Title: Revision of the Accounting Code for Business Combinations on the Principle of Giving Full Play to the Accounting Function Author: Li Ming Fang Jie Li Shu Peng Chuan Units: Center for Finance and Accounting, Chinese Academy of Fiscal Sciences, Graduate School of Chinese Academy of Fiscal Sciences Issue: Journal of Fiscal Science, No. 6, 2021
This paper conducts research and analysis on the many discussions (especially since 2020) of the relevant foreign accounting standards institutions on the improvement of the accounting standards for business combinations in recent years, the application status of china's merger accounting standards and their impact on the capital market, and the relevant debates in the accounting community on the theory and technology of merger accounting. It aims to explore how to improve the accounting standards for enterprise mergers in China under the new world economic situation and the domestic economic situation, so as to further improve the quality of accounting information in the capital market and optimize the efficiency of resource allocation in the capital market. On the basis of summarizing and analyzing the existing problems and their causes of the disclosure of consolidated accounting information in China, this paper proposes that the revision of the consolidated accounting standards should be based on the basic principle of fully and completely playing the accounting function, and the current enterprise consolidation accounting norms should be revised from the following aspects to further improve the quality of china's consolidated accounting information disclosure: clarify the consolidated accounting objectives, improve the consolidated accounting standards and related accounting standards with the goal orientation; adhere to the principle of distinguishing the types of control and applying the consolidated accounting methods, and refine the contents of the consolidated disclosure apply the full fair value method to consolidated accounting under current non-identical control, amortize goodwill with simplified impairment testing, and reasonably set the amortization period of goodwill.
Keywords: accounting function Standard goal-oriented Business combination accounting Goodwill Resource allocation efficiency
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The new wave of global mergers and acquisitions, which began in 2014, is deeply affected by the rapid development of global information technology on the economy, and the bidding methods of corporate M&A consideration, the conditions for the realization of M&A contracts, and the diversity and complexity of M&A content have changed greatly compared with previous M&A. The current consolidated accounting norms can no longer meet the decision-making needs of financial reporting users, and the reality of economic development has become increasingly urgent for the improvement of the current accounting standards related to enterprise consolidation accounting. Accordingly, the IASB and relevant international institutions have repeatedly issued discussion drafts and drafts of comments on the accounting norms involved in business mergers, and China's accounting regulations formulation department has also issued a number of supplementary provisions related to merger standards based on national conditions. However, as of now, under the new world economic situation and the domestic economic situation, how to improve the accounting norms for enterprise mergers in China to further improve the quality of accounting information in the capital market and optimize the efficiency of resource allocation in the capital market is still a theoretical and practical issue that needs to be broken through urgently.
On the basis of summarizing and analyzing the existing problems and their causes of the disclosure of consolidated accounting information in China, this paper proposes that the revision of the consolidated accounting standards should be based on the basic principle of fully and completely playing the accounting function, and the current enterprise consolidation accounting norms should be revised from the following aspects to further improve the quality of china's consolidated accounting information disclosure: clarify the consolidated accounting objectives, improve the consolidated accounting standards and related accounting standards with the goal orientation; adhere to the principle of distinguishing the types of control and applying the consolidated accounting methods, and refine the contents of the consolidated disclosure apply the full fair value method to consolidated accounting under current non-identical control, amortize goodwill with simplified impairment testing, and reasonably set the amortization period of goodwill.
Current status of application of consolidated accounting practices
and its impact on capital markets
(1) The current situation of the application of accounting standards for enterprise mergers in China and the existing problems
1. The improvement of the quality of accounting information in the capital market by the consolidated accounting standard system is manifested as the high and the low after
The current consolidated accounting standard system in China referred to in this article is a series of accounting regulations on consolidated transactions, which are mainly based on the three specific enterprise standards of enterprise consolidation, long-term equity investment and consolidated statements, their guidelines and relevant interpretations and announcements, supplemented by the relevant provisions of other standards (such as asset impairment, intangible assets, financial instruments, etc.). The current system of consolidated accounting norms is characterized by a commitment to nationalization in major aspects (such as adherence to the equity pooling method under the same control), while other aspects focus on international synergy. Empirical studies have shown that after the implementation of the new accounting standard system in 2006 to the end of 2009, the consolidated financial statements under the new standard can provide investors with more useful information for decision-making than before the implementation of the new standard. The value correlation of the accounting information in the consolidated financial statements is higher than the value correlation of the accounting information in the parent company's financial statements.
