Tighter accounting rules proposed to scrutinise corporate takeover promises

By Thomson Reuters Mar 14, 2024 | 5:09 AM

By Huw Jones

LONDON (Reuters) – Listed companies will have to give investors more detailed information on whether takeover deals live up to their initial promise to spare markets unexpected “goodwill” write-downs, proposed revisions to international accounting rules showed on Thursday.

The International Accounting Standards Board (IASB), whose book-keeping norms are used in over 140 countries, said its proposals are out to public consultation. They would come into force around 2027.

Goodwill refers to the premium paid over the market value of net assets in a takeover.

The proposed changes broaden an existing accounting rule on business combinations, known as IFRS 3, to bring a greater level of detail and comparability, IASB Chair Andreas Barckow told Reuters.

“We want to put all companies that engage in acquisitions in the same spot, saying you have to provide a single note that lays out the rationale, why you’ve entered into this, how you’re going to assess the performance of that entity, which metrics do you use, and then as we progress year-after-year, compare your initial view to the effective results.” Barckow said.

The disclosures, made in annual reports, would be externally checked by auditors.

IASB rules are applied in the European Union, Britain, China, Japan, Canada, Australia and Singapore, but not in the United States, which has its own norms.

The Harvard Business Review has said 70% to 90% of mergers and acquisitions fail to live up to their promise due to a clash of cultures, overpaying or insufficient due diligence.

CEOs often emphasise synergies or savings from a proposed deal to win over shareholder approval, and Barckow said that under the proposed standard, companies could give qualitative or quantitative details about synergies.

There could be several consequences.

Remuneration of some CEOs is tied to the performance of a takeover deal, and disclosures showing promised benefits of a takeover failing to materialise could put related bonuses in doubt.

Furthermore, improved information could also help markets test the validity of “goodwill” amounts on a company’s balance sheet following an acquisition when it becomes clearer that promised synergies have not played out, Barckow said.

“It would give investors a good reason to ask management and say, well, could you please explain to me why I don’t see any impairment occurring,” Barckow said.

(Reporting by Huw Jones; Editing by Tomasz Janowski)