G4+1 Invitation to Comment on Recommendations for Achieving Convergence on the Methods of Accounting for Business Combinations

22 April 1999

The Secretary General
International Accounting Standards Committee
166 Fleet Street
London EC4A 204
UNITED KINGDOM

Dear Sir

G4+1 Invitation to Comment
Recommendations for Achieving Convergence on the Methods of Accounting for Business Combinations

The Group of 100 is pleased to respond to the G4+1s Invitation to Comment. Our comments are set out below.

Question 1

Do the differences in the methods of accounting for business combinations and when they are applied make it difficult to compare financial statements of companies that apply different methods? Do those differences affect competition in the markets for mergers and acquisitions?

The Group of 100 believes that different methods are appropriate to recognise different circumstances and arrangements. Uniformity and comparability are not seen as ends in themselves. Rather the financial statements should reflect the underlying economic rationale of the business combination. As such, we believe that in the majority of cases the purchase method will be appropriate but that the uniting of interests (pooling) method may be appropriate in some circumstances such as occurred in respect of Swiss Bank – UBS and Citibank – Travellers Group mergers.

Our members believe that the method of accounting is often a significant factor in determining whether a business combination occurs. For example, it is our belief that a transaction is more likely to be consummated if the pooling of interests rather than the purchase method can be used if the relevant criteria are met.

Question 2

The Position Paper argues that a single method of accounting for all business combinations is preferable to two or more methods. Do you agree with this view? If not, why not?

No. Although similar transactions should be accounted for in the same way, the Group of 100 does not agree that all business combinations are identical. The method which is appropriate in different situations should reflect the commercial nature of the transaction and, as such, would be determined on the basis of the facts in each case.

Question 3

After considering the particular methods, the Position Paper argues that the pooling of interests method should not be applied to transactions that meet the definition of a business combination? Do you agree with that view? If not, why not?

The Group of 100 believes that the pooling of interests method should be permitted in limited circumstances where it is not possible to identify an acquirer such as the merger of entities of similar size and transactions between entities subject to common control. The Group of 100 would support the development of detailed rules to facilitate the determination of cases where pooling of interests is applied from those where the purchase method is applied.

Question 4

If a single method is to be prescribed it should be the purchase method. If not, why not? Which method would be more appropriate and why?

The Group of 100 does not support the prescription of a single method for all business combinations. If business combinations are different in nature and substance we believe that forcing the use of a single method will result in accounting numbers which are not representationally faithful.

Question 5

Application of the purchase method depends on being able to identify the acquirer of the purchase method. What should be done when an acquirer cannot be identified?

The Group of 100 believes that the focus of the effort should be on identifying and assessing the commercial and economic substance of the business combinations. The accounting method adopted should be consistent with the economic substance.

Question 6

Do you favour applying the fresh start method to certain business combinations?

The Group of 100 believes that the fresh start method may be appropriate in circumstances where its application reflects the economic substance of the business combination. As such its use should not be prohibited.

Yours sincerely,

Bryce JH Denison
National President

c.c. Mr. Ken Spencer
Chairman
Australian Accounting Standards Board