Goodwill and impairment project - Agenda paper 18

Recap

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 in October (first two topics) and November 2015 (third topic). No technical decisions were made at those meetings.  The Board asked the staff to perform additional work to help it understand the information needs of investors in relation to goodwill and impairment.

During this meeting the Board will continue deliberations and discuss the approaches proposed by the Staff. Agenda paper 18 includes a summary of feedback obtained on the project from CMAC and ASAF members.  In each case the staff papers are updated versions of those discussed in October or November 2015.

Staff proposal for continuing the project:

The staff proposes to continue the project in two phases:

Phase one: To discuss the following topics jointly with the FASB: (i) whether to include any intangible assets in goodwill rather than recognising them separately and (ii) subsequent accounting for goodwill (in particular the amortisation approach for goodwill)

Phase two: To have IASB-only discussions to consider improvements to the impairment testing and disclosures.

The staff indicates that next meetings on this topic will take place in March (IASB only) and April 2016 (joint session).

Discussion

There was no specific discussion about the direction of the project. The Board held a discussion on each of the agenda papers separately. See below.

Identifying and measuring intangible assets acquired in a business combination – Agenda paper 18A (Updated version of November 2015 IASB Agenda Paper 18A)

Recap

The Board will continue deliberation of the staff proposal presented in November 2015. The proposal considered four approaches:  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.

Staff analysis

The agenda paper includes a new section on presentation and disclosure concerns and additional discussion about differences between internally generated and intangible assets versus acquired intangible assets.  The Board will not be asked to make any decision because the staff considers that any potential amendment to IFRS 3 should be considered jointly with the FASB.

The staff will also present the following recommendations:

1. The Board should consider providing guidance on customer relationship intangibles;
2. To require IFRS 13 disclosures for any significant intangible asset acquired in a business combination;

Discussion

No decisions were made. The discussion did not provide a clear indication as to how the Board envisages solving the concerns noted. The discussion did not follow specifically the topics of the agenda papers nor the questions prepared by the staff.

There was an extensive discussion as to whether goodwill always represented an overpayment and whether in most cases the expectations were not achieved. Another topic with extensive discussion was whether the impairment model was effective, because the evidence appeared to indicate that impairment was not being recognised in a timely manner.

On the other hand, there was general agreement in that more information was needed before moving ahead in discussing this topic with the FASB; particularly the staff should provide more quantitative analysis to determine where the issues were focused—such as the types of intangibles recognised, the relative carrying amounts of goodwill, when business combinations are found to have been a problem (e.g. is it in the first 3 or 5 years?) etc..

There was also agreement that the main issue to be resolved was the late recognition of impairment; it was also pointed out that it was not relevant to evaluate cost matters related to the application of the Standard.  The Board asked to the staff to determine whether the delays were pervasive or were justified.

In relation to the topic of customer related intangible assets, the staff was asked to identify whether there had been changes since the issuance of the Standard, for example due to the concerns and regulations about data protection and privacy, there could be a potential impact in transactions around customer databases

There was agreement with the staff recommendation to require segregated disclosures of goodwill and intangibles by acquisition and disclosures about subsequent performance of the transactions.

Some Board members indicated that if a solution could not be found to amend the impairment testing, then the only solution would be to require the amortisation of goodwill. Although there was extensive discussion about amortisation of goodwill, there was no general agreement as to whether this approach could solve the issues noted in the PIR.

One approach suggested by one Board member was that since goodwill was being calculated as a residual amount, then management should be required to provide an assessment about why it considered that synergies would be achieved, otherwise goodwill should be amortised.

Another issue discussed was the widespread use of Non-GAAP measures which could be an indicator that the current accounting requirements were not providing useful information.

Subsequent accounting for goodwill – Agenda paper 18B (Updated version of October 2015 IASB Agenda Paper 18A)

Recap

The staff initially proposed three approaches for the IASB to consider: (1) Amortisation and impairment model; 2) Direct write off of goodwill and 3) impairment only model.

The agenda paper also includes a new analysis of issues related to approach 1) that the staff think the Board should consider.  See below.

Staff recommendation

The staff supports approach 3 and in agenda paper 18C presents a proposal to improve the impairment requirements. However, the staff considers that the three approaches should be discussed in a joint session with the FASB. The staff also indicates that the FASB is having similar discussions and has not yet made a decision on which approach it prefers. The staff believes that FASB members appear more focused on two approaches (i) amortisation of goodwill with impairment test over its useful life and (ii) simplifying the impairment test.

