The recent issue of revised accounting standards for business combinations under USGAAP (SFAS14R) and IFRS (IFRS3R) has been a significant step down the road to convergence. One of the most interesting changes has been the adoption by the Financial Accounting Standards Board, in the US, of the IFRS requirement for acquiring companies to disclose and explain the nature of the goodwill arising from the purchase price allocation. SFAS141R will require acquirers to disclose “a qualitative description of the factors that make up the goodwill recognized..”. It goes on to suggest that these might include expected synergies and intangible assets that do not qualify for separate recognition.
The new USGAAP requirement remains noticeably weaker than the IFRS3 equivalent which is for “a description of the factors that contributed to a cost that results in the recognition of goodwill –a description of each intangible asset that was not recognised separately from goodwill and an explanation of why the intangible asset’s fair value could not be measured reliably –or a description of the nature of the excess recognised in profit or loss”.
Given that goodwill is usually a significant part of the total purchase price and often the largest component, it is right that stakeholders should be told what it represents but two doubts remain as to whether IFRS3 and SFAS141R go far enough. Is a qualitative description, along the lines required in the revised standards, adequate for stakeholders’ needs? And secondly, what happens if companies fail even to comply with this simple disclosure requirement
