On 31 March 2004 the International Accounting Standards Board (IASB) issued IFRS 3 "Business Combinations" (replacing IAS 22 "Business Combinations"). Accompanying revisions were also made to IAS 36 "Impairment of Assets" and IAS 38 "Intangible Assets". Although differences remain, the new standards in this area achieve a high degree of convergence with US GAAP. FAS 141 "Business Combinations" and FAS 142 "Goodwill and Other Intangible Assets" in the US have already had important implications for brand owners and the way trademarks are valued and accounted for. For the first time, trademarks and other acquired intangibles had to be separately recognised on the balance sheet.
IFRS 3 also requires identifiable assets to be recognised on the balance sheet of the acquiring entity, provided that certain conditions are met. This is a significant change from most existing (non-US) national accounting standards. These and other significant new disclosures in respect of the cost of acquisition and the main classes of assets and liabilities will mean greater transparency and will require a much more detailed due diligence process.
Following recognition, the requirements of the new standards are more onerous than before. Goodwill and intangible assets with indefinite useful economic lives will need to be tested at least annually for impairment.
It seems likely that many companies will require independent specialist valuation assistance in order to withstand the market scrutiny that greater transparency will bring and to satisfy the need for objectivity and auditor independence.
In the countries where the new IAS are being adopted, IFRS 3 is effective immediately and should be applied by quoted companies prospectively to business combinations entered into on or after 31 March 2004. The new requirements to be applied in accounting for existing goodwill and negative goodwill are effective from the beginning of the first reporting period beginning on or after 31 March 2004.
The policy with regard to unquoted companies varies by country. In the UK for example, adoption of IAS is voluntary, whereas in several European countries such as France and Spain, unlisted companies will not be allowed to adopt IAS. Where allowed, voluntary adoption of IAS by unquoted subsidiaries of a quoted company would certainly simplify consolidation and also prevent having to implement piecemeal changes as national standards boards make changes to their own standards to come into line with IAS (as is the intention in the UK for example).