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Goodwill and impairment

Date recorded:

The Board continued its discussions on the goodwill and impairment research project. At this meeting the Board was asked whether it wants to change the requirement to recognise all identifiable assets acquired in a business combination separately from goodwill and whether the next stage in the project should be to issue a Discussion Paper or an Exposure Draft.

Recognising identifiable intangible assets acquired in a business combination– Agenda Paper 18A

Staff analysis

IFRS 3 requires an acquirer to recognise, separately from goodwill, all identifiable intangible assets acquired in a business combination. An intangible asset is identifiable if it (a) is capable of being separated or divided from the acquiree and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, identifiable asset or liability (the separability criterion); or (b) arises from contractual or other legal rights (the contractual-legal criterion). The previous version of IFRS 3 included two additional conditions for recognition of an intangible asset—the fair value of the asset can be measured reliably and it is probable that any associated future economic benefits would flow to the acquirer. When revising IFRS 3 in 2008, the Board deleted the two additional conditions because the Board concluded that those conditions will always be met in a business combination.

The staff paper summarises the relevant feedback from the PIR and undertaken since then.

Investor feedback was mixed. Some supported the current requirements because it helps them understand what the entity has acquired and the sources of potential future cash flows; has predictive value; encourages an entity to analyse the acquisitions; and permits comparison of accounting estimates made by different entities. Other investors do not think that recognising all identifiable assets and liabilities acquired and measuring them at fair value is helpful. But that view seems to apply to all components of the business combination, not just intangible assets. They said they have concerns about the fair values attributed to them, ignore amortisation do not like differences between internally generated and acquired assets.

The staff assessment is that the main concerns investors have is the lack of information about the disaggregation of amortisation and the carrying amount of assets acquired in past business combinations.

Auditors and preparers had similar views, although the reasons for holding those views were not clear. The staff assessment is that these stakeholders are more concerned about the costs of identifying and measuring these assets.

The UK FRC undertook some work and suggested that it would be helpful to distinguish between wasting and organically-replaced intangible assets. They would only separate wasting assets from goodwill. ESMA published a report that identified customer-related intangible assets as the most prevalent. In 2009 the IFRS Interpretations Committee recommended that the Board remove the distinction between contractual and non-contractual customer relationships.

Staff recommendation

The staff recommend that the Board should pursue allowing indefinite-lived intangible assets acquired in a business combination to be included within goodwill, if those assets are not already generating cash inflows from continuing use that are largely independent of those from other assets or groups of assets.

To address the potential loss of information to investors, some additional qualitative disclosures should be required.

Board discussion

One Board member agreed with the proposals as they exclude finite life intangibles and so there is no effect on consequential measurement. They also note that this would work with the headroom approach because it would reduce the burden of the rebuttable presumption. Another Board member supported the view that the treatment in the balance sheet and income statement is effectively the same and as such there is little value in splitting goodwill and indefinite life intangibles.

Another Board member asked for clarification on what motivated the proposal. The staff said that feedback from auditors and preparers suggested that there was a high cost to identifying and measuring intangible assets. The proposed approach could reduce the cost. It was noted by the Board that the GPF did not consider costs to be burdensome and that this could be a result of differences in views when the PIR was undertaken 5 years ago. Those concerns may have reduced since then.  

The Chairman asked if the impairment problem is exacerbated if indefinite-life intangibles are included within goodwill. This issue was debated widely among the board members and the Vice Chair commented that by consolidating the two figures the goodwill number would be muddied and the ability to impair becomes more challenging. Given this challenge the Board would need to be convinced further on the benefit for preparers and the users. Staff added that the challenge in relation to impairment would be the ability to allocate goodwill to separate CGUs rather than the mechanics of the IAS 36 impairment test.

In relation to the benefits of reducing cost and complexity for prepares the Vice Chair commented that it would also result in a loss of information and granular analysis for users and several Board members stated that there did not appear to be sufficient evidence that there was a cost burden on preparers.

One member did not support the proposal and suggested instead support for allowing or requiring to be included in goodwill identifiable intangible assets that would not have been recognised in financial statements if generated internally. This would apply to both indefinite and finite lived intangibles. This is on the basis that analysts do not consider the value of intangible assets on the balance sheet and that there is inconsistency of recognition between internally generated intangibles and those that are acquired. Another Board member stated that this issue of mismatching should be considered as a separate issue as it is considering acquisition accounting more broadly.