Over time, studies have found that between 2012 and 2017, consolidated statements were lower than parent statements in terms of the relevance of the value of accounting information. In 2018, the CSRC emphasized the impairment of goodwill, and there was a large-scale impairment of goodwill in listed companies that year, and the discussion of "goodwill thunderstorm" spread throughout the capital market. Between 2018 and April 2021, a number of studies in China, arising from the IASB's discussions on consolidated accounting and impairment of goodwill, showed that the relevance of consolidated accounting information in decisions as a whole was general, and in particular the usefulness of goodwill impairment accounting information was low. The application of consolidated accounting standards has improved the quality of accounting information of enterprises in China, and generally shows a trend of high in the previous stage and low in the later stage, and since 2012, the decision-making usefulness of consolidated accounting information is not high.
2. Adhere to the application of the equity set method to maintain the spirit of reflecting the "essence of the transaction" and effectively control the total scale of goodwill
At present, the major difference between China's consolidated accounting norms and the International Consolidation Accounting Standards is that China adopts the equity pooling method for enterprise mergers under the same control, and based on the theoretical basis that the "transaction essence" of the merger of enterprises under the same control is equity alliance rather than general commodity transactions, the net book value of the merged enterprise calculated according to the proportion of the shares of the merged enterprise is used as the initial recorded value of the long-term equity investment of the merged enterprise, and the difference between the merger consideration and the recorded value adjusts the owner's equity. In the consolidated asset-liability statement, the assets and liabilities of subsidiaries are also consolidated into the consolidated statement at carrying amount. In the consolidated income statement, according to the viewpoint of equity joint theory, under the same control, it should be regarded as if the merged enterprise existed under the control of the merged enterprise at the beginning of the consolidated statement, and the profits of the merged enterprise from the beginning of the period to the date of the merger should be incorporated into the consolidated statement of the merged enterprise. The same logic applies to the preparation of the consolidated cash flow statement.
Judging from the results since the implementation of the consolidated accounting standards, the equity pooling method adopted for the merger of enterprises under the same control is in line with China's national conditions. There are a relatively large number of large state-owned enterprise groups in China, and the actual controllers are the State-owned Assets Supervision and Administration Commission of the State Council or other ministries and commissions and local state-owned assets supervision and administration commissions. Merger transactions between these groups or their subsidiaries are more based on the overall arrangement of the state-owned asset management strategy, and are not simply based on market rules. The essence of the transaction is indeed a joint equity transaction rather than a general commodity transaction, such as the merger of China's CSR and CNR, the merger of CSSC and CSIC, and Baosteel's gratuitous acquisition of control of Masteel and other major merger cases. The insistence on the application of the equity pooling method under the same control not only makes the merger accounting faithfully reflect the essence of the merger transaction, but also helps to simplify the merger procedures of large enterprises in China, saving the expenditure of related merger costs and the improvement of the efficiency of the merger work. More importantly, due to the application of the equity set method, the proportion of the total goodwill of listed companies in China to their net assets is not as high as the international proportion. If China fully integrates with international standards at the beginning of the application of the consolidated accounting standards and adopts the purchase method for business combinations, the total amount of goodwill accumulated so far will be much greater than the current value, and the risk of goodwill impairment will pose a greater threat to the security of the financial market system.
3. The listed company has performed badly in implementing the current consolidated accounting standards
A comprehensive analysis of the Accounting Supervision Report of listed companies' annual reports issued by the China Securities Regulatory Commission for many consecutive years shows that some or individual of the following bad performances of listed companies in China in the implementation of the merger accounting norms are : (1) the accounting treatment of the derecognition of financial assets involved in the step-by-step realization of the enterprise merger is incorrect; (2) the judgment of the control is incorrect, and the enterprise merger under the same control is not correctly identified; (3) the intangible assets and goodwill in the enterprise merger are not properly recognized ;(4) Incorrect adjustment of consolidated costs after the date of purchase; (5) Failure to correctly recognize performance compensation, failure to correctly make subsequent measurements of contingent assets; (6) failure to correctly identify and account for equity transactions, errors in accounting treatment for loss of control of subsidiaries; (7) failure to fully disclose material judgments related to consolidated statements; (8) arbitrary changes to asset groups or combinations of asset groups involved in goodwill; (9) failure to properly conduct goodwill impairment tests and failure to fully recognize impairment losses on goodwill and asset groups ;(10) Incorrect recognition of deferred tax assets for impairment of goodwill. The formation of the above-mentioned bad performances is due to the subjective and deliberate reasons of the listed company, the reasons for the accounting professional level of the executive entity, the reason that the understanding of the principle provisions in the content of the norm is not in place, and the reason why the current norms are not meticulous enough.
