Goodwill and impairment

Date recorded:

Goodwill and Impairment research project — cover paper — Agenda paper 18

This was an education session.

The Staff discussed the following papers in this meeting:

  • Improving effectiveness of the impairment testing model in IAS 36: AP 18B
  • Possible simplifications to the impairment testing model in IAS 36: AP 18C
  • Improving disclosures about goodwill and impairment: AP 18D

AP 18A contains a summary of the Board’s discussions to date.

Improving effectiveness of the impairment testing model in IAS 36 — Agenda Paper 18B

Background and Staff analysis

This paper dealt with two issues: (1) the feasibility of using a single method to determine the recoverable amount, i.e. using either fair value less costs of disposal (FVLCD) or value-in-use (VIU), and (2) an updated headroom approach.

The discussion on the use of a single method repeated the contents of the May 2017 Board meeting paper 18B. The only additional point touched on briefly by the Staff was whether there is any substantive difference in the unit of account of the asset being considered for impairment when using VIU versus fair value. No other new or substantive observations were made by the Staff.

The Board had previously discussed the pre-acquisition headroom approach. The updated headroom approach considered in the paper replaces the static headroom amount calculated on the acquisition date with a dynamic headroom amount that is calculated at the most recent impairment testing date. The use of a dynamic headroom amount is intended to take into account changes in the business environment and the entity’s post-acquisition performance. This is expected to reduce the buffering effect of any unrecognised headroom more effectively and thus help capture goodwill impairment at a more appropriate time and amount.

The paper included a few examples illustrating how the pre-acquisition headroom and dynamic headroom methods are applied. However, members of the Accounting Standards Advisory Forum (ASAF) and the Global Preparers Forum (GPF) were concerned with the complexity of this approach.


The Board asked the Staff to consider the costs and benefits of the headroom approach more fully before the Board decides whether to pursue this approach further.

Board members raised many issues about the Staff proposals. Most Board members were concerned that the proposals have gone beyond the scope of the project. The project’s original objective was to address stakeholder concerns raised in the IFRS 3 post-implementation review – it was never meant to be a fundamental reconsideration of IAS 36. The presupposition that the outcome of the research would be a discussion paper (DP) further confuses the objective of the project, as a DP should be used to explore fundamentally new concepts and models; whereas this project should be aimed at making targeted, narrow-scope improvements to the existing IAS 36 impairment model which arguably doesn’t warrant the publication of a DP.

As in previous meetings, the Board had mixed views about whether they should move to a single method for determining the recoverable amount.

As regards the headroom approach, only six members supported pursuing it further. These members believed that the updated headroom approach is not that costly to apply and could be a real improvement to recognising goodwill impairment on a more timely basis. However, the other Board members were not convinced. They were concerned that stakeholders are not expecting a new impairment model, especially when a new model would impose additional costs on preparers (even if it’s only a perception) but does not add significant benefits to the users. These members believed the headroom approach is difficult to understand and apply for both preparers and users. This was also clear from feedback from ASAF and GPF members. The full cost and complexity of applying the headroom approach were not apparent from the Staff paper because the Staff have not thought through the potential consequences of applying the model nor tested it on a real-life conglomerate with many business acquisitions and/or restructurings throughout its life cycle.

Furthermore, several Board members observed that the headroom approach could result in over-impairment of goodwill. This could happen if the current year headroom decreased from previous years but there is still an overall significant headroom for the CGU under review. Is this what the stakeholders want? One Board member said that replacing one imperfect model with another imperfect model does not add value to anyone, and certainly would not make preparers’ lives easier, which is one of the objectives of this project.

Possible simplifications to the impairment testing model in IAS 36 — Agenda Paper 18C

Background and Staff analysis

This paper dealt with two issues: (1) relief from the mandatory annual impairment testing of goodwill, and (2) other possible simplifications.

The discussion on relief from annual testing and the possible alternative approaches that require testing only when there are indicators of impairment repeated the discussions in the May and July 2017 Board meeting papers (AP 18B for both meetings), updated with points raised by Board members in those two meetings.

