Why M&A financial information for investors needs to be improved

Proposals are being considered to provide investors with more relevant and useful information related to acquisitions.

Access to timely, relevant information about acquisitions is vital for investors, but a common criticism is that disclosures do not provide sufficient information to understand post-acquisition performance.

This is a crucial issue to address given the number of business acquisitions taking place each year and the amount of goodwill involved globally – amounting to many trillions of dollars.

The current accounting rules – under IFRS 3 Business Combinations and IAS 36 Impairment of Assets – require companies to use the impairment of goodwill model. This involves undertaking an annual impairment test to assess how an acquired business is performing.

Critics of this approach point out that problems are sometimes recognized late, while the impairment test can be complex and costly.

Before the introduction of IFRS 3, the requirement was for companies to adopt the amortization of goodwill model. This also has critics – based on suggestions that the amortization period is arbitrary – but there have been calls for the amortization of goodwill to be reintroduced.

In March 2020, the International Accounting Standards Board (IASB) published its preliminary views on these issues in a discussion paper Business combinations: disclosures, goodwill and impairment. This investigates whether entities can, at an acceptable cost, provide investors with more relevant and useful information about businesses that have been acquired, and about the subsequent performance of the entities making the acquisitions.