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Goodwill and impairment

Date recorded:

Goodwill and Impairment research project – cover paper - Agenda paper 18

The Board continued its discussions on the goodwill and impairment research project. The Staff discussed the following papers in this meeting:

  • Subsequent accounting for goodwill: AP 18B
  • Improving effectiveness of the impairment testing model in IAS 36: AP 18C
  • Courses of action for improving application of IAS 36: AP 18D

AP 18A contains a summary of the Board’s discussions to date. APs 18E and 18F summarise past Board discussions on simplifications to, and disclosures of, goodwill impairment respectively. These papers were for information only.

Subsequent accounting for goodwill – Agenda Paper 18B


In this paper, the Staff analyse whether the Board should reintroduce amortisation of goodwill.

Staff analysis

The Staff observed that the conceptual debate between amortising goodwill and only testing it for impairment is never-ending. On issues for which views have always been so polarised, and for which views may always remain so, it would not be appropriate to change the accounting model every few years unless significant new evidence has emerged indicating that previous conclusions are no longer valid.

To this end, the Staff have considered the work of three national standard-setters to assess whether there is any new conceptual arguments or information in support of amortising goodwill. The Staff observed that reintroducing the amortisation of goodwill would merely shift the focus away from poor impairment testing without addressing the fundamental problem. Furthermore, creating a robust amortisation model (given that straight-line amortisation is arbitrary with little value) is a complex and judgemental exercise involving the estimation of the useful life of goodwill and its pattern of consumption. The practical application of such a model would most likely increase cost and complexity.

On balance, the Staff believed that there are no convincing new arguments to support the reintroduction of goodwill amortisation.

Staff recommendation

In light of the above, the Staff recommended that the Board do not reintroduce goodwill amortisation.


This paper was discussed last. Based on the preliminary consensus reached in AP 18C, eleven Board members agreed that their preliminary preference is not to reintroduce goodwill amortisation and that it is not necessarily a fall-back option if the updated headroom approach fails.

Improving effectiveness of the impairment testing model in IAS 36 – Agenda Paper 18C


In this paper, the Staff:

  • (a) re-present their assessment of whether using a single method to determine recoverable amount would improve the effectiveness of impairment testing and whether moving to a single method would represent a fundamental reconsideration of IAS 36; and
  • (a) consider the costs and complexity of the updated headroom approach (see appendix B to the paper for numerical examples illustrating the mechanics of the approach).

Staff analysis

Using a single method to determine recoverable amount

This issue has been discussed previously by the Board (see appendix A to the paper for details). The Staff did not provide any new analysis in this paper and merely reconfirm that it is not clear that moving to a single method would improve the effectiveness of impairment testing. They also observe that using a single method to determine the recoverable amount would not represent a fundamental reconsideration of IAS 36 without giving any reasons.

Costs and complexity of applying the updated headroom approach

The updated headroom approach was introduced to the Board in its October 2017 meeting. Under this model, the headroom included in the impairment assessment is updated at each reporting date to reflect the headroom at the most recent impairment testing date, rather than including the static headroom calculated on acquisition date.

In this paper, the Staff discuss how a decrease in headroom could be attributed to the different assets in a cash generating unit (CGU), for example:

  • (1) the decrease is always attributed to goodwill; or
  • (2) the decrease is presumed to be attributable in full to goodwill unless the entity rebuts that presumption on the basis of specific evidence that all or part of the decrease is not attributable to goodwill. For example:
    • (a) If the decrease in headroom is due to an entity not being able to realise the expected synergies from a business combination, it may be appropriate to recognise the full decrease in headroom against goodwill.
    • (b) If the decrease in headroom is due to an increase in discount rate, it may be appropriate to allocate the decrease in headroom between goodwill and the unrecognised headroom.
    • (c) If the CGU contains land that is measured at historical cost but has a much greater fair value, any decrease in headroom could arise mainly from a decrease in the fair value of land. In this case, attributing all of the decrease to the unrecognised headroom would be appropriate.

The basis of rebuttal and the allocation of the decrease in headroom would no doubt require significant judgement and add complexity to the determination of the amount of goodwill impairment.

