UKEB introduces research on goodwill subsequent measurement at IFASS meeting

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Oct 07, 2022

At the meeting of the International Forum of Accounting Standard Setters (IFASS) held in London in September, a representative of the UK Endorsement Board (UKEB) introduced the recent research report "Subsequent Measurement of Goodwill: A Hybrid Model".

The UKEB representative noted that the research objective of the UKEB's goodwill research project is to contribute to the ongoing international debate on the subsequent measurement of goodwill by exploring the practical implications of a potential transition to a hybrid model consisting of an annual amortisation charge, combined with impairment testing that would take place only when there was an indicator of impairment, and supporting disclosures to increase management accountability for acquisitions.

The research explored the effects of the application of the impairment-only model for UK IFRS reporters from 2005 to 2021. It found that:

  • The carrying amount of goodwill in the FTSE 350 increased from £227 billion in 2005 to £397 billion in 2021.
  • A total of 228 companies in the FTSE 350 reported goodwill in 2021, representing on average 18% of total assets and 63% of net assets.
  • Current disclosures on goodwill and impairment provide limited insight into the age of goodwill or the acquisitions that led to its recognition on companies’ balance sheets.

The research also indicated that a transition to a hybrid model would be practically feasible as the majority of preparers involved in the outreach believe it is possible to estimate a useful life for goodwill through consideration of a range of relevant factors and if sufficient application guidance is provided. They also believed that suitable transition arrangements could be provided for legacy goodwill. No significant adverse consequences for financial stability or for processes, operations or costs were identified.

Feedback from outreach participants also revealed that the following benefits from a hybrid model could be anticipated:

  1. More faithful representation of underlying economics by reflecting the consumption of economic benefits (although not all stakeholders agree that goodwill is a wasting asset).
  2. Reduced impact of the shielding effect because the hybrid model would require management tracking of goodwill on an acquisition by acquisition basis.
  3. Improved comparability between entities that grow organically and those that grow through acquisition.
  4. Disclosure of management assumptions underpinning the estimate of useful life would increase management accountability for acquisitions.
  5. Potential cost savings as impairment testing will be done on an indicator only basis (potentially offset by cost of monitoring useful life of goodwill).

Review the full research report on the UKEB's website.

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