business-combinations

Football player transfers highlight wider reporting issues

Posted on

In many transactions the amount payable may not be not known until sometime after the related asset, liability, income or expense is recognised in financial statements. In some cases, the accounting for this ‘variable consideration’ is clearly specified by IFRS. However, in others, including the purchase of fixed assets, companies may adopt different approaches.

Intangible assets arising from football player transfers are a good example of where companies can apply different accounting policies for variable consideration. We use the financial statements of Manchester United to explain the challenges for investors.

Continue reading “Football player transfers highlight wider reporting issues” →

Negative goodwill may not mean a bargain purchase

Posted on

Acquisitions of struggling banks are producing record profits due to negative goodwill ‘bargain purchase gains’. The Q1 2023 earnings of Citizens Bank was $9,504m compared with $264m in the same period last year, largely due to its Silicon Valley Bank deal.

Negative goodwill arising from business combinations is reported as an immediate profit under both IFRS and US GAAP; but does it really represent an increase in shareholder value? We explain the meaning of negative goodwill, its relevance for investors and why we think (at best) only part should be recognised as a profit.

Continue reading “Negative goodwill may not mean a bargain purchase” →

M&A accounting: Puzzling gains and counterintuitive cashflows

Posted on

Companies are continuously reshuffling their business portfolio by either spinning off assets (GlaxoSmithKline, Vivendi) or increasing their share in existing businesses (BMW, Siemens Energy). However, the M&A accounting applied to these transactions can produce some unusual and potentially confusing effects.

In 2022, German luxury car manufacturer BMW increased its stake in its Chinese joint venture BMW Brilliance from 50% to 75%. Surprisingly, this produced a gain in profit and loss (even though nothing had been sold), a cash inflow (even though BMW paid cash for the additional investment), and recognition of an asset that BMW already owned.

Continue reading “M&A accounting: Puzzling gains and counterintuitive cashflows” →