Goodwill and impairment

Date recorded:

Following the post-implementation review (“PIR”) of IFRS 3, several projects related to IFRS 3 were added to IASB’s research agenda.  At their joint meeting in September, the IASB and FASB discussed their respective projects related to their Business Combinations Standards, and how the boards could work together on these projects.  At this meeting, the IASB started its discussions of two of these projects:  Definition of a business; and Goodwill and Impairment.

Goodwill and Impairment (Agenda papers 18A and 18B)

As a result of the 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 discussed the first two of these topics at the October meeting, with the third topic to be discussed at the November meeting.  The IASB was not asked to make any decisions at this meeting.  The intention is for the IASB to develop its views on all three topics, consider their interactions and have a discussion about the most appropriate due process document to work towards at the November meeting; after all three topics have been discussed.

Subsequent accounting for goodwill

The paper analysed four approaches the IASB could take:

  • developing an improved impairment test;
  • moving to the amortisation of goodwill;
  • accounting for the separate components of goodwill; and
  • writing goodwill off on acquisition. 

The staff recommended that the IASB focused on improving the impairment test for goodwill because they thought that the impairment test could be sufficiently improved, which would mitigate the need to make other changes.

Improving the impairment test

The PIR highlighted that the current impairment requirements in IAS 36 are perceived as being costly and complex to apply, and that there are shortcomings in the information provided to investors.  The paper considered four areas for possible improvement/simplification: Revisiting the methodology in the calculation of recoverable amount; Relief from the annual impairment test; Simplifying/clarifying the value in use calculation; and Adding guidance on identifying cash generating units (CGUs) and allocating goodwill to CGUs.  The staff recommended several ways of improving and simplifying the existing impairment requirements that the IASB could consider.  These are set out in paragraph 72 of agenda paper 18B for this meeting.


IASB Discussion

Subsequent accounting for goodwill

There was general consensus amongst IASB members of the need to introduce more rigour into the process to hold management accountable and force management to make goodwill more transparent than it is currently. However, several IASB members were sceptical as to whether the current impairment test could be simplified. 

Several IASB members expressed concerns about making major changes to the Standard given the fact that none of the arguments being put forward now were new, and given the mixed views on the most appropriate accounting for goodwill. 

Some IASB members thought that one of the biggest flaws in the impairment test today was the inability to hold management accountable.  Often, companies acquire a business and integrate it into their existing business. Visibility is lost as the acquired goodwill is tested in a CGU alongside existing goodwill.  As a result investors find it difficult to assess what was acquired, and whether the assumptions made at the time of the acquisition played out as expected.  The issue of whether impairment losses were being recognised too late under the current impairment model was also highlighted.

Some believed that a combination of impairment and amortisation would provide a better approach.  It was suggested that when management pays consideration in excess of the fair value of the net assets acquired they should be required to demonstrate what the excess purchase price was being attributed to, and over what horizon they expected to earn the excess returns (i.e. take a more forward looking approach).  This would determine the period over which goodwill should be amortised.  If these assumptions are not holding, it could indicate that impairment was appropriate.

One IASB member expressed strong views for taking an approach that was a combination of direct, immediate, write off and accounting for the separate components of goodwill, noting that discipline and rigour was the most important issue that needed to be addressed.  He believed that a self-policing mechanism should be introduced, whereby management would be incentivised to prove the existence of what they had purchased and estimate correctly the finite life of those assets, and anything that could not be proven would be directly written off.

There was support for the staff performing further outreach with respect to the needs of investors in this area. It was suggested that if the IASB had a better understanding of what investors were trying to get from the impairment information, this could help not only in the debate about impairment versus amortisation, but also indicate whether the IASB needed to take a step back and look at other presentation and/or disclosure tools that could help provide this information.

An IASB member suggested that the staff could explore further whether the form of consideration was important, noting that management tended to be much more savvy when paying cash or using debt than when using shares of the acquirer to fund the acquisition.  Big overpayments and subsequent write offs tended to be more prevalent in situations where there were equity payments.  The IASB member further noted that it was hard for investors to prevent management using the equity of the company to pay for an acquisition, and that in situations where acquisitions were paid for other than in cash / debt instruments; there should be more stringent requirements in accounting for the resulting goodwill.

The IASB Executive Technical Director noted that it was awkward to fundamentally change a conceptual conclusion that the IASB had recently reached as a result of a PIR, adding that PIRs should be more about practical improvement issues – and that improving the impairment test would tick that box.  With respect to what investors were looking for, he noted that investors were looking for signals on whether the acquisition had been successful, and that impairment (even if late) sent that signal.  He further noted that he had heard from investors that arbitrary amortisation adjustments over arbitrary periods were not particularly helpful, and so believed that the best approach was to try to improve the impairment test, but acknowledged that this was hard when it was not known what goodwill actually was, and suggested that some sort of qualitative solution in the middle might be interesting to explore.

The IASB Chairman thought that there was a lot of moral hazard around this issue.  He thought there was a strong case for goodwill to be amortised, but agreed that there was no objective way of doing so.  He noted that he did believe that it could be formulated in a way that could be self-policing in a sense that companies could be required to make an assessment of the period in which they expected to recoup their investment and that should be the basis for the amortisation, but that there would need to be a cap on this.  He noted that if the IASB was starting with a blank page, he would favour taking an amortisation approach, but noted that he was against making a major change in such a recently issued Standard, and one that would potentially upset a large number of people.  He also noted that the IASB should ask its constituents their thoughts on whether it would be appropriate for the IASB to make a major change.

No decisions were made at this meeting.  The intention is for the IASB to discuss the approaches at a joint meeting with the FASB before making any decisions.

Improving the impairment test

In the light of the preceding discussion, the IASB decided to defer discussion of this paper until a later date when additional information has been obtained from further outreach.

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