4. There is a lack of normative guidance on the accounting treatment of consolidated consideration in performance VAM mergers and acquisitions
Since 2014, in the enterprise merger transactions that are not under the same control in China, the number of merger and acquisition contracts signed in the form of performance betting each year has accounted for a relatively high proportion of the total number of merger transactions. According to wind data statistics, the composition of VAM and non-VAM transactions in M&A transactions of listed companies in China from 2017 to 2020 is as follows:
The share of VAM M&A transactions in 2017-2020 has decreased year by year, but by the end of 2020, VAM M&A transactions will still account for nearly half of all M&A transactions. Therefore, the quality of accounting reflection and control effect of VAM M&A transactions have a significant impact on the achievement of the objectives of the consolidated accounting. The calculation of the consolidated consideration, the content of the consideration bid and the accounting reflection of the amount of performance compensation in the VAM merger have an important impact on the choice of accounting control behavior of the transaction. In the current consolidated accounting norms, the relevant provisions on performance VAM mergers and acquisitions are principled, and the spirit of the main provisions is: to truthfully and objectively reflect the measurement of the merger consideration, and to distinguish the assets or liabilities of performance compensation. These provisions lack specific guidelines for identifying the specific economic substance of the merger consideration under the performance VAM transaction method from the purpose of accounting reflection and control, resulting in the accounting reflection of the consolidated consideration under the performance VAM merger, and the initial measurement of the value of goodwill is included in the economic content that is not goodwill. For example, the inclusion of some intangible assets that should otherwise be included in the life-limited (mostly intangible assets of customer relationship or special service value) is included in the goodwill, which significantly increases the initial measurement amount of the consolidated goodwill. This phenomenon is particularly prominent in the cases of high-tech enterprises and VAM mergers and acquisitions in the film and television entertainment industry.
5. The information disclosure requirements for the consolidated fees are not detailed enough
Judging from the use of the accounting standards for the merger of enterprises in recent years, the information disclosure of the consolidated expenses needs to be refined in terms of fully realizing the accounting reflection and control functions. The details are as follows:
(1) The notes to the consolidated statements do not require clarification of the operating performance of the management team before and after the consolidation. That is, it should be clearly stated in the notes to the consolidated statements of the current year that the profits realized by the consolidated subsidiaries in the current year from the beginning of the year to the date of consolidation and the profit realized from the date of consolidation to the date of the statement should be clearly stated. This can fully reflect the different performance performance of the merged enterprises before and after the merger, facilitate the relevant performance appraisal, and also facilitate the analysis and evaluation of the performance of the subsidiaries before and after the merger of the subsidiaries in the year of consolidation. Since the current normative system does not require this, the accounting function of reflecting and controlling merger transactions under the equity pooling method is relatively weakened.
(2) The disclosure provisions of the consolidated statements do not require a clear and unambiguous statement of the total expenditure of all consolidated expenses in the current year, and the disclosure of a sub-list of consolidated expenses. The current provision is that the general inclusion of various direct and indirect consolidated expenses in the current period's expenses is not subdivided, which is not conducive to the users of the statement and potential investors and creditors to understand the expenditure of the consolidated expenses, nor is it conducive to the performance evaluation of the enterprise by the stakeholders of the enterprise, which correspondingly weakens the accounting function of reflecting and controlling the consolidated transaction.
(2) The rapid growth of the total scale of goodwill of listed companies has increased the pressure of risk prevention in the capital market
According to the statistics of wind database on May 14, 2021, the total goodwill of all A-share listed companies in 2020 was 3,865 billion yuan, an increase of 145% compared with the total goodwill of 2019 (1,577.8 billion yuan). The total impairment of goodwill was 423 billion yuan, accounting for 10.94% of the total goodwill, and the net profit was 2792.3 billion yuan, and the total book value of goodwill was 1.23 times the net profit of the year. The net book value of goodwill of 3.44 trillion yuan is formed by the use of the purchase method under non-identical control and the subsequent measurement of goodwill using an impairment model. The total goodwill of A-share listed companies in 2020 increased by 1.45 times compared with the previous year, indicating that the scale of business combination transactions and the scale of consolidated goodwill of A-share listed companies that are not under the same control have increased significantly in 2020. If this trend is developed, the total goodwill of A-share listed companies will grow rapidly, which will be much greater than the growth rate of total net profit. The rapid growth of total goodwill has brought greater pressure and variables to the prevention of market risks under the shadow of the epidemic.
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