is, for an SBC, the acquirer shall disclose information that enables users to evaluate “the extent to which the benefit an entity expects from the business combination are being obtained”.
Preparers raised concerns that disclosures of certain targets could be commercially sensitive. Hence, the ED allows for exemption from disclosures of paragraphs B67A(a) and B67A(bii), if disclosure of the information “can be expected to prejudice seriously the achievement of any of the acquirer’s acquisition-date key objectives for the business combination” (ED paragraph B67D). An entity is required to consider various factors and to explore various ways of disclosure (for example, by applying different levels of aggregation) before using the exemption. The reasons for not disclosing would need to be provided for each exemption. No exemption is permitted for disclosure of paragraph B67A(bi) on the actual performance of the SBC being reviewed.
We discuss the proposed amendments to disclosures required by SBCs and the exemptions provided to them under IFRS 3. Requiring more disclosures for only a subset of business combinations and providing exemptions from some disclosures will likely address the commercial sensitivity concerns preparers raise. The IASB is inviting feedback on these proposals. The comment period for the ED is open until 15 July 2024.
Koh Wei Chern is Associate Professor, Accountancy Programme, School of Business, Singapore University of Social Sciences, and Patricia Tan Mui Siang is Associate Professor of Accounting, Nanyang Business School, Nanyang Technological University.
1 Exposure Draft (ED): Basis for Conclusions on Business Combinations – Disclosures, Goodwill and Impairment: Proposed amendments to IFRS 3 and IAS 36, March 2024, paragraph BC18.
2 ED: Basis for Conclusions on Business Combinations – Disclosures, Goodwill and Impairment: Proposed amendments to IFRS 3 and IAS 36, March 2024, para BC19. Note that impairment losses may be due to either (a) overpayment on acquisition date, or (b) poor post-acquisition performance of the acquiree.
3 The proposed additional disclosure requirements for material business combinations are discussed in an article published in week 1 of June 2024.
4 We do not assess B67C(ai) as the term “operating profit or loss” is defined only recently in the newly issued IFRS 18 Presentation and Disclosure in Financial Statements. There is not enough information provided in M1’s announcement of 2018 financial results to derive the values.
5 Fair value of assets including goodwill = ($772.654 + $44.324 + $610.516 + $34.745 + $163.121 + $197.211 + $88.991 + $988.288) mil = $2,865.105 mil. (Keppel Corporation Annual Report 2019, p. 199)
6 Total assets = $12,721.611 mil + $13,884.716 mil = $26,606.327 mil (Keppel Corporation Annual Report 2018, p. 123)
7 The disclosure in Keppel’s 2019 annual report page 199 was, “The acquisition (of M1) will also complement the (Keppel) Group’s mission as a solutions provider for sustainable urbanisation, which includes connectivity. M1 can serve as a digital and connectivity platform to complement and augment the Group’s current suite of solutions.”
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