A qualitative study of IFRS 3 - Allocation of the net acquisition cost

Abstract: Background and Problematization: Increased globalization has created a larger demand for a harmonization within accounting areas. The new accountancy standard, which is called IFRS, emphasizes that companies, to a larger extent than before in Sweden, make their own judgements of economic events. With the introduction of the IFRS standards, the purpose is to show the true and fair value of a company. One of the most significant changes has taken place within the regulation that concerns Business combinations which is denominated the IFRS 3 standard. When the IFRS 3 was introduced, companies quoted on the Swedish stock market became obliged to specify, to a larger extent than before, the acquired intangible assets instead of accounting them as part of goodwill. A problem seen from the external shareholder’s decision-making point of view is the fact that different entities allocate various amounts and percentages of the total acquisition cost. While some entities assign the total acquisition cost as goodwill, others assign only a small fraction of the total amount. Purpose: The purpose of this report has been to examine how companies reasoned and effected the allocation of the net acquisition cost between different assets and goodwill when acquiring companies. An additional purpose has been to illuminate how companies’ allocation of acquisition cost affects analysts’ opinions of the accounting information. Choice of method: The authors have conducted a qualitative study based on interviews. An investigation on how three selected companies reasoned when applying the IFRS 3 rules concerning allocation of acquisition cost between assets has been effected. Result and conclusions: There are several different reasons why allocation of acquisition cost differs between companies. Synergy effects, the acquirers’ size relative to the acquiree and result management incentives are all possible explanations as to why differences exist. Regarding the second question, the authors have come to the conclusion that analysts are far more interested in cash flows and as a result, effects from the transition on analysts have been quite limited. Further research within the area: The authors claim that it would be interesting to conduct a similar study within a few years to see the effects of time and experience regarding the application of the IFRS 3 regulation. Also, an investigation on the effects of a future recession on contingent impairments would be of interest.