Introduction
The Financial Reporting Council (FRC) has just published findings from research, 'FRC Study, Accounting for Acquisitions', revealing that companies do not understand IFRS 3 and its reporting requirements when accounting for acquisitions.

• The FRC evaluated twenty acquisitions completed in 2008 and accounted for under IFRS 3 2004.
• It assessed the quality of the information provided in the business review and the disclosures about individual intangible assets and goodwill recorded in the audited accounts. It did not examine other aspects of acquisition accounting.
• The FRC intends to conduct further interviews with investors and other stakeholders in eighteen months time to assess whether the quality of information about acquisitions has improved and whether it is useful. It will also work with companies to better understand the challenges and the level of costs incurred. The FRC will provide this feedback to the IASB.

Summary of the results

• Overall the results were disappointing. In some cases it was difficult to identify the required accounts disclosure and in other cases the information provided in the business review and the audited accounts was either insufficient or inconsistent.
• The FRC considers that there is a need for improved compliance with the disclosure requirements of IFRS 3.
• The FRC hopes that this short study will be a catalyst for Boards of directors, audit committees, accounting teams and auditors to consider the accounting for acquisitions more carefully.

Review of compliance by area

• Nearly all companies explained well the rationale for their material acquisitions in the business review. The quality could not be assessed without entering into correspondence with management but the explanations appeared logical and reasonable.
• Companies need to better link the explanations of the rationale for their material acquisitions set out in their business review with the information provided in the audited accounts. For seven companies the assessment of the link could not be made as there was insufficient information in the audited accounts. Of the other thirteen, only four were seen as consistent, four as having significant inconsistencies and five as inconsistent.
• Two of the companies in the sample recorded no intangible assets other than goodwill, although the explanation for the transaction in their business reviews highlighted several intangible benefits expected from the acquisitions.
• Seven of the companies had aggregated intangibles arising from a number of material transactions during the year thus failing to comply with IFRS 3 2004.
• The results suggest that companies find it difficult to establish meaningful groups of intangible assets to aggregate as classes in the audited accounts and that greater care is needed to ensure compliance with the disclosure requirements in a meaningful manner.
• Greater care is required to ensure that adequate disclosure is made of the intangible assets arising from individually material acquisitions and to ensure that material assets with significantly different economic characteristics are not aggregated.
• Six of the companies failed to provide an explanation of what goodwill represents. Of the remaining fourteen, none of the descriptions of the goodwill arising were genuinely informative.

Impact of IFRS 3 (revised) and other new guidance

• IFRS 3 (2004) had a requirement that the fair value of an intangible asset had to be capable of reliable measurement if it was to be recognised. IFRS 3 (revised) concludes that all intangible assets should be capable of reliable measurement when acquired as part of a business combination and, hence, there is no longer any test of reliable measurement that is required to be passed. This should lead to a step change in the recording of intangible assets in future audited accounts.
• The study flags other new guidance as being the IASB exposure draft issued on ‘Fair Value Measurement’ in May 2009 which is expected to be finalised during 2010 and the IVSC exposure draft on the ‘Determination of the Fair Value of Intangible Assets for IFR S Reporting Purposes’ due to finalized in early 2010.