Companies adopting International Financial Reporting Standards (IFRS) for the first time this year face a radical change both in the way they account for business combinations and in how they approach their due diligence ahead of finalising them.
Until now many have treated the allocation of the purchase price between the various assets and liabilities acquired largely as an afterthought to be sorted out towards the end of an acquisition. Doing this in the future, however, risks unwelcome surprises in the post-acquisition financial statements and challenging questions from investors on the merits of the deal. The key changes centre on increased pressure to recognise many more acquired intangibles and to account for contingent liabilities ahead of determining the residual goodwill.
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