Making acquisitions transparent

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This study assesses the financial reporting related to business combinations (acquisitions) and impairment testing of assets, particularly goodwill, as presented by leading European companies in their 2009 IFRS consolidated financial statements. The standards—IFRS 3 “Business Combinations” and IAS 36 “Impairment of Assets”—have sparked controversy since their introduction by the IASB in 2004, which instituted significant changes. Notably, the acquisition method is now the sole approach for accounting for acquisitions, requiring fair value measurement of all assets, liabilities, and contingent liabilities at the acquisition date. Goodwill is no longer amortized regularly; instead, companies must conduct annual impairment tests, a process that is complex and demands specialized valuation expertise. The IFRSs also mandate extensive disclosures in financial statement notes. The IASB argues that these new rules enhance transparency and enable better assessment of the financial implications of acquisitions, thus reflecting management quality. However, critics highlight the complexity and high costs associated with these IFRS rules, as well as the subjectivity and potential for manipulation in fair value estimates when liquid markets are absent. Concerns are similarly raised about the impairment-only approach to goodwill, which relies on subjective forecasts that are difficult for auditors to verify, and the overall usefulness of the