Contact: Alison Davies
Marketing Director
(02) 9322 7731
Contact: Ian Thatcher
Head of Corporate Finance
(02) 9322 7640
A-IFRS will make capital raisings and M&A activity far more complicated for companies, their stakeholders and advisers, according to Deloitte Corporate Finance
Head of Deloitte Corporate Finance, Mr Ian Thatcher, says, "the new A-IFRS standards include a number of areas which will add complexity to the planning and communication processes which companies must address from a risk management point of view.
"Whilst valuation fundamentals will not change under A-IFRS, greater earnings volatility will make the earnings per share impact of acquisitions harder to forecast," Mr Thatcher says. "This may complicate M&A planning and decision-making and make it more difficult for companies to explain these impacts to stakeholders".
Earnings are likely to be affected by changes in the accounting treatment of items including:
- property revaluations
- defined benefit scheme valuations
- financial instruments
- share based payments
- impairment of intangible assets
- acquisition purchase price allocation
- embedded derivatives
- relocation costs
- restructuring costs
Mr Thatcher says that earnings of target companies affected by these changes will flow through to the acquirer’s own earnings, which may not be clearly understood by stakeholders. This will create the need for more comprehensive communication with stakeholders to adequately explain these impacts.
"Under the new business combinations standard, managing profitability in the context of a merged environment will be more difficult, with the general outcome expected to be lower profits in the period immediately following a business combination than would have been reported under A-GAAP. Companies considering acquisitions should be aware of the impact of these A-IFRS issues.
"The impact upon reported profits post merger or acquisition could influence the decision-making process of whether to acquire a target company and could move the focus away from underlying value drivers.
"M&A decision-makers need to give early consideration to how potential business combinations are assessed and monitored in light of these new standards and ensure transactions are optimally structured.
"Often the decision to make an acquisition involves a capital raising and this is another area that will become more complex under A-IFRS.
"Compliance with all the A-IFRS requirements in prospectuses and other capital raising documents will increase the complexity and cost of preparing these documents.
"Companies should allow for this in their planning and be prepared to clearly communicate the changes to their stakeholders. Managing stakeholder expectations is crucial in this regard.
"From a risk management perspective, companies need to re-examine and re-engineer their planning, decision-making and communication processes in light of expected capital raisings or M&A activity," Mr Thatcher says.
Further information
Deloitte has released a new guide to the business combinations requirements, focussing on the impacts for Australian entities of the transition to A-IFRS. Click here to download the report.
