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.