Business Acquisition and Impairment Review 2010

In this, our second annual review, we have again analysed the financial statements of a diverse cross-section of Australian listed companies to assess the financial reporting impact of acquisitions made by these companies during the 2009 and 2010 financial years.  All of the findings in this review are based on our analysis of thissample of 150 companies.

Our analysis is segmented into ASX 300 and non ASX 300 entities. This allows insight into the differing acquisition strategies of large, medium and small companies.

The global financial crisis resulted in restricted availability of debt and equity capital. Australia’s economy appears to have ridden out the worst of the crisis. We were interested to assess whether this had translated into a return to M&A activity and, if so, how M&A activity is now being structured.

Having seen large levels of impairment write downs in the 2009 financial year, as the impact of the global financial crisis resulted in companies writing down assets that were purchased at prices seen at the peak of the market in the 2007 and 2008 financial years, we have also assessed the level of impairment in 2010 to determine whether this trend has continued.

We have also analysed the discount rates applied by companies in their testing of goodwill and other intangible assets for impairment, to assess how these rates compare across various industries and between larger and smaller listed entities.

The introduction of AASB 3 Business Combinations in 2006 represented a fundamental change in the way that business combinations were accounted for, requiring companies to identify, value and recognise separately identifiable intangible assets acquired as part of a business combination. From 1 July 2009 onwards, AASB 3 Business Combinations (Revised) removed the criteria that the 2009 acquirer needs to be able to reliably measure the value of intangible assets. This change has been made on the basis that it is considered that there are sufficiently reliable valuation methodologies to enable the valuation of all intangible assets.

As separately identifiable intangible assets are required to be recognised and amortised over their economic useful lives, the accounting treatment of a business combination can have a significant impact on the post acquisitions profits of an acquiring entity. This can pose a complex challenge for an acquiring company requiring, amongst other factors, the identification, recognition and measurement of intangible assets previously not recognised in the target’s balance sheet.

As part of our review we have analysed the impact that the adoption of this standard has had on the financial statements of acquiring companies, and whether this has increased the level of intangible assets identified.