In relation to the additional topics for approach 1; the staff proposes the following:

• How goodwill differs from other intangible assets: Discussion only- no staff proposal.
• How useful life of goodwill should be determined:  The staff recommends that life of goodwill should be determined based on facts and circumstances rather than prescribing a default useful life;
• Whether there should be an upper limit on the useful life: The staff recommends that there should be a rebuttable presumption that useful life of goodwill should not exceed twenty years; however, there should not be a prescribed time limit;
• How the amortisation of goodwill should be determined: The staff recommends that the amortisation method should reflect the pattern in which the benefits are expected to be consumed (consistent with IAS 38);
• Whether annual reassessment of the amortisation method and useful life of goodwill should be required: The staff recommends that changes should only be made if they can be justified;
• Whether all indefinite life intangible assets should be amortised: In this topic, the staff proposes three approaches: (i) allow goodwill and intangible assets to be classified as indefinite: (ii) restrict those assets that can be classified as indefinite; (iii) not have an indefinite life classification. The staff recommends approach (i).

The staff also indicates that the following issues should also be discussed (i) allocation of impairment to amortisable units of goodwill and (ii) allocation of goodwill to amortisable units of goodwill on disposal or reorganisation.

Discussion

No decisions were made. The discussion of this topic also did not provide an indication as to what direction the Board would take.

There was substantive discussion about the feasibility of introducing the concept of determining the useful life of goodwill. Many Board members indicated several concerns such as:

1. amortisation of goodwill would trigger a need to evaluate other topics such as reassessment of the useful life and residual value which should be considered before moving ahead;
2. whether the concept of useful life used in IAS 16 or IAS 38 would be applicable to goodwill because goodwill was a very different kind of asset; one example provided was that after an acquisition took place goodwill would be with time replaced by internally generated goodwill which was not accounted for;
3. whether the period in which the benefits were realised would be an indicator of the useful life; one example raised by the Chairman was if a company intended to recover the value of goodwill in a two- year period, he questioned whether that would mean that the amortisation period should be two years; he indicated that the transaction would probably continue to provide benefits beyond two years; and
4. it would be very difficult to determine what portion of the goodwill could have a finite life and what portion an indefinite life; one Board member used the example of buying Manchester United football club.

Despite those concerns, the Chairman indicated that the lack of amortisation of goodwill at all would also be a mistake because there was currently an incentive for overpayments and takeovers instead of organic growth.

Another topic discussed was what type of facts and circumstances should be considered in determining whether an impairment test was necessary. In some cases, there were significant acquisitions in which top management was involved and the potential indicators would be clear noted; in other cases when companies made small acquisitions year after year, the indicators would be more difficult to identify.  

A potential solution was raised again by one Board member indicating that management should demonstrate why goodwill was generated and why it had and indefinite life and the basis of those assertions. The Chairman indicated that he supported this view.

Improving the impairment requirements for goodwill and other non-current, non-financial assets- Agenda paper 18C (Updated version of October 2015 IASB Agenda Paper 18B)

Recap

The Board will continue deliberations from their discussion held in October and November 2015. The staff has introduced a significant number of changes from prior papers.

Staff Analysis

The agenda paper presents a discussion of the following areas for possible improvements:

1. Moving from a two model approach to a single model approach in determining impairment:

(a)    Fair value less cost of disposal

(b)   Value in use

(c)    Expected manner of recovery

The staff does not recommend moving to a one model approach because it considers that the current approach in IAS 36 is conceptually correct. However if the Board decides to consider a one approach model, the staff prefers approach (a)

2. Relief from  the annual impairment test requirement: The staff considers that instead of an annual requirement there should be an indicator-only approach with the addition of (i) a qualitative assessment of whether it is more likely than not that the fair value of a CGU to which goodwill is allocated is less than its carrying amount and (ii) an impairment indicator of whether actual performance of the acquisition was worse that its expected performance during the first three years following an acquisition.

3. Address investor’s concerns about the current information provided: The staff proposes (i) focusing on improving the impairment test by making it less burdensome and (ii) requiring disclosure of key performance assumptions or targets supporting the purchase price allocation.

Discussion

No decisions were made. During the discussion there was no clear indicator as to what decisions the Board would make to address this topic.

There were concerns raised about the indicator approach to determine whether an impairment testing was necessary. Some concerns were related to the fact that it would be difficult to track the performance of an acquisition when a company usually carried out several acquisitions year after year; also it would be difficult to obtain comparative information for those performance indicators.

It was also discussed whether it would be useful to eliminate the value in use model and move towards the fair value model.  It was asserted that the value in use model can be prepared in a way that could delay the recognition of impairment; while the fair value model had market discipline and would also create more convergence.  Some Board members indicated agreement with this view; others indicated that it could be more useful to finish the discussion on measurement within the Conceptual Framework before moving forward.

Another concern was raised indicating that in practice many companies probably did not perform the two steps approaches (i.e. comparing value in use with fair value). The staff was asked to perform further analysis to identify whether companies were actually performing the two steps approach.