June 2015

Report and Feedback Statement

Post-implementation Review of
IFRS 3 Business Combinations
Post-implementation Review:
IFRS 3 Business Combinations

Contents
Introduction and Overview 4
Summary of our findings and next steps 5
Background to IFRS 3 11
Consultation and evidence gathered 13
Feedback Statement on the implementation of IFRS 3 17
Respondents to the Request for Information 28
Summary of academic research and related literature 31
Appendix: Time line for the Post-implementation Review of IFRS 3 36

Post-implementation Review: IFRS 3 Business Combinations | June 2015 | 3

Introduction and Overview

Introduction The scope of our PIR covered the On the basis of the evidence
whole Business Combinations received through the PIR, we
This Report and Feedback
project, which resulted in present, in this Report and
Statement describes our
IFRS 3 (2004), IFRS 3 (2008) and Feedback Statement, our findings
Post‑implementation Review (PIR)
any resulting consequential and set out possible responses
of IFRS 3 Business Combinations.
amendments to IAS 27, IAS 36 to these findings. Our responses
It sets out the work that we—
and IAS 38 being issued. include further research of
the International Accounting
specific areas identified by
Standards Board—completed, The areas on which we focused
the PIR.
the findings of our review and our PIR were:
our preliminary views on the (a) the definition of a business;
follow‑up work needed.
(b) fair value measurement in a
Overview of our PIR business combination;
process (c) the separate recognition
Our PIR was conducted in of intangible assets from
two phases. The first involved goodwill and the accounting
an initial identification and for negative goodwill;
assessment of the matters to be (d) impairment of goodwill and
examined, which were then the indefinite-life intangible
subject of a public consultation assets;
in the form of a Request for
(e) accounting for non-controlling
Information (RFI). In the second
interests;
phase, we considered the
comments received from the (f) accounting for step
RFI along with the information acquisitions and loss of
that we had gathered through control; and
other consultative activities and (g) disclosures.
a review of relevant academic
studies.

4 | Post-implementation Review: IFRS 3 Business Combinations | June 2015

Summary of our findings
and next steps

Summary of our findings (b) separate recognition of Many investors do not support
intangible assets: some the current requirements on
about IFRS 3
investors support the current step acquisitions and loss of
There are three strands to the practice, because it provides control and are asking for
information we gathered in the an insight on why an entity additional information about the
PIR; the results of the review of purchased another entity. subsequent performance of the
academic literature and other Other investors do not acquired business.
reports, the feedback received support the current practice
from investors and other users Many preparers, auditors,
of identifying additional
of financial statements, and the regulators and others think that
intangible assets (for example,
feedback received from preparers, there are some areas in which
brands, customer relationships,
auditors and regulators. implementation challenges have
etc) separately from goodwill,
arisen and for which further
Investors have mixed views on because it is highly subjective.
clarification would be useful.
the following topics: They think that these
These areas are the following.
intangible assets should be
(a) subsequent accounting for recognised only if there is a (a) the definition of a business:
goodwill: some investors market for them. many participants think
supported the current that the definition of a
requirements, because (c) measurement of
business is too broad and
they think that the non- non‑controlling interests
that more guidance is needed
amortisation of goodwill and (NCIs): some investors think
to determine whether a
the absence of impairment that NCIs should be measured
transaction is a business
charges help them to verify using the proportionate
combination or an asset
whether an acquisition method, while other investors
acquisition, especially when
is working as expected. prefer the fair value method,
the processes acquired are not
Other investors support the and others did not have a
significant or when the entity
amortisation of goodwill, preference.
acquired does not generate
because they think that (d) subsequent accounting for revenues.
goodwill acquired in a contingent consideration:
business combination is (b) fair value measurement:
some investors think that
supported and replaced by many participants think that
the current requirements
internally‑generated goodwill contingent consideration,
are counterintuitive, because
over time. contingent liabilities and
the acquirer recognises an
intangible assets, such as
expense if the acquiree is
brand names and customer
performing better than
relationships, are difficult to
expected. Other investors
measure at fair value.
support the current
requirements, because they
help the investor to know how
the acquiree is performing.

Post-implementation Review: IFRS 3 Business Combinations | June 2015 | 5

Summary of our findings
and next steps continued...

(c) impairment test for goodwill: Many participants in the review, We think that this review of
many participants think across all types of participants, academic research provides
that the impairment test is think that the IASB should try evidence that generally supports
complex, time‑consuming to work together with the US the current requirements,
and expensive and involves national standard-setter, the particularly in relation to the
significant judgements, Financial Accounting Standards usefulness of reported goodwill,
especially in determining the Board (FASB), if future changes other intangible assets and
assumptions used in the value are considered, in order to goodwill impairment.
in use (VIU) calculation and reduce the risk of divergence As expected, some studies
in allocating goodwill to the in the accounting for business showed the impact of managerial
cash-generating units (CGUs). combinations. Many noted that incentives on impairment
(d) contingent payments to the FASB has recently decided to recognition. Nevertheless,
selling shareholders who reconsider the post-acquisition some authors pointed to an
become employees: many accounting for goodwill and they association between impairment
participants have asked the would support a similar effort by and economic factors, market
IASB to revisit the accounting the IASB. indicators and firm earnings,
for these payments. In their and concluded that impairment
Our review of academic research
view, the fact that contingent recognition was conveying
considered evidence from
payments are forfeited if relevant information.
studies on the value relevance of
employment terminates goodwill, other intangible assets Further details about these
should not be a conclusive and impairment. It also included studies are included in the
rule, but should instead be studies investigating application section Summary of academic
one of the indicators that issues and compliance with research and related literature.
is considered in assessing IFRS 3 and IAS 36 Impairment
whether such contingent of Assets. The evidence for this
consideration should review was drawn from publicly
be treated as part of the available published papers,
consideration transferred or as located via Google Scholar and
a post-acquisition expense. other databases of academic
Some preparers expressed studies. Evidence from working
concerns regarding the level of papers that are not yet published
effort required and the costs was generally not included,
incurred in order to meet the because the results of these
requirements in IFRS 3. They studies may change prior
think that these costs may, in at to publication.
least some cases, have exceeded
the benefits to investors.

6 | Post-implementation Review: IFRS 3 Business Combinations | June 2015

Our assessment of (a) have investors expressed
concerns about the usefulness
the significance of the
of the information provided
PIR findings and the by the current requirements?
next steps (b) have preparers, auditors or
Taking into account all of the regulators expressed concerns
evidence collected, we have about the application of the
identified some areas of focus current requirements?
that we think warrant further
(c) is the area of focus included in
investigation. In the following
the issues recommended by the
table we have classified these
Accounting Standards Advisory
areas of focus on the basis of our
Forum for further work?
assessment of their significance
and we have identified the (d) is the area of focus included
possible next steps. We have in the Financial Accounting
assessed their significance using Foundation’s Report on PIR of
the following criteria: Statement 141(R) or in the FASB
agenda?

Post-implementation Review: IFRS 3 Business Combinations | June 2015 | 7

Summary of our findings
and next steps continued...

Area of focus Assessed Possible next steps

significance

Effectiveness and complexity High Research will be undertaken. We could review IAS 36
of testing goodwill for and we could consider improvements to the impairment
impairment. model; particularly whether there is scope for
simplification.
Subsequent accounting for High Research will be undertaken. We could consider
goodwill (ie impairment-only whether and how the costs of accounting for goodwill
approach compared with an can be reduced without losing the information that
amortisation and impairment is currently being provided by the impairment-only
approach). approach, and which our review of academic studies
suggested was value-relevant. This could include
considering:
(a) how improvements to the impairment-only approach
(in particular to the impairment test) could address
some of the concerns that have been raised; and
(b) whether a variation on an amortisation and
impairment model could be developed with an
amortisation method that does not undermine
the information currently provided by the
impairment‑only approach.
Challenges in applying the Medium/ Research will be undertaken. We could try to clarify
definition of a business. high the definition of a business and the related application
guidance.
We could also consider whether a market-participant
approach is preferable to an entity-specific approach
when making this assessment.
We could consider whether and how the accounting
differences between a business combination and an asset
purchase could be reduced, thereby relieving some of
the pressure on the definition of a business (for example,
in accounting for deferred taxes).
continued...

