IASB publishes discussion paper on goodwill and impairment

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Mar 19, 2020

On March 19, 2020, the International Accounting Standards Board (IASB) has published a comprehensive discussion paper DP/2020/1 "Business Combinations — Disclosures, Goodwill and Impairment". The IASB's related project aims at improving the information companies provide to investors, at a reasonable cost, about the businesses those companies buy and would help to hold management to account for its decisions to acquire those businesses. In this context, the IASB is investigating possible improvements to IFRS 3, "Business Combinations" and IAS 36, "Impairment of Assets". The comment period on the discussion paper ends on September 15, 2020.



The IASB's project on goodwill and impairment results from the post-implementation review of IFRS 3 Business Combinations.

The feedback on the post-implementation review had revealed that impairment of goodwill is not always recognized in a timely fashion and that disclosures required by IFRS Standards do not provide enough information to understand whether the acquired business is performing as was expected at the time of the acquisition. There were also comments that the impairment test required for goodwill under IAS 36, Impairment of Assets is costly and complex. Some respondents also suggested reintroducing amortization of good will.

In February 2015, to address the concerns mentioned and investigate possible improvements to IFRS 3, Business Combinations and IAS 36, the IASB added to its research agenda the following areas of focus, which later evolved into the goodwill and impairment project:

  • improving the impairment test in IAS 36;
  • subsequent accounting for goodwill (including the relative merits of an impairment-only approach and an amortization and impairment approach); and
  • identification and measurement of intangible assets acquired in a business combination.

The discussions leading to the discussion paper published today were taken up in September 2015.


Summary of preliminary views

The discussion paper DP/2020/1 Business Combinations — Disclosures, Goodwill and Impairment presents preliminary views on the following topics:

Improving disclosures about acquisitions. The IASB believes that companies should be required to disclose the strategic rationale for an acquisition, the objectives for the acquisition, and the metrics for monitoring achievement of objectives. This should be disclosed at the acquisition date. After the acquisition date the performance against the objectives should be disclosed. Companies would disclose information management uses internally to monitor acquisitions, therefore, they would not need to create information solely for external reporting purposes. Disclosure would be required for as long as the performance is monitored by management. If the company ceases to monitor the performance or if the metrics for monitoring the performance are changed, the reason for doing so would be disclosed. The Board also believes that it should develop additional proposals that would require companies to disclose the amount, or range, of synergies expected from the acquisition, to disclose the amount of defined benefit pension liabilities and debt of the acquiree, and to disclose both actual and pro-forma revenue, operating profit and cash flows from operating activities.

Improving accounting for goodwill — Can the impairment test be made more effective? The Board believes that significantly improving the effectiveness of the test at a reasonable cost is not feasible. It also points out that shielding cannot be eliminated because goodwill has to be tested for impairment with other assets. The discussion paper also notes that an impairments test cannot always signal how an acquisition is performing, but that does not mean that the test has failed. When performed well, the test can be expected to achieve its objective of ensuring that the carrying amount of the cash-generating unit as a whole is not higher than its combined recoverable amount. The disclosure ideas discussed above could help provide investors with the information about the performance of acquisition they need. Finally, the discussion paper notes that if estimates of cash flows are too optimistic, this is best addressed by auditors and regulators, not by changing IFRS Standards.

Improving accounting for goodwill — Should amortization of goodwill be reintroduced? Having concluded that the impairment test cannot be significantly improved at a reasonable cost, the Board considered whether to reintroduce amortization of goodwill (an impairment test would still be required). The discussion paper notes that Board members have different views on this topic, but by (narrow) majority came to the preliminary view that the Board should retain the impairment only approach because there is no compelling evidence that amortization would significantly improve financial reporting. The impairment test is believed to provide more useful information than an arbitrary amortization charge and is more effective at holding management to account for acquisition decisions. The Board believes that it would not be appropriate to reintroduce amortization solely because of concerns that the impairment test is not being applied rigorously or simply to reduce goodwill carrying amounts. In this context, the Board also came to the preliminary conclusion that it should develop a proposal to require companies to present on their balance sheets total equity before goodwill.

Improving accounting for goodwill — Simplifying the impairment test. The Board is of the preliminary view that it should provide relief from the mandatory annual quantitative impairment test. A quantitative impairment test would be required only if there is an indication of impairment. The Board believes that the reduction in robustness of the test would be marginal because it is unlikely that material impairment losses occur with no indicator. Similarly, the Board is of the opinion that the benefit of performing the test when there is no indicator is marginal. The Board also intends to improve the calculation of value in use. This would be achieved by removing the restriction in IAS 36 that prohibits companies from including uncommitted restructuring and asset enhancement cash flows and by allowing companies to use post-tax inputs and post-tax discount rates in calculating value in use.

Other topics. The discussion paper also sets out the Board's preliminary view that it should continue to require identifiable intangible assets to be recognized separately from goodwill. The Board believes that there is no compelling evidence that the requirements in IAS 38 should be amended. Considering whether to align the accounting treatments for acquired and internally generated intangible assets would be beyond the scope of the project.

Comments on the discussion paper are requested by September 15, 2020.


Additional information on the IASB's website


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