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IASB publishes revised merger rules after FASB bridges the GAAP with its international counterpart.
Marie Leone, CFO.com | US
January 10, 2008
The accounting world got a little bit smaller on Thursday when the International Accounting Standards Board published revised rules on mergers and acquisitions. The rules, which the IASB said "reinforce" rather than change existing standards, will ensure that transactions are accounted for the same way regardless of whether a company uses International Financial Reporting Standards or U.S. generally accepted accounting principles.
The newly minted mandates — IFRS 3, Business Combinations, and IAS 27, Consolidated and Separate Financial Statements — are part of an ongoing joint effort between IASB and its U.S. counterpart, the Financial Accounting Standards Board, to converge global standards. In December FASB issued its revised M&A rules, which essentially brought U.S. standards in line with most provisions of IFRS.
"The U.S. made big moves" to catch up with IFRS 3, IASB chairman David Tweedie told CFO.com. "The [FASB] changes were more fundamental than the changes we made." As a result, the IFRS and FASB business-combination rules "will be substantially the same," he said.
The new IASB rules close the disparity gap even further by adopting joint-project concepts that simplify the measurement of goodwill in a step acquisition, require that acquisition-related fees are expensed, and recognize contingent considerations on the acquisition date.
The FASB rules, FAS 141(R), Business Combinations, and FAS 160, Noncontrolling Interests in Consolidated Financial Statements, were the first accounting rules to go global. And it is little wonder that rules related to M&A transactions were tapped for that honor. According to the IASB, there were more than 13,000 M&A transactions worldwide in 2006, and just under half of them — with an aggregate value of $1.5 trillion — were completed by companies using U.S. GAAP. Most of the remaining deals, valued at $1.82 trillion, were completed by companies that apply IFRS, or are moving toward the international standards.
What's more, over the last decade, the average annual value of corporate acquisitions worldwide has been 8 to 10 percent of the total market capitalization of listed securities, IASB reported. Further, there has been a five-fold increase in the volume of transatlantic deals between 2003 and 2006.
With more deals on the horizon, it was important for standard-setters to set M&A rules as a top priority. "Investors and their advisers have a difficult enough job assessing how the activities of the acquirer and its acquired business will combine," said Tweedie in a statement. "But comparing financial statements is more difficult when acquirers are accounting for acquisitions in different ways."
To that end, IFRS and FASB came together on several rules governing M&A, including step acquisitions. A step, or partial, acquisition occurs when an company that holds stock in a target company acquires additional shares to take control of the target. Similar to FASB's new business-combination rules, IFRS 3 does not require companies to fair-value every asset and liability at each stage of a step acquisition to calculate goodwill. Instead, goodwill is now measured as the difference (at acquisition date) between the combined value of the existing holding in the target and the value of shares transferred, and net assets acquired.
Similarly, both FASB and IFRS no longer allow acquisition-related costs — such as fees paid to investment banks, attorneys, and valuation experts — to be included in goodwill. Those costs must be accounted for as expenses, separate from the acquisition. Further, both sets of standards mandate that acquirers must recognize contingent liabilities at the acquisition date, and that changes in the value of the liabilities after the acquisition date are recognized in accordance with existing rules governing contingent considerations, such as FAS 5. (A contingent liability is a current obligation that results from a future event, such as a lawsuit settlement.)
IAS 27, as well as FAS 160, refer to minority interests, and require that a parent company's ownership interest in a subsidiary that does not result in a loss of control must be accounted for as equity. In the past, IAS 27 allowed for six different methods of booking the stake.
Differences in the rules do remain, however. For instance, IFRS 3 allows an acquiring company to measure minority interest in a target company either at fair value or at its proportionate share of the target's identifiable net assets. Meanwhile, FAS 141(R) requires minority interests to be measured at fair value.
Other discrepancies are caused by "legacy differences," says Tweedie, including the boards' different definitions of control as it pertains to business combinations. In practice, that means that a transaction defined under IFRS 3 as a business combination may not be considered one under FAS 141(R). Currently, a project to define control is on the IASB agenda, and the board expects to issue a discussion paper on the topic sometime this year.
Another legacy difference that will be discussed by IASB this year is the definition of fair value. IFRS 3 bases fair value on the exchange value of an asset or liability, while U.S. GAAP defines fair value as an exit value. In addition, there is a split between the two boards regarding the threshold for recognizing contingent liabilities. IFRS 3 requires recognition of a liability if it can be reliably measured, while FAS 141(R) requires management to be more than 50 percent sure that the contingency is likely.
IFRS 3 and IAS 27 take effect on July 1, 2009, although companies are allowed to adopt them earlier. The standards will be subject to a post-implementation review two years after they become mandatory, but reviews will be limited to "contentious" issues identified during the development of the rule and complaints related to unexpected costs or implementation problems.