Accounting for business combinations in IFRS: rule changes ahead!

The proposed amendments to IFRS 3 and IAS 36 in ED/2024/1 are summarized as follows:

Overall, the proposed amendments to the disclosures in IFRS 3 are likely to lead to new practical challenges. With regard to the analysis and disaggregation of synergy effects, for example, these may result in new, complex measurement issues that not all companies will be able to deal with without additional internal or external resources. The implementation of new disclosures on the performance of business combinations also places high demands on acquisition controlling and poses further procedural challenges, for example with regard to the integration of the corresponding data analyses and data preparation into the prepara-tion process of the consolidated financial statements. All of this is likely to lead to addi-tional direct costs for the companies concerned. Indirect costs could also result from the disclosure of potentially commercial sensitive information. Although the planned specifica-tions of existing requirements should be helpful in terms of clarifying and facilitating appli-cation, the proposed deletions of individual requirements essentially serve to eliminate existing redundancies and do not lead to a real reduction in disclosures. The extent to which limiting certain disclosures to "strategic acquisitions" that are significant either in terms of volume or strategic relevance can reduce the burden on companies caused by the proposals to an acceptable level remains to be seen in the case of implementation. This applies analogously to the de facto usability of the planned restrictive exemptions, which require justification, in practice, which could be countered by market pressure, for example.

The proposed amendments to IAS 36 are the result of ongoing criticism of the current model for the subsequent measurement of goodwill, the impairment-only approach. The IASB is reaffirming this approach, citing a lack of compelling case for a change. In particular, the complexity of the goodwill impairment test and its perceived ineffectiveness, which is expressed in doubts about the amount and timeliness of goodwill impairments, are criticized.

The IASB attributes the criticized ineffectiveness to compensation effects ("shielding") on the one hand and overoptimistic management assumptions on the other. Although the IASB sees the latter primarily in the responsibility of the various players in corporate governance and not least the auditors, the proposed amendments to IAS 36 are aimed at both aspects. The changes to the requirements for the allocation of goodwill to CGUs and the associated clarification of the bottom-up approach could lead to lower test levels than previously. The disclosure of the allocation of goodwill-carrying CGUs to reportable segments should generally serve to link the assumptions underlying the impairment test with segment information. This could lead to a transparency-related reduction in incentives to exercise existing management discretion. Similar transparency-related effects could also result from interactions between the goodwill impairment test and corresponding disclosures as well as the proposed amendments to the disclosures in accordance with IFRS 3, for example with regard to the allocation of goodwill to CGUs on the basis of synergy effects.

While the proposals for taking tax into account in the impairment test adapt the rules to established practice, the proposed elimination of existing cash flow restrictions opens up potential for a stronger integration of the subsequent measurement of goodwill with internal controlling and eliminates practical demarcation issues in the context of deriving the valuation-relevant budget. At the same time, this could create new leeway for discretion, which in turn could possibly run counter to the intention of increasing effectiveness. Furthermore, the proposed amendments are likely to reduce the conceptual differences be-tween VIU and fair value less costs of disposal (FVLCOD) and further blur the two value concepts of IAS 36. This is also likely to make the practical distinction more challenging.