Goodwill and impairment

Date recorded:

Agenda paper summary


As a result of the post-implementation review (“PIR”) of IFRS 3 the IASB decided to examine issues related to the subsequent accounting for goodwill; improving the impairment test in IAS 36; and the identification and measurement of intangible assets in a business combination.  The IASB started its discussions on the first two of these topics at the October 2015 meeting, and the third topic – identification and measurement of intangible assets in a business combination – was discussed at the November 2015 meeting.  At this meeting, the IASB also considered the feedback received so far about what users of financial statements wanted to receive about goodwill and impairment.

The IASB was not asked to make any decisions in this meeting.  The purpose of the session was for the IASB to consider what additional information they needed before discussing the most appropriate due process document to work towards (discussion paper or exposure draft), and to be in a position to discuss any of the topics with the FASB.  The FASB also has active projects on its agenda looking at accounting for goodwill, including impairment, and for the accounting for identifiable intangible assets in a business combination; and given IFRS 3 and the equivalent FASB guidance are aligned, there is strong support for the boards to work together in this area to ensure convergence is maintained.  Further, at the Accounting Standards Advisory Forum (ASAF) meeting in December, the staff will ask the ASAF to consider the IASB’s initial discussions at its October and November 2015 meetings; and provide advice on the way forward with the project – including the most appropriate due process document to work towards.

Identification and measurement of intangible assets in a business combination

The IASB received feedback that some intangible assets are costly, complex, and time-consuming to measure at fair value; and further, that valuations of some intangible assets are subjective and do not result in useful information.  Accordingly, the feedback indicated that the benefit of the information provided to users of financial statements about these intangible assets did not justify the costs of separately recognising them.

Paper 18A considered four approaches for possible improvement/simplification:  Approach 1 – No change to existing requirements; Approach 2 – subsume some identifiable intangible assets in goodwill for cost-benefit reasons; Approach 3 – only separately recognise those intangible assets for which fair value can be measured reliably; and Approach 4 – Allow further grouping of intangible assets.

The staff supported Approach 1 – No change to existing requirements (not subsuming any identifiable intangible assets in goodwill); however, recommended that prior to making any decisions, the IASB should discuss Approach 2, and in particular, whether any customer related intangible assets should be subsumed in goodwill, at a joint meeting with the FASB to avoid divergence between the board’s converged standards.  The staff did not recommend the IASB pursued Approaches 3 or 4 any further.

The staff also suggested that the IASB should work with the FASB to consider whether there is a need to clarify the requirements for customer relationships and also consider whether further guidance or education material could be developed to address other issues.  The staff further suggested that the IASB also considered several improvements to disclosures: a) considering the IFRS 13 disclosures for significant intangible assets; and b) assessing whether the existing disclosure requirements in IFRS 3 are still relevant or justified from a cost-benefit perspective and also when considering them against the disclosure objective in IFRS 3.

The IASB was not asked to make any decisions at this meeting.  The session provided the IASB members with an opportunity to have an initial discussion to determine whether they required any additional information before developing their views on which of the approaches to consider further.  Further, in making any decisions as to which approach to take, the IASB will need to work with the FASB to avoid divergence, and should also consider the interaction this topic has with other areas of accounting for goodwill and impairment.

Feedback from users

At the October 2015 meeting, the IASB asked the staff to perform additional work to better understand what information investors wanted to receive about goodwill and impairment and how they currently used the information about goodwill and impairment provided by companies, in order to inform the IASB’s future discussions.

Paper 18B summarised the feedback received from various sources, and feedback received in the November Capital Markets Advisory Committee (CMAC) meeting was provided orally to the IASB at the November meeting.

The IASB was asked whether they required any additional information and whether; based on feedback received, they thought the staff should consider addressing any disclosures about subsequent performance of the acquired business, for example about whether the key targets/synergies of the acquisition are met, as part of this project.

IASB discussion

Identification and measurement of intangible assets in a business combination

There was general agreement amongst the IASB members on the approach proposed by the staff, and the need to begin discussions with the FASB as soon as possible.