8 | Post-implementation Review: IFRS 3 Business Combinations | June 2015

...continued

Area of focus Assessed Possible next steps

significance

Identification and fair value Medium/ Research will be undertaken. We could consider
measurement of intangible high whether particular intangible assets (for example,
assets such as customer customer relationships) should be subsumed into
relationships and brand names. goodwill.
We could also consider what additional guidance could
be given to assist in the identification of customer
relationship intangible assets and their associated
measurement.
Information about the Medium This topic is related to the subsequent accounting for
subsequent performance of goodwill.
the acquiree.
Depending on the feedback received from the 2015
Agenda Consultation, we could investigate whether
it would be practical to prepare this information, and
for how many reporting periods post-acquisition this
information would be cost-beneficial.
Usefulness of the subsequent Medium Depending on the feedback received from the 2015
accounting for contingent Agenda Consultation, we could start working on this
consideration. issue. Some participants suggested investigating
whether, in some circumstances, changes in the fair
value of contingent consideration should be recognised
by adjusting the carrying value of the assets acquired.
Fair value measurement of Medium Depending on the feedback received from the 2015
contingent consideration and Agenda Consultation, we could start working on this
contingent liabilities. issue. Some participants suggested investigating
whether the accounting for contingent consideration
and contingent liabilities could be reconsidered in order
to enhance relevance and faithful representation.
Usefulness of the accounting Medium Depending on the feedback received from the 2015
for step acquisitions and loss Agenda Consultation, we could start working on this
of control. issue. Some participants suggested investigating
whether remeasurement gains resulting from step
acquisitions and loss of control should be recognised in
other comprehensive income (OCI).
continued...

Post-implementation Review: IFRS 3 Business Combinations | June 2015 | 9

Summary of our findings
and next steps continued...
...continued

Area of focus Assessed Possible next steps

significance

Measurement of NCIs. Low Depending on the feedback received from the 2015
Agenda Consultation, we could start working on this
issue. Some participants suggested investigating
whether the measurement of NCIs should be a one-time
accounting policy choice for all business combinations
(ie it should not be a transaction‑by‑transaction choice).
Pro-forma prior year Low Depending on the feedback received from the 2015
comparative information. Agenda Consultation, we could start working on this
issue. Some participants suggested investigating
whether it would be practical to prepare this
information.
Usefulness of the recognition of Low Depending on the feedback received from the
negative goodwill in profit 2015 Agenda Consultation, we could start working
or loss. on this issue. Some participants suggested investigating
whether negative goodwill should be recognised in OCI.
Accounting for contingent Low Depending on the feedback received from the 2015
payments to selling Agenda Consultation, we could reconsider the guidance
shareholders who become for contingent payments to selling shareholders in
employees. circumstances in which those selling shareholders
become, or continue as, employees. Some participants
think that this guidance should be one of the indicators
to consider in assessing whether such payments should
be treated as consideration or as a post-acquisition
expense.

In February 2015, we decided to (d) identification and fair value Depending on the feedback
add to our research agenda the measurement of intangible received from the 2015 Agenda
following areas of focus: assets such as customer Consultation, the IASB could
relationships and brand start working on the areas
(a) effectiveness and complexity
names. of focus assessed as being of
of testing goodwill for
medium or lower significance.
impairment; We will consider how to develop
these projects. The FASB is
(b) subsequent accounting for
also working on these topics,
goodwill (ie impairment-only
so we will assess how we might
approach versus amortisation
co‑operate with the FASB on these
and impairment approach);
projects. Additionally, other
(c) challenges in applying the national standard-setters have
definition of a business; and an interest in these areas, which
could give us the opportunity to
pool resources.
10 | Post-implementation Review: IFRS 3 Business Combinations | June 2015
Background to IFRS 3

Project history and The project we started in We worked with the FASB on the
2001 reviewed IAS 22 Business second phase. We concluded
project objective
Combinations (revised in 1998) that sharing our resources and
The Business Combinations with the objective of improving debating the issues together was
project was part of our initial the quality of, and seeking the best way for each to improve
agenda when the IASB was international convergence on, the application of the acquisition
formed in 2001. Accounting the accounting for business method and to eliminate as many
for business combinations had combinations. We decided differences between IFRS 3 (2004)
been identified previously as an to address the accounting and SFAS 141 as possible. The
area of significant divergence for business combinations in changes that we had incorporated
within and across jurisdictions. two phases. The first phase into IFRS 3 in 2004 moved IFRS
Extensive work on the topic had was short-term, addressing ahead of US GAAP, so this phase
been undertaken in the previous the pooling of interests and also provided the FASB with the
decade by national standard- goodwill impairment and opportunity to catch up with the
setters and by our predecessor, amortisation in a replacement decisions already incorporated
the International Accounting for IAS 22. The second phase into IFRS. The second phase
Standards Committee. took a broader look at business took a broader look at business
The FASB was also conducting a combinations accounting. We combinations accounting and,
project on business combinations. started the two phases at about therefore, addressed aspects
In June 2001, the FASB concluded the same time, which meant of merger and acquisition
its first phase of that project that they ran in parallel until activity, for which there was no
by issuing SFAS 141 Business the first phase was completed. guidance. We also examined the
Combinations and SFAS 142 Goodwill Before the first phase had been requirements that we had carried
and Other Intangible Assets, which completed, we had already forward from IAS 22 into IFRS 3
removed the merging (or pooling) finished our analysis of three (2004) without reconsideration.
of interest methods and replaced areas: the initial measurement of The continuation of our work in
the amortisation of goodwill with identifiable assets acquired and the second phase of the project
a goodwill impairment test. We liabilities assumed in a business gave both Boards the opportunity
received numerous requests from combination; the recognition to address the areas of IFRS 3
Europe and Australia to make of liabilities for terminating (2004) and IAS 27 Consolidated
similar changes to the accounting or reducing the activities of an and Separate Financial Statements,1
for goodwill. acquiree; and the accounting for as revised in 2003, (and the
bargain purchases. We decided US equivalents), which we knew
to incorporate those decisions required additional work.
into the first phase of the new
Standard, IFRS 3, which was
issued in March 2004, bringing
the first phase of the project to a
conclusion.

1 I AS 27 was amended in 2011 as a result of the IASB’s project on consolidation. IFRS 10 Consolidated Financial Statements, issued in 2011, addresses
the principle of control and the requirements relating to the preparation of consolidated financial statements. As a result, the amendments
made to IAS 27 (2008) by the Business Combinations project are included in IFRS 10. IAS 27 (2011) now contains requirements relating only to
separate financial statements.
Post-implementation Review: IFRS 3 Business Combinations | June 2015 | 11
Background to IFRS 3 continued...

