Merger and Acquisition (M&A) activity is likely to grow as economic conditions improve. Companies have told the Financial Reporting Council (FRC) that M&A accounting is costly and difficult, yet investors say that the resulting information is not useful.

This FRC study of the quality of accounting and reporting on acquisitions suggests a possible reason for this is that the International Financial Reporting Standard (IFRS) on business combinations has been poorly applied by companies due to unfamiliarity with its requirements and the complexity of valuing intangible assets such as brands and customer relationships.

The study found that companies had provided insufficient or inconsistent information about material acquisitions in their audited accounts when compared to the rationale for these acquisitions and supporting explanations given in their business reviews.

Commenting on the study, Ian Wright, Director of Corporate Reporting at the FRC, said:

“A step change is needed in the quality of the information about M&A transactions given in annual reports and accounts. Improvements should result, in part, from new fair value guidance and more practical experience of estimating fair values for intangible assets.

In addition, recent amendments to IFRS 3 ‘Business combinations’ mean that, in future, more intangibles will be recognised for accounting purposes. This may help ensure a greater degree of consistency between what is disclosed about acquisitions in the accounts and the rationale for acquisitions set out in business reviews.”

The FRC intends to conduct further interviews with investors and other stakeholders in 18 months time to assess whether the information about acquisitions in annual reports and accounts has improved in quality and proved to be useful. In addition, the FRC will work with companies to better understand whether the costs of compliance and the complexity of performing the asset valuations are increasing or reducing.

The FRC will publish the results of this work and will provide feedback to the International Accounting Standards Board as part of its planned post implementation review of IFRS 3 (revised).

1. The Financial Reporting Council (FRC) is the UK’s independent regulator responsible for promoting confidence in corporate reporting and governance. Its functions are exercised principally by its operating bodies (the Accounting Standards Board, the Auditing Practices Board, the Board for Actuarial Standards, the Financial Reporting Review Panel, the Professional Oversight Board and the Accountancy and Actuarial Discipline Board and by the FRC Board. The Committee on Corporate Governance assists the Board in its work on Corporate Governance.
2. IFRS 3 “business combinations” was first applied by UK Listed companies in 2005 and by AIM companies in 2007. IFRS 3 (revised) applies to annual reporting periods beginning on or after 1 July 2009.
3. All Press enquiries should be addressed to Jon Hooper telephone: 020 7492 2344 or at j.hooper@frc.org.uk or to Ian Wright, Director of Corporate Reporting on 0207 492 2330.