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How IFRS Is Changing the M&A Game

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How IFRS Is Changing the M&A Game

by Pascal Jauffret, Mazars, 26 January 2010
topics:
Accounting and Regulations Auditing Investor Relations
tags:
control fair value fair value accounting fair value measurement IFRS 3 Business Combinations international financial reporting standards M&A Mazars step acquisitions

For many people, International Financial Reporting Standards (IFRS) appear as yet another game for accountants. Bankers, lawyers and investors should now be considering playing this game, too. IFRS 3 Business Combinations is a new accounting standard that became applicable to M&A deals closed on or after January 1, 2010, if the acquirer is located in Hong Kong, Singapore or any of the 110 other jurisdictions that have adopted IFRS.

 
The new standard has been prepared by the International Accounting Standards Board (IASB) based on two key principles: 1) the acquired business should be measured based on its fair value and 2) taking control of a business is a critical event that should be reported as such to investors.
 
Implications on M&A
The consequences of these two principles are numerous. Let’s consider the main impact.
 
Transaction costs to be expensed as incurred. Considering the acquired business based on its fair value means that it should be estimated on a stand-alone basis. In other words, the value of the business acquired is not different because the deal was structured by one law firm or the other. As a consequence, the acquirer will have to record all the transaction costs in its P&L as incurred. In the past, those costs would have been included in the cost of the deal (i.e. in the goodwill). 
 
It is certain that acquirers will now regard fees differently as their bottom line will be impacted irrespective of whether the deal is concluded or not.
 
For example, assume that Holding plc is planning to acquire Target Ltd. By year end 2010, the deal is not yet closed, but Holding Plc incurred fees from its lawyers of US$500,000. The deal is concluded in early 2011. Lawyers receive a success fee of US$2 million. The P&L of Holding plc will be hit with an expense of US$500,000 in 2010 and US$2 million in 2011. Had this deal been concluded before January 1, 2010, these costs would have been included in the goodwill related to the acquisition of Target Ltd.
 
Target to be measured at 100%. The acquired business should be measured at its fair value. Because taking control is a critical event, the acquired business should be reported at its fair value at 100%. It makes no difference if the parent holds 60%, 75% or 100% of the shares. As a result, the acquired business should be reported as a whole and not to the extent of the percentage of ownership. In other words, the acquired business will be reported on the same basis as the one used in the newspapers to announce the value of the deal.
 
For example, Holding plc launches an offer on Target Ltd. The offer is US$11 per share, which values the whole company at US$1.4 billion. The amount of US$1.4 billion will be used to report the deal, provided Holding plc takes control of Target Ltd., but irrespective of the actual percentage of interest Holding plc gets. 

  

It should be noted that, for deals closed before 1st January 2010, the value of the deal was recognised based on the actual percentage of interests the acquirer gained in the acquired business. 

 

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