We issued a revised version of (d) indefinite-life intangible (d) any investment the parent
IFRS 3 and an amended version of assets and goodwill are no has in the former subsidiary
IAS 27 in 2008. The FASB issued longer amortised but are after control is lost should
SFAS 141 (revised 2007) Business instead tested annually for be measured at fair value at
Combinations and amended impairment. the date that control is lost,
SFAS 160 Noncontrolling Interests in and any resulting gain or loss
(e) negative goodwill is
Consolidated Financial Statements. should be recognised in profit
recognised by the acquirer in
or loss;
The main standard-setting profit or loss.
decisions made by the IASB (e) measurement of goodwill
These decisions were included in
during the first phase of the in a step acquisition was
IFRS 3 (2004) and in the revised
Business Combinations simplified, acquisitions
versions of IAS 36 and IAS 38
project were: or disposals of NCIs were
Intangible Assets.
required to be accounted for
(a) the acquisition method is the
The main decisions made by the as equity transactions and it
only method of accounting for
IASB during the second phase was required to attribute the
business combinations.
of the Business Combinations total comprehensive income
(b) liabilities for terminating project were: applicable to NCIs without
or reducing activities of the any limitations, which could
(a) business combinations
acquiree and contingent lead to NCIs having a deficit
involving only mutual entities
liabilities are recognised only balance; and
and business combinations
when they are liabilities of
achieved by contract alone are (f) aspects for which there was no
the acquiree at the acquisition
included within the scope of guidance were addressed, such
date in accordance with IAS 37
IFRS 3; as accounting for reacquired
Provisions, Contingent Liabilities
rights, indemnification assets,
and Contingent Assets (they were (b) acquisition-related costs are
leases and insurance contracts
previously accrued as part of expenses and contingent
and contingent liabilities.
the cost of acquisition). consideration is recognised
at the acquisition date at its These decisions were included
(c) separate recognition of
fair value, with changes in in IFRS 3 (2008) and IAS 27 (as
intangible assets from
the fair value of the liability amended in 2008).
goodwill. In order to
recognised in accordance
achieve this, the probability
with other Standards (those
recognition criterion for
changes would usually be
intangible assets acquired in
recognised in profit or loss);
business combinations was
deemed to always be satisfied. (c) NCIs are measured at either
Fair value can normally be fair value or the present
measured with sufficient ownership instruments’
reliability for intangible assets proportionate share in the
to be recognised separately recognised amounts of the
from goodwill. acquiree’s net identifiable
assets;

12 | Post-implementation Review: IFRS 3 Business Combinations | June 2015

Consultation and evidence
gathered

Initial assessment The initial assessment also Information-gathering

helped us identify the seven areas
The first phase of the PIR of
on which to focus the review.
phase
IFRS 3 consisted of an initial
These were: In 2014, the PIR process entered
assessment of the issues that
the information-gathering phase.
arose on the implementation (a) the definition of a business;
The PIR process is designed so
of IFRS 3. This assessment was (b) fair value measurement in a that we can gather evidence from
conducted in 2013 through a business combination; which we can draw conclusions
review of available literature
(c) the separate recognition about the effect of implementing
and educational materials and
of intangible assets from IFRS 3. There were three
by consultation in 60 outreach
goodwill and the accounting principal sources of this evidence
meetings.2 This allowed us
for negative goodwill; for the PIR of IFRS 3:
to compile a list of issues for
subsequent investigation about (d) impairment of goodwill and (a) public consultation through
the effect of implementing IFRS 3. indefinite-life intangible an RFI;
assets; (b) outreach activities; and
Scope of the PIR
(e) accounting for NCIs; (c) a review of academic research.3
The results of the initial
assessment allowed us to (f) accounting for step
acquisitions and loss of
Public consultation
determine the scope of the
PIR. We decided that the PIR control; and through an RFI
should cover both phases of the (g) disclosures. In January 2014, we published
Business Combinations project. for public comment an RFI, with
This included the requirements comments due by 30 May 2014.
introduced by the issue of IFRS 3
We received 93 comment letters,
in 2004, as well as those that
all of which are available on the
were part of the 2008 revisions.
IASB website.
We also decided that the review
should include the consequential
amendments made to IAS 27,
IAS 36 and IAS 38 by the Business
Combinations project.

2 F or further details, see Agenda Papers 13A and 13B for the November 2013 IASB meeting.
3 For further details, see Agenda Papers 12F and 12G for the September 2014 IASB meeting.

Post-implementation Review: IFRS 3 Business Combinations | June 2015 | 13

Consultation and evidence
gathered continued...

Respondents to the RFI

A diverse range of types of interested parties responded to the RFI:

Type of respondent Number of Percentage of

respondents respondents
Academia 4 4%
Accounting firms and accountancy bodies 21 23%
Investors and investors representative bodies 4 4%
Preparers and industry organisations 38 41%
Regulators and government agencies 6 6%
Standard-setters 14 15%
Other 6 7%
Total 93 100%
All geographical regions were represented in the responses:

Geographical region Number of Percentage of

respondents respondents
Africa 3 3%
America 14 15%
Asia, Oceania and Middle East 21 23%
Europe 45 48%
International 7 8%
Not specified 3 3%
Total 93 100%
We discussed a summary of the comments received in September 2014.

14 | Post-implementation Review: IFRS 3 Business Combinations | June 2015

Outreach activities
In this information‑gathering phase, IASB members and staff took part in 30 outreach events in a range of
formats, including discussion forums, conferences, webcasts and individual meetings. This outreach was
facilitated locally by national and regional standard-setters, accounting firms, academics and regulators.
We focused our outreach activities on investors and investors’ representative bodies, because we expected
few comment letters from investors and many questions included in the RFI aimed to get investors’ views
on such questions:

Participant type Number of Percentage of

events events
Investors and Investors’ representative bodies 19 64%
Preparers 4 13%
Mixed groups (ie regulators, auditors, preparers and investors) 7 23%
Total 30 100%
All geographical regions were represented in the outreach conducted:

Geographical region Number of Percentage of

events events
Africa 1 3%
America 2 7%
Asia, Oceania and Middle East 3 10%
Europe 20 67%
International 4 13%
Total 30 100%

Review of academic research

Another part of the PIR has been the review of academic research. This review was presented to the IASB
at its meetings in September and December 2014.
The evidence in this review was drawn from publicly available published papers, located via Google
Scholar and other databases of academic studies. Evidence from working papers that are not yet
published was generally not included, because the results of these studies may change prior to publication.
We think that this review provides evidence that generally supports the current requirements, particularly
in relation to the usefulness of reported goodwill, other intangible assets and goodwill impairment. As
expected, some studies showed the impact of managerial incentives on impairment recognition.
Further details about these studies are included in the section Summary of academic research and related literature.

Post-implementation Review: IFRS 3 Business Combinations | June 2015 | 15

Consultation and evidence
gathered continued...

Adequacy of this input

The PIR of IFRS 3 was discussed at the following public IASB meetings:

Meeting date Topic Paper number

July 2013 Scope of the PIR 12
November 2013 Issues identified for investigation 13–13B
December 2013 Request to publish the RFI 13
September 2014 Summary of the feedback received on the RFI and academic 12F–12G
literature review
December 2014 Findings and comparison of the feedback received on the 12A–12B
RFI with the review of academic literature
The papers discussed, and the recording of each public meeting, are available on the project page of our
website: http://www.ifrs.org/Current-Projects/IASB-Projects/PIR/PIR-IFRS-3/Pages/PIR-IFRS-3.aspx.
We discussed the evidence gathered, whether from responses to the RFI, outreach or our review of
available literature, in September 2014. At that meeting we decided that the evidence gathered was
sufficient to form the basis for our Feedback Statement on the PIR of IFRS 3.
In December 2014, we discussed the findings of the PIR and a comparison of the feedback received on the
RFI with a review of relevant academic literature. At that meeting we identified the areas of IFRS 3 that
could be considered for follow-up work and assessed the relative significance of these areas.

16 | Post-implementation Review: IFRS 3 Business Combinations | June 2015

Feedback Statement on the
implementation of IFRS 3

The definition of a business

In the RFI we asked the following questions:
(a) Are there benefits of having separate accounting treatments for business combinations and asset acquisitions? If so,
what are these benefits?
(b) What are the main practical implementation, auditing or enforcement challenges you face when assessing a
transaction to determine whether it is a business? For the practical implementation challenges that you have
indicated, what are the main considerations that you take into account in your assessment?