As regards the other possible simplifications, the Staff believed that the Board should consider the following points:

  1. Removing the requirement to use pre-tax inputs in a VIU calculation. Feedback from the post-implementation review of IFRS 3 indicated that it is often difficult to obtain a pre-tax discount rate. In practice, most entities start off with a post-tax discount rate (as they often use WACC as a start or even as a surrogate measure of the discount rate for impairment purposes) and convert that into a pre-tax rate. Furthermore, many academics and valuation professionals recommend using a post-tax discount rate and post-tax cash flows. Practice also differs between regulators with some taking a more relaxed stance when entities use a post-tax discount rate. The Staff further noted that removing the requirement to use pre-tax inputs would be consistent with IFRS 13’s requirement on determining the fair value of an asset or a liability.
  2. Removing the requirement to exclude cash flows arising from future restructuring and future enhancements of an asset when determining the VIU of an asset. The forthcoming revised Conceptual Framework describes VIU but does not specify that it should exclude cash flows resulting from future enhancements to the asset. Furthermore, the current condition of an asset may contain an existing potential to restructure or enhance the asset. This existing potential has a value that market participants would be willing to pay for when buying the asset and there is no reason why an asset’s VIU should exclude this value. The Staff further observed that the split in management budget between cash flows arising from the asset’s existing condition and those arising from future restructurings may be arbitrary in some cases, which in turn detracts from the usefulness of the resulting financial information.
  3. Allowing goodwill to be tested at the entity level or at the reportable segment level. However, the Staff did not recommend that the Board pursue this route because potential goodwill impairment could be hidden by CGUs with significant headroom.


There was not much discussion on this paper. The few Board members who spoke did not support providing relief from annual testing of goodwill because it would worsen the already too-little-too-late recognition of goodwill impairment. Stakeholders are not asking for such a change and the identification of possible indicators of impairment would present a new challenge on its own.

Improving disclosures about goodwill and impairment — Agenda Paper 18D


In this paper, the Staff considered three possible approaches for improving disclosures of goodwill and impairment that had not yet been discussed by the Board.

Staff analysis

The first approach is to consider requiring disclosure of the headroom in a CGU that contains goodwill or indefinite life intangible assets. The Staff noted that a similar proposal was made as part of the 2004 amendments to IAS 36 but the proposal was not finalised because of the potential practical challenges associated with its application. These challenges are explained in IAS 36.BC207. As a result, the final amendments to IAS 36 require disclosure of the headroom only when a reasonably possible change in a key assumption used in calculating a CGU’s recoverable amount would cause its carrying amount to exceed its recoverable amount.

The Staff’s analysis did not address the concerns contained in IAS 36.BC207. The Staff merely asked that the Board consider whether requiring the disclosure of headroom would impose a significant burden on the preparers (from a cost and availability of information perspective), and suggested that the potential use of a single method of impairment and removing the requirement to exclude cash flows arising from future restructurings or enhancements to assets (see APs 18B and 18C) could enhance the relevance of the disclosure of the headroom amount. This is because the trend in the headroom would not be distorted by the switching of recoverable amount between VIU and FVLCD under the single method. The headroom amount would also be more complete if cash flows from future restructurings or enhancements to assets are allowed to be taken into account when calculating VIU.

The other two approaches are:

  1. disclosing a measure of total assets and liabilities for each reportable segment even if such amounts are not regularly provided to the CODM; and
  2. reviewing the drafting of the current disclosure requirements of IFRS 3, including a clarification of the objectives of those disclosures.

The Staff were of the view that these changes are not within the scope of the goodwill and impairment project. However, the Board could consider addressing these issues as part of other projects.


There were mixed views regarding the disclosure of the headroom amount. Some members thought it would only add value if the headroom approach in paper 18B was adopted. Others doubted the practicality of tracking goodwill that is scattered across different CGUs over time. The level at which the amount of headroom is disclosed was also brought up, as too high an aggregation level could cloud underperforming units and result in ‘unforeseen’ impairments, undermining the usefulness of the disclosure.

Other Board members suggested disclosing more qualitative information about business acquisitions, including whether the business is performing as expected and whether and how management have revised their expectation. The Staff would need to strike a balance between information that should be disclosed in the financial statements versus those that are better suited for the MD&A.

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