In addition to the allocation considerations above, the Staff also note that an entity would have to perform additional tracking under the updated headroom approach. For instance, an entity would have to recalculate the headroom upon partial disposal or a restructuring of a CGU containing goodwill. Also, the headroom amount may not be readily available to an entity with no indication of impairment of goodwill because the recoverable amount would not have been calculated. Entities may also have difficulty calculating the headroom when there is no single point estimate for the recoverable amount; however, the Staff think that using a single method to determine the recoverable amount would solve this problem.

Notwithstanding the above, the Staff did not think that the updated headroom approach adds complexity to the impairment testing.


Eleven Board members voted in favour of exploring the updated headroom approach further in a discussion paper, which seems to be preferred as the next consultative document.

Most Board members believe that the biggest imperfection of the current impairment model is the buffering effect of the pre-existing headroom on acquisition date. They believe that the updated headroom approach could solve this problem and improve the timeliness of the impairment test. While they acknowledge that this approach is potentially more costly to apply and is not without conceptual flaws, they are willing to explore it further because they need to be seen doing something to address the concerns raised in the PIR. The Chairman commented that the alternatives would be to consider amortisation of goodwill or do nothing at all.

Many Board members agreed that the updated headroom approach would require a precise headroom calculation to be made at each reporting period, whereas the current model would only require a precise calculation if the recoverable amount is below carrying amount, thereby imposing additional costs on preparers. Nevertheless, the majority of Board members believe that this approach may not add significant complexity in application. They would consider complexity only after they have explained the model in detail to stakeholders.

Despite the overwhelming majority vote, there was significant push back from a couple of Board members to pursue the updated headroom approach. Their key concern is that not only does the approach not address the core concerns raised by respondents in the PIR that the current impairment test is ‘complex, time-consuming, expensive and involves significant judgements’, the updated headroom approach would add to these challenges. Furthermore, a few members believed that this approach puts acquired and internally generated goodwill in a pejorative light and is counter-intuitive to anyone trying to assess the success of a business combination. The model also does not address a decrease in headroom caused by a change in discount rates without an associated worsening of performance.

Another major cause for concern is how to attribute the decrease in headroom to the different components of the CGU, including both recognised and unrecognised amounts. A few Board members believe that this would be a very challenging exercise and would require significant judgement. One member also noted that investors do not pay much attention to the goodwill impairment figure as it is a non-cash number and it does not affect the cash paid for the transaction, which is the focus for analysts. Overall, these members believe that the updated headroom approach fails both the improved effectiveness and simplification objectives of the project.

There was also some preliminary discussion around whether the next consultative document should be a DP or an exposure draft. The Board and Staff generally thought that a DP would provide a better platform for explaining the Board’s preliminary ideas and rationale for undertaking certain routes while abandoning others, and to explain the updated headroom approach in detail to stakeholders.

There was hardly any discussion on moving to a single approach to determining the recoverable amount.

Courses of action for improving application of IAS 36 – Agenda Paper 18D

Background and Staff analysis

The Staff have previously presented to the Board various possible causes of action to improve the application of IAS 36. APs 18E and 18F summarise past Board discussions on simplifications to, and disclosures of, goodwill impairment respectively.

In this paper, the Staff ask the Board to confirm which approaches it would like to adopt to achieve the simplification and effectiveness objectives of the project. These approaches include:

  • (1) Taking no further action;
  • (2) Simplifying the VIU calculation by removing:
    • (a) the explicit requirement to use pre-tax inputs; and
    • (b) the requirement to exclude estimated cash flows from uncommitted future restructuring and from improving or enhancing the asset’s performance;
  • (3) Using a single method to determine the recoverable amount; and
  • (4) Applying the updated headroom approach.

The Staff also asked the Board to confirm whether it wishes to develop the following disclosure requirements further:

  1. disclosure of the headroom in a CGU to which goodwill is allocated; and
  2. breakdown of goodwill by past business combination, explaining why the carrying amount of goodwill is recoverable.


The Board voted without much discussion. They agreed to explore the updated headroom approach further but rejected using a single method to determine the recoverable amount.

They also agreed to explore developing the disclosure requirements listed above further, together with disclosures of the reasons for payment of a premium over and above the value of the net identifiable assets acquired in a business combination, including the key assumptions or targets supporting the purchase consideration and comparison of actual performance with those assumptions or targets.

The Board also agreed with not pursuing the other approaches as recommended by the Staff in the paper.

Simplification of the VIU calculation will be discussed at a future meeting.

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