Messages received Our responses

The main challenges that participants to the PIR have identified when Applying the definition of a business is
determining whether an acquisition includes a business are the following: particularly challenging in some industries,
(a) the assessment of the relevance of processes acquired as part of the such as real estate, extractive activities,
acquired set of assets and the significance of the processes missing pharmaceutical, technology and shipping.
from the set. We assessed this issue as having medium/
(b) t he definition of a business is broad and IFRS 3 has little or no high significance. Consequently, we think
guidance on when an acquired set of assets is not a business. that research should be undertaken in order
to determine whether it is possible to clarify
(c) t he wording ‘capable of being conducted as a business’ does not help the definition of a business and the related
in determining whether a transaction includes a business. application guidance.
(d) I FRS 3 is not clear on the definition of a business when the entity
acquired does not generate revenues.
(e) t he term ‘market participant’ is not defined in IFRS 3. Some sets
of assets may be considered as a business for a specific group of
market participants if they could integrate the set of assets in their
processes. However, the same set of assets may not be considered as a
business from the perspective of other market participants. Further
guidance on what constitutes a market participant would help in this
determination.
(f) I FRS 3 requires a fact-driven assessment that excludes the business
rationale, the strategic considerations and the objectives of the acquirer.
A separate accounting treatment for business combinations and asset In addition to researching clarifications to
acquisitions is conceptually justified only with respect to whether or not the definition of a business and the related
goodwill is recognised. The IASB should revisit whether the differences application guidance, we think that we could
in the accounting treatment for deferred tax, contingent payments consider whether and how the accounting
and acquisition costs are really justified, taking into consideration the differences between business combinations
difficulties that arise from having to determine whether a transaction and asset acquisitions could be reduced.
represents an acquisition of assets or a business combination. Doing so could relieve some of the pressure on
the definition of a business.
A significant part of the accounting
differences relates to deferred tax accounting.
We have a research project aiming to better
understand the needs of financial statement
stakeholders regarding income taxes. This
issue could also be considered as part of this
research project.

Post-implementation Review: IFRS 3 Business Combinations | June 2015 | 17

Feedback Statement on the
implementation of IFRS 3 continued...

Fair value measurement in a business combination

In the RFI we asked the following questions:
(a) To what extent is the information derived from the fair value measurements relevant and the information disclosed
about fair value measurements sufficient? If there are deficiencies, what are they?
(b) What have been the most significant valuation challenges in measuring fair value within the context of business
combination accounting? What have been the most significant challenges when auditing or enforcing those fair value
measurements?
(c) Has fair value measurement been more challenging for particular elements: for example, specific assets, liabilities,
consideration etc?

Messages received Our responses

Fair values at the acquisition date provide useful information about how We acknowledge that it is difficult to compare
management spends the investor’s money. Fair values are useful when companies that grow organically and those
asking management questions and to understand better the transaction. that grow through acquisitions. However,
However, fair value does not facilitate the comparison of trends between we think that the comments received
companies that grow organically and those that grow through acquisitions. confirm that fair value is the best approach
Upward revaluations of acquired inventory to fair value reduce for measuring the assets acquired and the
profitability in the first period following the acquisition. liabilities assumed in a business combination.

The main valuation challenges that participants in the PIR have faced We acknowledge that the separate recognition
in measuring fair value within the context of business combinations and measurement of particular intangible
accounting are the following: assets is challenging and can be time-
(a) identification and measurement of intangible assets that are separable consuming and costly. We assessed this issue
from goodwill. This is primarily due to the lack of sufficiently as medium/high significance. Consequently,
reliable and observable data. Intangible assets that are particularly we think that research should be undertaken
challenging to measure are customer relationships, non‑contractual in order to explore whether particular
intangible assets, intangible assets for which there is no active market intangible assets (for example, customer
and intangible assets in the ‘early stage’ of development. relationships) should be subsumed into
goodwill, and whether additional guidance
(b) measuring the fair value of contingent consideration is highly could be given about the types of intangible
judgemental and difficult to validate. This is particularly relevant in assets that are commonly acquired in a
the pharmaceutical industry, in which the research and development business combination and how to achieve the
period of a drug can take more than a decade to get a preclinical measurement objective for these assets.
compound to market. In this industry, it is common for deal
structures to have multiple success-based contingent consideration We also acknowledge that the fair value of
payments linked to the successful completion of the various phases of contingent consideration and contingent
the research and development process. Given this, some think that it liabilities can be difficult to measure. We
is extremely challenging to measure these contingent payments at fair assessed this issue as being of medium
value at the acquisition date (or within 12 months of the acquisition significance. Consequently, we think that
date) based on the probability of success of each milestone. this topic may warrant further analysis.
For example, some participants suggest
(c) because of the uncertainties regarding outcomes, the fair value investigating whether the accounting for
of contingent liabilities is difficult to measure. This is because fair contingent consideration and contingent
value relies on a number of assumptions and because of a general liabilities could be reconsidered in
lack of guidance (indeed a number of different valuation approaches order to enhance relevance and faithful
are used). representation.

18 | Post-implementation Review: IFRS 3 Business Combinations | June 2015

The separate recognition of intangible assets from goodwill and the accounting
for negative goodwill
In the RFI we asked the following questions:
(a) Do you find the separate recognition of intangible assets useful? If so, why? How does it contribute to your understanding
and analysis of the acquired business? Do you think changes are needed and, if so, what are they and why?
(b) What are the main implementation, auditing or enforcement challenges in the separate recognition of intangible
assets from goodwill? What do you think are the main causes of those challenges?
(c) How useful do you find the recognition of negative goodwill in profit or loss and the disclosures about the underlying
reasons why the transaction resulted in a gain?
Messages received Our responses
Investors have mixed views on the separate recognition of intangible assets We acknowledge that the separate
from goodwill. recognition and measurement
Some do not support the current practice of identifying additional requirements of particular intangible assets
intangible assets (for example, brands, customer relationships, etc) is challenging.
beyond goodwill, because, in their opinion, it is highly subjective and We assessed this issue as being of medium/
open to significant arbitrage opportunities for companies during business high significance. Consequently, we think
combinations. They think that these intangible assets should be recognised that research should be undertaken in order
only if there is a market for them. to explore whether particular intangible
Other investors support the current practice, because it provides an assets (for example, customer relationships)
insight on why a company purchased another company and it helps in should be subsumed into goodwill and
understanding the components of the acquired business, including its whether additional guidance could be
primary assets (ie the value-drivers). given about the types of intangible assets
that are commonly acquired in a business
Academic research indicates that separate recognition of goodwill and combination, and the measurement
identifiable intangible assets are value-relevant and, in some studies, objective for these assets.
identifiable intangible assets are more relevant under IFRS than prior
national GAAP. Thus, the research provides some support for the IFRS 3
approach.
The main causes of the challenges in recognising and measuring intangible
assets described by participants in the PIR are:
(a) m
 any intangible assets are not frequently traded on a stand-alone basis
and therefore there is very often no active market for them;
(b) m
 any intangible assets are unique and it is therefore not easy to identify
and assess their value;
(c) valuation methods are complex and subjective;
(d) t he measurement is more complex when the intangible assets are not
based on legally enforceable rights; and
(e) the useful life of some intangible assets is subjective.
continued...

Post-implementation Review: IFRS 3 Business Combinations | June 2015 | 19

Feedback Statement on the
implementation of IFRS 3 continued...
...continued

Messages received Our responses

Investors usually strip out gains from bargain purchases from their We assessed this issue as being of low
assessment of underlying earnings, because they think that such gains are significance, because investors generally
not part of the performance of the company. find the current disclosures useful and
However, many investors have no strong views on the accounting treatment are not significantly concerned about
of negative goodwill. They are not significantly concerned about the recognising negative goodwill in profit or
current accounting for negative goodwill, as long as the amount of gain loss.
is clearly presented in the financial statements or in the notes. Other However, depending on the feedback
investors think that recognising gains from bargain purchases in OCI would received from the 2015 Agenda
be a better approach. Consultation, we could start working
Investors usually find the disclosures required by IFRS 3 about negative on this issue, for example, investigating
goodwill useful because, if an entity recognises negative goodwill, then it is whether negative goodwill should be
important to know why the transaction resulted in a bargain purchase. recognised in OCI.

20 | Post-implementation Review: IFRS 3 Business Combinations | June 2015

Impairment of goodwill and indefinite-life intangible assets
In the RFI we asked the following questions:
(a) How useful have you found the information obtained from annually assessing goodwill and intangible assets with
indefinite useful lives for impairment, and why?
(b) Do you think that improvements are needed regarding the information provided by the impairment test? If so, what
are they?
(c) What are the main implementation, auditing or enforcement challenges in testing goodwill or intangible assets with
indefinite useful lives for impairment, and why?

