Accounting for M&A has changed again. In January 2008, the International Accounting Standards Board (IASB) issued revised standards on business combinations and consolidated finan- cial statements. These new standards are applied prospectively from July 1, 2009, but earlier application is permitted. The Financial Accounting Standards Board (FASB), IASBs US counterpart, has issued almost identical standards on business combina- tions and consolidated financial statements. In doing so, substantial convergence has been achieved between IFRSs and US GAAP on these topics.
Management in charge of planning or overseeing acquisition deals will want to understand the impact of the standards in areas such as acquisition deal structures, financial reporting and communications with stakeholders and analysts.
What are the main impacts The revised standards bring a further iteration of the acquisition accounting model, require greater use of fair value through the income statement and cement the entity concept of the reporting entity. One of the key challenges for the entities will be explaining a different and more volatile income statement to the users of financial statements. The standards will most likely have the following impacts:
* Affect negotiations and acquisition structures in an effort to mitigate unwarranted income statement impact
* Potentially impact the scope and extent of due diligence and data gathering exercises prior to acquisitions
* Require new policies and procedures to monitor and determine the changes in the fair value of some assets and liabilities
Further, the revision of the standards will also have certain implications on systems and controls and the level of expertise required within a company. Some of these are considered below:
* The standard requires any existing share in entities acquired to be re-measured to fair value; any resultant gain plus any previous fair value changes taken to equity are recorded in income. This will require detailed tracking on an investment-by-investment basis, including details of carrying amount and subsequent re-measurements.
* The standard mentions the circumstances in which share-based payments affect goodwill or post-acquisition income. Entities will need to have systems to enable timely calculations of the value of replacement awards and those that they are replacing to ensure that the opening balance sheet and post-acquisition charges are appro-priately accounted.
* All the acquirees hedge relationships are required to be re-designated and tested for effectiveness.
* Contingent consideration is fair valued at acquisition and, unless it is equity, is subsequently re-measured through income statement rather than the old practice of re-measuring through goodwill. It is likely to increase the focus and attention on the opening fair value calculation and subsequent re-measurements.
* Post-acquisition disclosures include annualised revenue and profit as if deals had been completed at the start of the financial year. Even for business combinations completed after the end of the reporting period but before the financial statements are issued, many disclosures are required unless disclosure is impracticable and the reasons why it is impracticable are disclosed. It is not likely to be easy to collect the data for disclosure requirements in a short span of time. There are conceptual differences between the Indian AS-14 Accounting for Amalgamations and IFRS 3 Business Combinations. Indian GAAP permits two methods for accountingpooling-of-interests method and acquisition method.
Goodwill under IFRS is not amortised but reviewed for impairment annually, and when impairment indicators exists, at the cash generating unit (CGU) level whereas under AS -14 goodwill amortised over its useful life not exceeding five years and is reviewed for impairment at the CGU level whenever there is an impairment trigger.
A onetime impairment charge will bring a volatility to the income statement whereas amortisation of goodwill over its useful life will result in equal spread of charge to the income statement. These and many other differences between the existing Indian GAAP and IFRS are expected to be ironed out in the Convergence with IFRS in India project of the Institute of Chartered Accountants of India.
Potential business combinations will require additional planning and resources. For Indian corporates, a business combination as accounted for under new IFRS 3 may result in the financial statements looking very different from the current state of play under the existing Indian AS -14.
(The writer works with a leading international bank and is the author of a book Financial Instruments Standards)