Disclosing Pro Forma Information for Business Combinations (#116)
/In this podcast episode, we discuss a new accounting standard pertaining to information reporting for business combinations. The key points made are noted below.
This episode is about the new Accounting Standards Update number 29 for 2010. It’s called Disclosure of Supplementary Pro Forma Information for Business Combinations. If you work for a public company and it does acquisitions, then keep listening.
First, for some background. Up until now, if a public company completes a business combination, it’s supposed to disclose the combined revenue and earnings results of the entities as though the transaction had occurred as of the beginning of the current annual reporting period. This is on what’s called a pro forma basis, so that means you report these combined results separately from the regular income statement, and you state that they’re pro forma results.
Also, the company may be presenting comparative financial statements, which means that it’s presenting the results of multiple periods side by side. If it’s making this kind of a presentation, then it should report pro forma results for the prior period, too, so the reader has comparable information for both the current period and the prior period.
The question is, how far back do you present pro forma information? Some companies have presented pro forma results for as far back as they have comparative information in their financial statements – which may be five years or even more, while others only do it for the immediately preceding year.
Well, this ASU comes down on the side of only adding pro forma information for just the last annual reporting period, and then only if the company is even providing comparative financial information. And, again, this is only for revenue and earnings. So for example, if the company completes an acquisition in the middle of 2012, it’s supposed to provide pro forma results for both entities combined as of the beginning of 2012, and – if it also provides comparative information for additional preceding years, then it only has to issue pro forma results for the combined entities for 2011.
In addition, you’re supposed to include a description of the nature and amount of material, nonrecurring pro forma adjustments that’re directly attributable to the business combination.
Why do this? Well, the second part about new requirements are easy enough. These’re new disclosures, so obviously the FASB thinks this improves the usefulness of the total package of information that a reader of financial statements receives.
As for the first part, the FASB received a half-dozen letters about this issue, and nobody really seemed to care too much about whether you issue pro forma results for just the prior year, or for a bunch of prior years. So, this was probably a case of judging in favor of the reporting requirement that was easier to complete.
These changes should be less expensive than the current situation for those companies that were reporting pro forma results for all of the prior years listed in their comparative financial statements, since now they’re doing it just for the immediately preceding year.
If you’re with a company that was only doing it for just the immediately preceding year, then your will go up a bit, since now you have to layer on the new disclosures about material, nonrecurring adjustments.
On the whole, the core of this change was about standardizing the current disclosure practices, so it’s not really a big deal.
And a final point is that these are all changes to generally accepted accounting principles, not to international financial reporting standards. The international standards do not require pro forma disclosures, and they also don’t call for any of the extra disclosures that we just talked about.