Messages received Our responses

Investors have mixed views on the impairment‑only approach We assessed this issue as being of high significance.
(ie non‑amortisation) of goodwill. We acknowledge that there is some support for a
Some investors supported the current requirements, because they return to an amortisation-based model of accounting
think that the impairment-only approach: for goodwill with indicator‑based impairment testing.
(a) is useful for relating the price paid to what was acquired and However, the academic literature review provided
for calculating the return on invested capital; support for an impairment-only approach being
value‑relevant.
(b) helps them to assess the stewardship of the management; and
We think that research should be undertaken in
(c) helps them to verify whether an acquisition is working as
order to investigate whether and how the costs of
expected.
accounting for goodwill can be reduced without
They think that the information provided by the impairment test losing the information currently being provided,
of goodwill is useful, because it has a confirmative value. and which our review of academic studies suggested
Other investors would prefer the re-introduction of the was value‑relevant. We think that this could include
amortisation of goodwill, because they think that: considering:
(a) g
 oodwill acquired in a business combination is supported and (a) h
 ow improvements to the impairment‑only
replaced by internally generated goodwill over time; approach (in particular to the impairment test)
(b) e stimating the useful life of goodwill is possible and is could address some of the concerns that have been
no more difficult than estimating the useful life of other raised; and
intangible assets; (b) w
 hether a variation on an amortisation and
(c) g
 oodwill has been paid for and so, sooner or later, it should impairment model may be developed with an
have an impact on profit or loss; amortisation method that does not undermine
the information currently provided by the
(d) a
 mortising goodwill would decrease volatility in profit or loss
impairment‑only approach (for example, whether
when compared to an impairment model; and
this could be achieved with an increasing‑balance
(e) a
 mortising goodwill would reduce pressure on the amortisation method).
identification of intangible assets, because both goodwill and
As part of this work we think we need to:
intangible assets would be amortised.
(a) u
 nderstand why there are differences between
Many participants in the review suggested an amortisation and
participants’ feedback and academic evidence;
impairment approach. Under this model, an impairment test
would only be performed if specific impairment indicators arise. (b) a
 nalyse the causes of the concerns about the
impairment-only approach;
The academic evidence points to some managers using their
discretion in recognising impairment in ways that are potentially (c) u
 nderstand whether some of the concerns are
favourable to themselves. Nevertheless, some studies conclude caused by poor application of the requirements;
that impairment reflects economic fundamentals, because it and
is associated with share price (ie it is value-relevant). Taken (d) u
 nderstand the cost-benefit trade-off of the
together, the evidence suggests that for IFRS entities although impairment-only approach and the consequences
there is some evidence of managerial discretion regarding the of any change.
amount and timing of impairment recognition, other evidence
suggests that the IFRS impairment model is operating effectively. continued...
Post-implementation Review: IFRS 3 Business Combinations | June 2015 | 21
Feedback Statement on the
implementation of IFRS 3 continued...
...continued

Messages received Our responses

Many participants think that the impairment test is complex, We assessed this issue as being of high significance.
time-consuming and expensive and involves significant We acknowledge that the impairment test could be
judgements. The main challenges identified are the following: improved irrespective of whether the amortisation of
(a) d
 ifficulties in determining a pre-tax discount rate for the VIU goodwill is reconsidered.
calculation. We think that research should be undertaken in order
(b) s ome of the limitations of the VIU calculation, in particular to review IAS 36. In our view, this project requires
the prohibition on including expansion capital expenditures a broad approach, first to ensure that all significant
in cash flow projections and the requirement to perform the issues with impairment testing have been identified,
test based on the most recent approved budgets, which over and then to consider the possible alternative
time can be substantially different from the business plans at approaches.
the acquisition date. These limitations are seen as artificial by
participants citing these problems.
(c) m
 any participants think that there appears to be a ‘lag’ in the
time between the impairment occurring and the impairment
charge being recognised in the financial statements.
(d) t he costs involved in performing the impairment test,
including the requirement to perform it annually in the
absence of impairment indicators.
(e) c oncerns about the high degree of subjectivity in the
assumptions used in the VIU calculation.
(f) d
 ifficulties (and subjectivity involved) in allocating goodwill to
CGUs for impairment testing purposes, and reallocating that
goodwill when restructuring occurs.

22 | Post-implementation Review: IFRS 3 Business Combinations | June 2015

Accounting for NCIs
In the RFI we asked the following questions:
(a) How useful is the information resulting from the presentation and measurement requirements for NCIs? Does the
information resulting from those requirements reflect the claims on consolidated equity that are not attributable to
the parent? If not, what improvements do you think are needed?
(b) What are the main challenges in the accounting for NCIs, or in auditing or enforcing such accounting? Please specify
the measurement option under which those challenges arise.

Messages received Our responses

Most investors support the presentation requirements for NCIs. Many We assessed this issue as being of low
investors do not support the measurement choice for NCIs between significance, because investors generally do
fair value and a proportionate share in the recognised amounts of the not have a strong view on how to measure
acquiree’s identifiable net assets. However, they expressed mixed views NCIs and they usually find the current
on which measurement choice is preferable. Some prefer the proportionate disclosures required by IFRS 3 to be useful.
method, while others prefer the fair value method, and others did not We acknowledge that the current
have a preference. measurement option for NCIs impairs the
comparability of companies that account for
partial acquisitions differently.
Depending on the feedback received from
the 2015 Agenda Consultation, we could
start working on this issue, for example, by
investigating whether the measurement of
NCIs should be a one-time accounting policy
choice for all business combinations (ie it
should not be a transaction‑by‑transaction
choice).
Some participants think that measuring NCIs at fair value presents We acknowledge that measuring NCIs at
significant practical difficulties, particularly when the shares of the fair value can be challenging. However, we
acquiree are not traded in an active market. think that the current measurement option
addresses this issue, because it permits,
on a transaction-by-transaction basis, the
measurement of NCIs at the proportionate
share of the acquiree’s identifiable net assets
(ie an entity can choose to measure NCIs at
the proportionate share of the acquiree’s
net assets when measuring NCIs at fair value
is complex).

Post-implementation Review: IFRS 3 Business Combinations | June 2015 | 23

Feedback Statement on the
implementation of IFRS 3 continued...

Accounting for step acquisitions and loss of control

In the RFI we asked the following questions:
(a) How useful do you find the information resulting from the step acquisition guidance in IFRS 3? If any of the
information is unhelpful, please explain why.
(b) How useful do you find the information resulting from the accounting for a parent’s retained investment upon the
loss of control in a former subsidiary? If any of the information is unhelpful, please explain why.

Messages received Our responses

Many investors think that the gain or loss on the remeasurement at fair We assessed this issue as being of medium
value of the previously held interest is a non-recurring gain or loss that significance.
is not part of the performance of the entity. Consequently, such gains We acknowledge that these remeasurement
(or losses) are not considered in their valuation models. For this reason, gains should be disclosed in financial
many investors think that it would be useful to have these gains (or losses) statements, because these gains are generally
clearly identified in the financial statements. not included in investors’ valuation models.
Similarly as for step acquisitions, many investors think that the gain or Depending on the feedback received from
loss on the remeasurement at fair value of the retained interest in the the 2015 Agenda Consultation, we could start
former subsidiary is a non-recurring gain or loss that is not part of the working on this issue, for example, some
performance of the entity. Consequently, they think that it would be participants suggest investigating whether
useful to have these gains (or losses) clearly identified in the financial these gains should be recognised in OCI.
statements.