Another Board member was not in favour of the proposal as it appears to be against the trend of what the market wants to be recognised. Furthermore, the recognition of intangibles increases the accountability for acquisitions as it is clearer to see what has been acquired.

One Board member disagreed with the proposal on the basis that IAS 38 sets out clear criteria for recognition of intangibles and if these criteria are met then an intangible should be recognised and not included in goodwill. Any changes would need a sound reason as they may not be in line with IAS38.

One Board member noted that information in relation to separated intangibles in the annual report was useful and staff could consider how to make this more useful. The proposal increases what is in the black box of goodwill.

In summary staff are to consider whether there is sufficient evidence of a cost burden on preparers and if that outweighs the loss of information for users. Additionally, they are to consider whether the amalgamation of goodwill and indefinite life intangibles will exacerbate and make more difficult the ability to impair goodwill.

Board decisions

The Board did not support the proposal, with 10 members voting against the recommendation and only 4 in favour.

Next stage in the research project– Agenda Paper 18B

Staff analysis

The Board has decided:

  • (a) not to reintroduce amortisation of goodwill;
  • (b) to consider improving the application of IAS 36 by:
    1. making impairment of goodwill more likely by adjusting for pre-acquisition “headroom” when assessing goodwill.
    2. removing the requirement to exclude from the calculation of value in use those cash flows that would result from a future restructuring or from a future enhancement.
    3. removing the explicit requirement to use pre-tax inputs in calculating value in use, and to disclose pre-tax discount rates used. Instead, an entity would be required to use internally consistent assumptions about cash flows and discount rates, and to disclose the discount rate(s) actually used.
  • (c) to consider introducing requirements for an entity to disclose:
    1. each year, information about the headroom in a cash-generating unit (or groups of units) to which goodwill is allocated for impairment testing.
    2. each year, a breakdown of goodwill by past business combination, explaining why the carrying amount of goodwill is recoverable.
    3. the reasons for paying a premium that exceeds the value of the net identifiable assets acquired in a business combination, key assumptions or targets supporting the purchase consideration and, then subsequently each year, a comparison of actual performance with those assumptions or targets.
  • (d) at this meeting, the Board will consider whether some identifiable intangible assets acquired in a business combination could be allowed to be included within acquired goodwill.

Staff recommendation

The staff are recommending that the Board issue:

  • (a) an Exposure Draft proposing amendments to IAS 36 to:
    1. remove the explicit requirement to use pre-tax inputs in calculating value in use, and to disclose pre-tax discount rates used; and
    2. instead, require an entity to use internally consistent assumptions about cash flows and discount rates, and to disclose the discount rate(s) actually used.
  • (b) a Discussion Paper inviting comments on the Board’s preliminary views on all other matters considered in the research project.

Board discussion

There were mixed views from the Board in relation to whether a discussion paper was appropriate for the other matters considered in the project. Several Board members considered that a focused request for information provide a better way of reaching a more informed decision before a discussion paper is released. This was on the basis that there have already been a lot of negative comments about the headroom approach from the outreach work done so far which could not all be blamed on a lack of understanding by those providing feedback. One Board member commented that being able to explain the approach may help and should be combined with a simplification of the value-in-use calculation.

It was also noted by a Board member that a discussion paper would not be appropriate as they are not in a position to have sufficiently clearly articulated views and there has not been sufficient consideration of the negative comments already received. Those providing feedback may be frustrated that they have not been heard.

The Board discussed the headroom approach and one member suggested changing the name. Another member supported a discussion paper that covered all of the approaches to impairment of goodwill.

Several Board members agreed with recommendation (a) that an exposure draft should be proposed and could include other areas of the project such as possible additional disclosure requirements. This would require a two phase approach but would enable the items that are easy wins to be combined in to a shorter term project.

One member strongly objected to the inclusion of the exposure draft alongside the agriculture amendment as part of annual improvements. This is a deliberate decision to reverse a previous approach and therefore should stand alone. It was also recommended that rather than releasing a separate exposure draft all of the proposals should wait to go out together as a package.

The Chairman proposed showing a measure in the financial statements of equity less goodwill which would reflect the real equity position if cashflows on which equity relies do not materialise.

Board decisions

The Chair recommended that the staff develop a new paper for the Board to consider based on their discussions. All Board members supported this recommendation.  

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