In response to the International Accounting Standards Board (IASB) public consultation on IFRS 3: Business Combinations, the Association of Chartered Certified Accountants (ACCA) and the UK Financial Reporting Council (FRC) have called for an improvement of the international standard.

Issued on 1 January 2013, IFRS 3 establishes the disclosure requirements and the accounting treatment of mergers and acquisitions, which follows the so-called acquisition method, measuring acquired assets and liabilities at their fair value when the acquisition took place.

In January 2014 the IASB published a consultation seeking feedback on whether the standard provides useful information, as well as on its implementation challenges and associated compliance costs.

As part of its official response ACCA published a research report entitled Worldwide application of IFRS3, IAS38 and IAS36, related disclosures and determinants of non-compliance, covering IFRS3 and the two related standards: intangible assets and impairment of assets respectively.

Disclosure requirements

The report studied how a sample of 554 companies in 23 countries around the world applied IFRS 3, IAS 38 and IAS 36. The study concluded: "A broad international set of firms exhibit a high level of disparity of information and, apparently, of non-compliance with the mandatory disclosure requirements in IFRS 3, IAS 36 and IAS 38."

"It is difficult to determine whether this disparity is the result of firms’ not viewing their acquisitions as material, not understanding the mandated requirements and/or simply not following the standard to the letter," the report read.

Consequently, ACCA recommended the IASB to reconsider some fundamental aspects of IFRS 3. "The IASB should consider revisiting the disclosure requirements at a standards level. Such a review should reflect on the need for and provision of specific materiality thresholds to trigger the disclosure of particular information," the ACCA recommended.

The ACCA argued in favour of a "comply or explain" principle. In the absence of

disclosure, IFRS should require companies to provide an explicit statement explaining why disclosure is not merited. The ACCA said this "would reduce information asymmetry and improve comparability across companies".

Fair value

The UK FRC which also called for an improvement of IFRS 3 based its response on the findings of an outreach meeting attended by 40 prepares, users and auditors.

"A very common response from preparers was to highlight the difficulties in determining many of the fair value measurement requirements of the standard, from valuing intangible assets that are not separable from the business to previously held equity interests on gaining control," the UK FRC said in a statement.

Investors also understand these difficulties and are often sceptical of the reliability of the information provided, the UK FRC continued. "This scepticism often results in investors making significant adjustments to the information provided under IFRS 3."

Respondents to the UK FRC outreach meeting made three suggestions to improve IFRS 3. First, they suggested separating recognition and measurement of fewer intangible assets.

Second, they recommended reducing the complexity and the use of judgemental valuations in areas such as stepped acquisitions, the treatment of non-controlling interests and partial disposals.

And finally, they argued for a move to a model of disclosures that concentrates on high level objectives rather than specifying a list of detailed requirements.

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