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In September 2014, EFRAG published a Short Discussion Series paper 'Presentation of the reversal of acquisition 'step-ups'.
In general, respondents were not in favor of introducing new presentation or disclosure requirements although some recognised that the reversal of step-ups creates an issue and information may be relevant. The majority supported allowing entities to provide the information when needed.
Four respondents did not consider necessary to introduce new requirements and were supportive of simply allowing disclosure of the effect, when relevant to users and material. One of them (the Norwegian Accounting Standards Board) noted that this should not be restricted to step-ups that arise from business combinations or to particular types of assets (such as inventories). Another (the Dutch Accounting Standards Board) was in favor of voluntary disclosure only because of the practical problems to calculate the amounts. Another (the FRC staff) noted that the issue did not seem sufficiently widespread to justify the need for a new requirement.
Two respondents considered necessary to provide the information. One respondent (CFA UK) noted that many analysts do not view the reduced profitability in the initial period following the acquisition as recurring and therefore need the information on the reversal to make adjustments to their own measure of underlying earnings. While it noted that companies are not shy to disclose non-IFRS measures, the respondent would prefer common guidance in the interest of transparency. Another respondent (Linde) noted that there is a need to correct reported figures because the effects that occur after the application of IFRS 3 requirements are counter-productive.
One respondent (FRC staff) agreed that the inclusion of the step-ups fails to provide a fair reflection of the post-acquisition performance, because ‘fair value’, which is defined as an exit value, is not a relevant measurement basis for items such as inventory. Another respondent (Linde) noted that these effects have to be explained to users and to be ‘adjusted’ which shows that the use of fair value may not provide the most useful information. Another respondent (Mr. Chua) noted that, if there is an issue, it concerns all fair value adjustment made in accounting for the business combination and not only those on assets expected to be sold in the operating cycle.