24 | Post-implementation Review: IFRS 3 Business Combinations | June 2015

Disclosures
In the RFI we asked the following questions:
(a) Is other information needed to properly understand the effect of the acquisition on a group? If so, what information is
needed and why would it be useful?
(b) Is there information required to be disclosed that is not useful and that should not be required? Please explain why.
(c) What are the main challenges to preparing, auditing or enforcing the disclosures required by IFRS 3 or by the related
amendments, and why?
Messages received Our responses
Many investors think that once an acquisition has been completed, it We assessed this issue as being of medium
is often hard to assess the subsequent performance of the acquired significance.
business. Consequently, they think that better disclosure is needed We acknowledge that information about the
to allow them to do so. For example, it is important for them to know subsequent performance would be useful for
how much of the business has grown organically versus how much it investors.
has grown through acquisitions. They require clear information on
the operating performance of the acquired business after the business Depending on the feedback received from
combination; specifically, its revenues and operating profit. the 2015 Agenda Consultation, we could
investigate whether it would be practical to
prepare this information in the first two or
three years after the business combination.
Some investors also require pro-forma prior year comparative information We assessed this issue as being of low
for the combined entity for purposes of their trend analysis. significance. This is because we note
Many participants find it very difficult to disclose the revenue and that preparing and auditing pro-forma
profit or loss of the combined entity for the current period as though information may be challenging.
the acquisition had occurred at the beginning of the reporting period, We acknowledge that pro-forma information
because information prior to the acquisition is not always readily would be useful to investors.
available. Because of the practical limitations and the significant effort Depending on the feedback received from
required to determine the disclosures, they think that the IASB should the 2015 Agenda Consultation, we could
consider providing some relief from this disclosure requirement. start working on this issue, for example, by
investigating whether it would be practical to
prepare this information.

Post-implementation Review: IFRS 3 Business Combinations | June 2015 | 25

Feedback Statement on the
implementation of IFRS 3 continued...

Other matters
In the RFI we asked whether there are other matters that the IASB should be aware of as it considers the PIR of IFRS 3.
Messages received Our responses
Many participants in the review think that the IASB should reconsider the We assessed this issue as being of medium
subsequent accounting for contingent consideration. Some noted that significance.
when contingent consideration liabilities are directly linked to a particular We acknowledge that many participants
(new) intangible asset acquired (for example, an in-process research in the PIR think that the subsequent
project), the values of the liability and the related intangible asset respond accounting for contingent consideration is
equally to the related changes in the development of the project. These counterintuitive.
participants suggest that changes in the fair value of the liability could be
recognised as an adjustment to the related intangible asset, instead of in Depending on the feedback received from
profit or loss, to avoid potential ‘accounting mismatches’. the 2015 Agenda Consultation, we could
start working on this issue; for example, by
investigating whether in some circumstances
changes in the fair value of contingent
consideration should be recognised against
the assets acquired.
Many participants asked the IASB to revisit the guidance in paragraph We assessed this issue as being of low
B55(a) of IFRS 3 for contingent payments to selling shareholders in significance.
circumstances in which those selling shareholders become, or continue We think that in most cases these payments
as, employees. They note that the paragraph appears to mandate that an are post-acquisition expenses.
arrangement in which contingent payments are forfeited if employment
terminates is treated as post‑acquisition remuneration. In their view, this However, depending on the feedback received
should not be an individually conclusive rule, but should instead be one from the 2015 Agenda Consultation, we could
of the indicators that should be considered in assessing whether such start working on this issue; for example,
contingent consideration should be treated as part of the consideration by investigating in which circumstances
transferred in the acquisition or as a post-acquisition expense. these payments should be considered as
consideration transferred in the acquisition.

26 | Post-implementation Review: IFRS 3 Business Combinations | June 2015

Effects
In the RFI we asked which areas of IFRS 3 and related amendments:
(a) represent benefits to users of financial statements, preparers, auditors and/or enforcers of financial information, and
why;
(b) have resulted in considerable unexpected costs to users of financial statements, preparers, auditors and/or enforcers of
financial information, and why; or
(c) have had an effect on how acquisitions are carried out (for example, an effect on contractual terms)?
Messages received Our responses
The main benefits mentioned by the participants in the review are: We think that the benefits of applying
(a) I FRS 3 provides a coherent framework for accounting for business IFRS 3 are largely as expected and that overall
combinations that is converged with US GAAP; the Standard has achieved its objectives and
has improved financial reporting.
(b) t he information derived from fair value measurements can serve to
explain management’s intention behind the acquisition;
(c) t he approach of clearly setting out the Standard’s principles and then
highlighting exceptions to them makes the Standard easy to follow
and understand;
(d) enhanced transparency due to the extensive disclosures; and
(e) t he identification of intangible assets apart from goodwill provides
investors with critical information on the underlying fundamental
drivers of value in businesses that a management team is choosing to
invest in.
Many participants in the PIR think that the most considerable unexpected We acknowledge that applying the
costs arise from the separation and measurement of intangible assets requirements on these areas of IFRS 3 can
from goodwill and the impairment test of goodwill, because these areas sometimes be costly. For this reason, we think
of IFRS 3 sometimes require the involvement of external valuation that a research project should be undertaken
specialists. on these topics with the aim of identifying
how some of those requirements could be
simplified.
Many participants in the PIR are not aware of any changes to the way in We think that maintaining convergence with
which acquisitions are carried out or structured. However, some had the US GAAP on the accounting for business
following perceptions: combinations is an important factor to take
(a) e ntities could overestimate contingent consideration to avoid negative into account in considering whether and how
effects in the post-acquisition profit or loss; to amend IFRS 3.

(b) entities try to avoid contingent consideration when possible; and

(c) t he increased alignment between US GAAP and IFRS makes
transaction negotiations and structuring between different parts of
the world more straightforward.

Post-implementation Review: IFRS 3 Business Combinations | June 2015 | 27

Respondents to the RFI

Accounting Standards Board of Canada (AcSB)

Accounting Standards Board of Japan (ASBJ)
Allianz
American Appraisal
Anglo American Platinum Limited
Asian-Oceanian Standard-Setters Group (AOSSG)
Associação Brasileira das Companhias Abertas (ABRASCA) [Brazilian Association of Listed Companies]
Association of Chartered Certified Accountants (ACCA)
Association pour la participation des entreprises françaises à l’harmonisation comptable internationale (ACTEO) [French
association for the participation of businesses in the convergence of accounting standards]
Astra Zeneca
Australian Accounting Standards Board (AASB)
Austrian Financial Reporting and Auditing Committee (AFRAC)
Autorité des normes comptables (ANC) [French standard-setting body]
Banco Bilbao Vizcaya Argentaria, S.A. (BBVA)
Barrick Gold Corporation
Bayer
BDO IFR Advisory Limited
BP p.l.c.
BusinessEurope
CFO Forum South Africa
Chartered Financial Analyst Society of the UK (CFA UK)
Chime Communications plc
China Accounting Standards Committee (CASC)
China Securities Regulatory Commission (CSRC)
Christoph Fröhlich
Cobham plc
Comitê de Pronunciamentos Contábeis (CPC) [Brazilian Committee for Accounting Pronouncements]
Consejo Mexicano de Normas de Información Financiera, A.C. (CINIF) [The accounting standard setting body in Mexico]
CPA Australia Ltd
Deloitte Touche Tohmatsu Limited
Deutsches Rechnungslegungs Standards Committee e.V. (DRSC) [Accounting Standards Committee of Germany (ASCG)]
Duff & Phelps
Ernst & Young Global Limited
European Federation of Financial Analysts Societies (EFFAS)
European Financial Reporting Advisory Group (EFRAG)
European Securities and Markets Authority (ESMA)