One IASB member suggested that if the IASB was to try to make the distinction between identifiable intangible assets that should be subsumed in goodwill and those that should remain independent.  This could be done on the basis of whether the intangible asset was capable of generating cash flows distinct from the actual reporting entity.  The IASB member thought that the notion of separability that was introduced in the 2008 amendments to IFRS 3 was a good starting point, but that this needed expanding to look at whether the intangible asset was also generating value.

Another IASB member highlighted, from reading paragraphs 37 and 44 in the agenda paper, that when deliberating on the 2008 amendments, the IASB had considered the concerns raised that some intangible assets were complex and subjective to measure, which meant that the information is less useful.  As the Basis for Conclusions notes, the IASB made a conscious decision that separate recognition on the basis of an estimate of fair value (rather than subsuming in goodwill) provided better information to users of financial statements, even if a significant degree of judgement was required to estimate fair value.  The IASB member noted that they still agreed with that decision, and that Approach 3 was definitely out.

A further IASB member believed that both Approaches 1 and 2 should be given equal weighting at this stage and, to avoid making fundamental changes, suggested a modified Approach 2 whereby only indefinite life intangibles would be subsumed into goodwill.  The IASB member further suggested that the loss of information (through additional intangible assets being subsumed into goodwill) could be mitigated through enhanced qualitative disclosures about goodwill.  

Several IASB members requested more detail on the process the FASB had been through in reaching their current position (the FASB’s external papers only provide summaries of what was discussed), noting that it would be helpful to have this background information prior to having discussions with the FASB. 

In bringing the discussion to a close, the IASB Chairman noted that he liked the general approach in the agenda paper, but stressed that it was important that the IASB had all the information on the interrelated topics before making any decisions.  He referred to paragraph 22(f) of the agenda paper, which stated that “Many users have concerns about separately identifying intangibles because of the effect of their amortisation on profits, rather than the fact they are recognised separately from goodwill. This is because they have concerns that, amortising intangible assets that are considered to be continually replaced by the entity (e.g. brands and customer-related intangibles) results in double counting of expenses. This is because an entity will expense both amortisation and the expense incurred to grow new intangible assets or maintain existing ones, for example sales and marketing expenses.”  He thought that the users had a point and that what the IASB had previously decided could be conceptually wrong here.  He directed the staff to look into this issue further.  With respect to goodwill, he noted that, to the extent that goodwill resulted from expected synergies, his sense was that it was clearly conceptually wrong not to amortise it, adding that not amortising goodwill created perverse incentives for entities to grow through acquisitions rather than through organic growth.  He asked the staff to specifically look at this conceptual issue, including the reasons why previous boards decided against amortisation of goodwill.  He noted that he could imagine a final picture whereby there would be some amortisation of goodwill, which could result in different incentives for entities to recognise intangibles vs goodwill in the future.  He reiterated the comments he had made in previous discussions that the IASB needed to be careful making significant changes to a recently amended Standard, and that such changes should only be made where the IASB decided that there were things that were conceptually wrong.

Feedback from users

The IASB Senior Technical Manager provided the IASB with a summary of the feedback received in the November CMAC meeting.  The CMAC members were asked for their views on goodwill amortisation and how they used the information provided by entities (i.e. whether or not they made any adjustments).  Responses were mixed, and the feedback was not radically different to the feedback received from users in the PIR.  Some CMAC members supported amortisation of goodwill, because they thought it provided useful information about the number of years that management expected to benefit from the investment, and best reflected the fact that goodwill was consumed and replaced by internally generated goodwill.  Other CMAC members thought that conceptually, the current impairment test was the right approach even though in practice losses are often recognised late.  They thought that amortisation would only be arbitrary and could hide some of the information provided by the current impairment test – i.e. whether management had overpaid. 

An IASB member who was also present at the CMAC meeting added that even though there were differing views on impairment and amortisation amongst the CMAC members, there was a common desire for information that would assist them in understanding what it was that management thought they were paying for, the drivers behind management being willing to pay an additional amount, and whether the acquisition had performed better or worse than expected when that price was paid.  The IASB member further suggested that the staff look at coming up with disclosures that communicated what was paid for and how the entity had performed relative to what management thought they were paying for; adding that the challenge would be coming up with something preparers could actually provide and that wasn’t too forward looking and outside of what was generally considered the scope of financial statements.

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