Proposals to boost M&A disclosures will offer investors valuable insights

The comment period for the International Accounting Standards Board (IASB) exposure draft IASB/ED/2024/1 aimed at improving the disclosures organisations provide on their business combinations (mergers and acquisitions) and the impairment of goodwill will end on July 15, 2024.

The proposals are in response to the post-implementation review of the IFRS 3 Business Combinations standard. The feedback from this process identified a few challenges faced by users of the financial statements.

These include insufficient information on how acquired businesses have performed compared to the anticipated performance at the time of acquisition. It also highlighted a worrying trend in which goodwill impairment is hardly recognised timely, as impairment losses are often overdue when recognised. In addition, stakeholders noted the complexity and steep costs of conducting an impairment test.

Therefore, the IASB addressed these concerns with suggested improvements to existing standards, IFRS 3—Business Combinations and IAS 36—Impairment of Assets. This proposal to enhance disclosures on acquisitions is welcome as more organisations include M&As in their growth strategy. It will offer investors valuable insight for decision-making.

Some of the targeted improvements on disclosures of acquisitions include required disclosures for strategic buyouts that meet a specific threshold with information on acquisition date objectives and targets for the acquired business in the year of acquisition and disclosures in subsequent years on whether these initial objectives and targets are being met.

The proposed changes to the impairment provisions include clarifications on allocating goodwill to cash-generating units to reduce ‘shielding’ (delayed recognition of impairment losses due to impairment assessment at the wrong level).

Other amendments include changes to the calculation of value in use. These improvements will provide investors with the necessary information on acquisitions and post-acquisition performance and hold organisations accountable for resources spent on these acquisitions.

Organisations will have to be deliberate when executing acquisitions that are considered strategic, as the expected benefits in performance and synergies of the acquired business will have to be monitored and reported on in subsequent periods.

The exposure draft includes several other proposed amendments and does not specify an effective date for the amendments. However, it proposes that entities apply the amendments prospectively with early application permitted.

Akinyemi Awodumila is a Partner at Deloitte East Africa. He is an author who writes and speaks widely on corporate reporting topics.