28 | Post-implementation Review: IFRS 3 Business Combinations | June 2015

Fédération des Experts-comptables Européens (FEE) [The Federation of European Accountants]
Financial Executives International (FEI)
Financial Reporting Council (FRC) [Mauritius]
Financial Reporting Council (FRC) [UK]
Financial Supervisory Service (FSS) [Korea]
Frederik Schmachtenberg
GDF Suez
German Property Federation (ZIA)
Gesamtverband der Deutschen Versicherungswirtschaft e. V. (GDV) [German Insurance Association]
Grant Thornton International Ltd
Grupo Latinoamericano de Emisores de Normas de Información Financiera (GLENIF) [Group of Latin-american Accounting
Standard Setters (GLASS)]
GSK plc
Henderson Global Investors
Hong Kong Institute of Certified Public Accountants (HKICPA)
Institut Akauntan Awam Bertauliah Malaysia [The Malaysian Institute of Certified Public Accountants (CPA)]
Institut der Wirtschaftsprüfer in Deutschland e.V. (IDW) [Institute of Public Auditors in Germany]
Institute of Certified Public Accountants of Kenya (ICPAK)
Institute of Singapore Chartered Accountants (ISCA) [Formerly ICPAS]
International Business Machines (IBM)
Japan Foreign Trade Council, Inc (JFTC)
Keppel Corporation Ltd
Kingston Smith
Korea Accounting Standards Board (KASB)
KPMG
Malaysian Accounting Standards Board (MASB)
Marketing Accountability Standards Board (MASB)
Mazars
Meyers Norris Penny (MNP) LLP
Mr Peter Dittmar Mr Dritan Muneka
Nestlé S.A.
New Zealand Accounting Standards Board (NZASB)
Norsk RegnskapsStiftelse (NASB) [Norwegian Accounting Standards Board]
Organismo Italiano di Contabilità (OIC) [Italian Accounting Organisation]
Pearl Tan
PricewaterhouseCoopers International Limited
Real Property Association of Canada (REALPAC)

Post-implementation Review: IFRS 3 Business Combinations | June 2015 | 29

Respondents to the RFI continued...

Repsol
Rio Tinto plc
Roche Group
Sanofi
Securities and Exchange Board of India (SEBI)
Singapore Accounting Standards Council (ASC)
SIX Swiss Exchange
Société Française des Analystes Financiers (SFAF) [French Society of Financial Analysts]
Standard Chartered PLC
Svenskt Naringsliv [Confederation of Swedish Enterprise]
SwissHoldings [Federation of Industrial and Service Groups in Switzerland]
Syngenta International AG
Telecom Argentina
The 100 Group
The Institute of Chartered Accountants in England and Wales (ICAEW)
The Japanese Institute of Certified Public Accountants (JICPA)
The Linde Group
The South African Institute of Professional Accountants (SAIPA)
TUV SUD AG
University of Technology Sydney
Westworth Kemp Consultants

30 | Post-implementation Review: IFRS 3 Business Combinations | June 2015

Summary of academic research
and related literature

Summary of research evidence

Value Country Years Goodwill Impairment expense Other
relevance intangible
studies assets
AbuGhazaleh et UK (n = 5284) 2005–2006 Negative association
al. (2012) with share price.
Amel-Zadeh et al. UK (n = 507) 1997–2011 Negative association
(2013) with share price;
negative association
with market returns.
Aharony et al. 14 EU countries 2004–2005 More
(2010) (n = 2,298) value‑relevant
under IFRS.
Chalmers et al. Australia (n = 599) 2005–2006 More More
(2008) value‑relevant value‑relevant
under IFRS. under IFRS
(capitalised
software).
Chalmers et al. Australia 1993–2007 More useful for
(2012) (n = 3,328 firms analysts under
years) IFRS.
Laghi et al. (2013) France, Germany, 2008–2011 Positive Negative association
Italy, Portugal, association with with share price.
Spain, UK (n = 835) share price.
Oliviera et al. Portugal (n = 354 1998–2008 More More
(2010) firm-years) value‑relevant value‑relevant
under IFRS. under IFRS
(including
capitalised
research and
development).
Sahut et al. (2011) France, Sweden, 2002–2007 Positive Positive
Italy, UK association with association with
(n = 1,855) share price. share price.
Value relevance Value relevance
decreased increased (relative
(relative to other to goodwill) in the
intangible assets) IFRS period.
in the IFRS period.
Su and Wells Australia 1998–2008 Positively Not associated
(2014) (n = 367-309) associated with future
with future performance.
performance.

4 This is the size of the sample considered in each study.

Post-implementation Review: IFRS 3 Business Combinations | June 2015 | 31
Summary of academic research
and related literature continued...

Implementation Country Years Income Compensation, Timeliness of

and incentives smoothing, tenure impairment
studies big bath using recognition
impairment
recognition
AbuGhazaleh et al. UK (n = 507) 2005–2006 Evidence of
(2012) income smoothing
and big bath.
Amiraslani et al. EU, Norway, 2006–2011 More timely
(2013) Switzerland in countries
(n = 4,474) with strong
enforcement.
Detzen and Zülch Germany 2004–2010 Evidence
(2012) (n = 805 firm-years) of income
smoothing.
Glaum et al. (2014) 21 countries 2005–2011 Evidence Longer tenure, More timely
including US IFRS of income impairment less in countries
firms (n = 25,046 smoothing. likely. with strong
and n = 5,427 enforcement.
firm-years for
non-financial and
financial firms)
Hamberg et al. (2011) Sweden (n = 2001–2007 Longer tenure,
232–254 firms) impairment less
likely.
Chalmers et al. (2011) Australia (n = 1998–2008 Reflects
4,991 firm‑years) underlying
investment
opportunities.

32 | Post-implementation Review: IFRS 3 Business Combinations | June 2015

Compliance studies Country Years Incidence Disclosure Enforcement

Amiraslani et al. (2012) EU, Norway, 2010–2011 Boilerplate Rate of Compliance

Switzerland language used. compliance higher for firms
(n = 324) Lack of change around 82 per with Big 4
post-2008. More cent for goodwill auditors.
compliance disclosure.
with low-effort Adequate
disclosure items. disclosure of
assumptions and
relevant factors.
Camodeca et al. (2013) UK (n = 85) 2007–2011 Disclosure Lack of disclosure
improved post – of some key
2008. assumptions used
in impairment.
Carlin and Finch (2010) Australia (n = 50) 2005–2006 10 per cent
of companies
failed to disclose
discount rates for
impairment.
Glaum et al. (2012) 17 countries 2005 Compliance
(n = 357) higher for firms
with Big 4
auditors.
Glaum et al. (2014) 21 countries 2005–2011 Companies with Delays in
including US higher market recognition of
IFRS firms (n = returns and impairment in
25,046 + n = 5427 return on assets low enforcement
firm‑years) less likely to countries.
impair.
Guthrie and Pang (2013) Australia (n = 287) 2005–2010 More companies
allocated goodwill
to CGUs over
sample period
(61 per cent
improved to
80 per cent).
Johansen and Plenborg Denmark— Pre 2013 IFRS 3 and IAS 36
(2013) Financial report disclosures were
preparers (n=89) highly demanded,
and users (n=288) most costly to
prepare and
least satisfying
(along with
IFRS 7 Financial
Instruments:
Disclosures).

Post-implementation Review: IFRS 3 Business Combinations | June 2015 | 33

Bibliography:
Academic Research

AbuGhazaleh, N. M., Al-Hares, O. M., & Haddad, A. E. (2012). The value relevance of goodwill impairments:
UK Evidence. International Journal of Economics & Finance, 4(4).

AbuGhazaleh, N. M., Al-Hares, O. M., & Roberts, C. (2011). Accounting discretion in goodwill impairments:
UK evidence. Journal of International Financial Management & Accounting, 22(3), 165-204.

Aharony, J., Barniv, R., & Falk, H. (2010). The impact of mandatory IFRS adoption on equity valuation of accounting numbers
for security investors in the EU. European Accounting Review, 19(3), 535-578.

Amel-Zadeh, A., Faasse, J., Li, K., & Meeks, G. (2013). Has accounting regulation secured more valuable goodwill disclosures?
Available at SSRN 2306584.

Amiraslani, H., Iatridis, G. E., & Pope, P. F. (2013). Accounting for asset impairment: a test for IFRS compliance across Europe:
Cass Business School, City University London.

Bradbury, M. E. (2010). Commentary: Discount rates in disarray – Evidence on flawed goodwill impairment testing.
Australian Accounting Review, 20(3), 313-316.

Brown, P., Preiato, J., & Tarca, A. (2014). Measuring Country Differences in Enforcement of Accounting Standards: An Audit
and Enforcement Proxy. Journal of Business Finance & Accounting, 41(1-2), 1-52.

