Goodwill and impairment

Date recorded:

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

This was an education session. The Staff discussed following paper in this meeting:

  • Simplifying the impairment testing model in IAS 36 Impairment of Assets: AP 18B

Three other papers have been included for information purposes only:

  • Summary of discussions to date: AP 18A
  • Improving the effectiveness of the impairment testing model in IAS 36 – AP 18C
  • Improving disclosures about goodwill and impairment – AP 18D

Simplifying the impairment testing model in IAS 36 Impairment of Assets – Agenda Paper 18B


In this paper, the Staff gave a high-level overview of two of the possible approaches to simplifying the impairment testing model under IAS 36.

Staff analysis

Approach 1: Using a single method to determine the recoverable amount

The Staff intend to analyse whether it is operational to use only fair value less costs of disposal (FVLCD) or value in use (VIU) in determining an asset’s recoverable amount by considering the following:

  • whether the reasons given by the International Accounting standards Committee (IASC), the predecessor of the Board, for requiring the recoverable amount to be the higher of FVLCD and VIU are still relevant today, particularly in light of the fair value measurement requirements of IFRS 13; and
  • what are the similarities and differences between FVLCD and VIU?

In the agenda paper, the Staff have mainly reproduced the relevant passages from IAS 36 in respect of each of the points above, with a promise to bring back further analysis for future discussion.

Approach 2: Relief from annual testing

The Staff outlined a potential indicator-only approach to testing goodwill for impairment as follows:

  • On the date of acquisition, the acquirer would identify the key performance targets supporting the purchase price paid for the acquiree, as well as the period over which these targets are expected to be met;
  • At the end of each reporting period, a failure to meet these performance targets would represent an impairment indicator which would then require the entity to assess goodwill for impairment; and
  • The entity would update the key performance targets at each reporting date to reflect any changes in management’s forecasts. The updated targets would then serve as the basis for the following year’s impairment indicator.

This approach is based on a similar qualitative assessment in US GAAP. The IASB Staff will liaise with the FASB Staff on how to develop this approach further. As it stands, the approach described by the Staff in the agenda paper begs many substantive operational questions.


Using a single method to determine the recoverable amount

The Board had mixed views on this issue. Some Board members preferred keeping both VIU and FVLCD while others preferred having one approach only, but they were split as to whether it should be VIU or fair value.

Those preferring to retain the existing requirements believed that the reasons previously given by the IASC for requiring this approach are still valid today and that the impairment model is conceptually sound. They believed that using a single method to determine the recoverable amount would be a fundamental change to IAS 36 and that would be beyond the simplification and cost reduction objectives of the project. Working through the ramifications of that fundamental change will also require many more resources (time and human capital) than originally planned. Furthermore, they are not convinced that moving to a single method would achieve a significant amount of cost savings or be a significant improvement to impairment testing.

In practice, companies choose the least cost approach when testing for impairment and that is often VIU because management have the budgetary information at hand. On the presupposition that the inputs used in a VIU calculation are no more or less subjective than level 3 inputs used in a fair value calculation, it follows that requiring a fair value estimation in all cases would arguably impose an additional cost on the preparers because they would need to justify the VIU inputs from a market participant’s perspective.

Those preferring requiring fair value to be the single method in determining recoverable amount believed that the publication of IFRS 13 could affect the arguments made by the IASC. One Board member in particular believed that requiring fair value would put trust back into the system because the management estimates need to be anchored to market data. Auditors would also be more empowered to challenge management estimates on this basis. This Board member believed that VIU incorporates bias for success because that is inherent in any internal budgetary process; whereas the market (and thus fair value) reflects both the probability of success and failure. However, other Board members warned against being too idealistic because all valuation is subject to manipulation. Also, IAS 36 already requires management to give more weight to external evidence – it’s the adherence to the requirement that is the problem. Furthermore, requiring fair value would also aggravate the P*Q problem of measuring quoted investments in subsidiaries, associates and joint ventures if such investments are subject to impairment testing.

The Staff agreed to liaise with the FASB Staff to assess further the feasibility of using fair value as the single method to determining the recoverable amount.

Relief from annual testing

There was not much discussion on this topic. The Board generally thought that it would be worthwhile to explore this alternative further but asked the Staff to work through the operational questions, e.g.:

  • If management keeps revising the key performance targets to a lower threshold, would it not delay and/or reduce impairment?
  • How can one ensure the robustness of the key performance targets, especially if they are not publicly available or objectively assessable by the investors?
  • Is the indicator-based approach a bridging solution after an acquisition? If so, how long should it be available for after an acquisition? This is because it gets harder to identify information relating solely to an acquisition as time moves on and the key performance targets correspondingly lose their relevance.

One Board member believed that a relief from annual testing should not be considered without a simultaneous deliberation of re-introducing goodwill amortisation.

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


The Staff recapped the pre-acquisition headroom (PH) approach and provided an overview of the notional goodwill concept in FRS 11 of UK GAAP which is similar to the PH calculation. The Staff noted from discussions with practitioners that the requirements of FRS 11 are not worth pursuing and concluded that they will continue developing the PH approach for discussion at a future Board meeting.


There was no discussion on this paper.

Improving disclosures about goodwill and impairment – Agenda Paper 18D


This paper largely repeats AP 18 to the March 2016 Board meeting. In light of the Board discussion and feedback received from other consultative groups, the Staff have condensed the additional disclosure requirements proposed in the March 2016 paper into the following:

  1. What are the reasons for paying a premium over and above the fair value of the net identifiable assets acquired in a business combination?
  2. What are the key performance assumptions or targets set by the entity for recovering the premium?
  3. A comparison of actual versus target performance for a specified number of years following a business combination; and
  4. A disaggregation of the carrying amount of goodwill by each acquisition.

The Staff also suggest that the Board revisit the current disclosure requirements of IAS 36 holistically as part of this project.


There was only limited discussion on this paper. The Board acknowledged that entities are not disclosing the relevant information even though they are required by IAS 36. They understood that this is mostly due to commercial sensitivity reasons and that the solution does not lie in requiring more disclosures but rather in how to encourage and monitor the appropriate application of the existing requirements.

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