Camodeca, R., Almici, A., & Bernardi, M. (2013). Goodwill impairment testing under IFRS before and after the financial crisis:
evidence from the UK large listed companies. Problems and Perspectives in Management, 11(3).

Carlin, T. M., & Finch, N. (2009). Discount rates in disarray: Evidence on flawed goodwill impairment testing. Australian
Accounting Review, 19(4), 326-336.

Carlin, T. M., & Finch, N. (2010). Resisting compliance with IFRS goodwill accounting and reporting disclosures. Journal of
Accounting & Organizational Change, 6(2), 260-280.Carlin, T. M., & Finch, N. (2011). Goodwill impairment testing under IFRS: a
false impossible shore? Pacific Accounting Review, 23(3), 368-392.

Chalmers, K., Clinch, G., & Godfrey, J. M. (2008). Adoption of International Financial Reporting Standards: Impact on the
value relevance of intangible assets. Australian Accounting Review, 18(3), 237-247.

Chalmers, K., Clinch, G., Godfrey, J. M., & Wei, Z. (2012). Intangible assets, IFRS and analysts’ earnings forecasts. Accounting &
Finance, 52(3), 691-721.

Chalmers, K. G., Godfrey, J. M., & Webster, J. C. (2011). Does a goodwill impairment regime better reflect the underlying
economic attributes of goodwill? Accounting & Finance, 51(3), 634-660.

De George, E. T., Ferguson, C. B., & Spear, N. A. (2013). How much does IFRS Cost? IFRS adoption and audit Fees. Accounting
Review, 88(2), 429-462.

Detzen, D., & Zülch, H. (2012). Executive compensation and goodwill recognition under IFRS: Evidence from European
mergers. Journal of International Accounting, Auditing and Taxation, 21(2), 106-126.

Glaum, M., Schmidt, P., Street, D. L., & Vogel, S. (2012). Compliance with IFRS 3- and IAS 36-required disclosures across 17
European countries: company- and country-level determinants. Accounting and Business Research, 43(3), 163-204.

Glaum, M., Landsman, W., & Wyrva, S. (2014). Determinants of goodwill impairment incidence and intensity: International
evidence. Working paper, Justus-Liebig- Universität Gießen.

Guthrie, J., & Pang, T. T. (2013). Disclosure of goodwill impairment under AASB 136 from 2005–2010. Australian Accounting
Review, 23(3), 216-231.

Hamberg, M., Paananen, M., & Novak, J. (2011). The adoption of IFRS 3: the effects of managerial discretion and stock market
reactions. European Accounting Review, 20(2), 263-288.

Husmann, S., & Schmidt, M. (2008). The discount rate: a note on IAS 36. Accounting in Europe, 5(1), 49-62.

34 | Post-implementation Review: IFRS 3 Business Combinations | June 2015

Johansen, T. R., & Plenborg, T. (2013). Prioritising disclosures in the annual report. Accounting and Business Research, 43(6),
605-635.

Kaufmann, D., Kraay, A., & Mastruzzi, M. (2010). The Worldwide Governance Indicators Project: The World Bank.
www.govindicators.org.

Kvaal, E. (2007). Discounting and the Treatment of taxes in impairment reviews. Journal of Business Finance & Accounting,
34(5-6), 767-791.

Laghi, E., Mattei, M., & di Marcantonio, M. (2013). Assessing the value relevance of goodwill impairment considering
country-specific factors: Evidence from EU listed companies. International Journal of Economics and Finance, 5(7), 32-49.

Leuz, C. (2010). Different approaches to corporate reporting regulation: How jurisdictions differ and why. Accounting and
Business Research, 40(3), 229-256.

Lopes, A. I., Lourenço, I., & Soliman, M. (2013). Do alternative methods of reporting non-controlling interests really matter?
Australian Journal of Management, 38(1), 7-30.

O’Hanlon, J., & Peasnell, K. (2002). Discussion of residual income and value-creation: the missing link. Review of Accounting
Studies, 7, 247-251.

Ohlson, J. A. (1995). Earnings, book values and dividends in equity valuation. Contemporary Accounting Research, 11, 681-687.

Oliveira, L., Rodrigues, L. L., & Craig, R. (2010). Intangible assets and value relevance: Evidence from the Portuguese stock
exchange. The British Accounting Review, 42(4), 241-252.

Pajunen, K., & Saastamoinen, J. (2013). Do auditors perceive that there exists earnings management in goodwill accounting
under IFRS? Managerial Auditing Journal, 28(3), 245-260.

Petersen, C., & Plenborg, T. (2010). How do firms implement impairment tests of goodwill? Abacus, 46(4), 419-446.

Sahut, J.-M., Boulerne, S., & Teulon, F. (2011). Do IFRS provide better information about intangibles in Europe? Review of
Accounting & Finance, 10(3), 267-290.

Schultze, W., & Weiler, A. (2010). Goodwill accounting and performance measurement. Managerial Finance, 36(9), 768-784.

Siggelkow, L., & Zülch, H. (2013). Determinants of the write-off decision under IFRS: Evidence from Germany. International
Business & Economics Research Journal (IBER), 12(7), 737-754.

Su, W.H. & Wells, P. (2014). The association of identifiable intangible assets acquired and recognised in business
combinations with post-acquisition firm performance. Accounting & Finance, forthcoming.

Verriest, A., & Gaeremynck, A. (2009). What determines goodwill impairment? Review of Business and Economics, 54(2), 1-23.

Post-implementation Review: IFRS 3 Business Combinations | June 2015 | 35

Appendix: Time line for the
Post‑implementation Review of IFRS 3

July The IASB agreed that the scope of the PIR would be the whole Business
2013 Combinations project and any resulting consequential amendments to other
Standards (ie amendments to IAS 27, IAS 36, IAS 38 etc).

January
2014 RFI published.

Feb-May Extensive and focused consultation with stakeholders and a review

2014 of academic literature.

May
2014 RFI comment deadline—93 comment letters received.

September Summary of information received and review of academic literature

2014 presented to the IASB.

December
Summary of our findings presented to the IASB.
2014

June
IASB issues its Report and Feedback Statement.
2015

36 | Post-implementation Review: IFRS 3 Business Combinations | June 2015

Notes

Post-implementation Review: IFRS 3 Business Combinations | June 2015 | 37

 IAS®

International Financial Reporting Standards® IFRIC®

IFRS Foundation® SIC®

IFRS® IASB®
Contact the IFRS Foundation for details of countries where its Trade Marks are in use and/or have been registered.

International Accounting Standards Board® (IASB® )

The IASB is the independent standard-setting body of the IFRS Foundation®
30 Cannon Street | London EC4M 6XH | United Kingdom
Telephone: +44 (0)20 7246 6410 | Fax: +44 (0)20 7246 6411
Email: info@ifrs.org | Web: www.ifrs.org
Publications Department
Telephone: +44 (0)20 7332 2730 | Fax: +44 (0)20 7332 2749
Email: publications@ifrs.org
Copyright © 2015 IFRS Foundation®
All rights reserved. Reproduction and use rights are strictly limited. No part of this publication may be
translated, reprinted, reproduced or used in any form either in whole or in part or by any electronic, mechanical
or other means, now known or hereafter invented, including photocopying and recording, or in any information
storage and retrieval system, without prior permission in writing from the IFRS Foundation.
The IFRS Foundation logo/the IASB logo/the IFRS for SMEs logo/‘Hexagon Device’, ‘IFRS Foundation’, ‘IFRS
Taxonomy’, ‘eIFRS’, ‘IASB’, ‘IFRS for SMEs’, ‘IAS’, ‘IASs’, ‘IFRIC’, ‘IFRS’, ‘IFRSs’, ‘SIC’, ‘International Accounting
Standards’ and ‘International Financial Reporting Standards’ are Trade Marks of the IFRS Foundation.
The IFRS Foundation is a not-for-profit corporation under the General Corporation Law of the
State of Delaware, USA and operates in England and Wales as an overseas company
(Company number: FC023235) with its principal office as above.

100%

Printed on 100 per cent recycled paper