Goodwill and impairment

Date recorded:

Cover paper (Agenda Paper 18)

In March 2020, the Board published Discussion Paper DP/2020/1 Business Combinations—Disclosures, Goodwill and Impairment which included the Board’s preliminary views to address feedback the Board heard during the post-implementation review (PIR) of IFRS 3.

In this meeting, the staff provided the Board with their analysis of feedback on:

  • The location of the information resulting from, and practical challenges related to, the Board’s preliminary views on improving disclosures (Agenda Paper 18A)
  • Improving the effectiveness of the impairment test (Agenda Paper 18B and 18C)
  • The subsequent accounting for goodwill, including whether to reintroduce amortisation of goodwill (Agenda Paper 18D).

The Board was not asked to make any decisions at the meeting.

Disclosures (Agenda Paper 18A)

In this paper, the staff provided the Board with their analysis of the common matters raised by respondents in relation to the Board’s preliminary views that it should add disclosure objectives and requirements.

Most respondents agreed with the proposed additional disclosure objectives and requirements, though there were some disagreements expressed as considered by the staff in their analysis.

Staff analysis

The staff analysis considered two themes that were common areas of feedback:

  • The costs of providing the required disclosures
  • The location of the proposed disclosures

Costs of providing the disclosure

Some respondents in their feedback said the benefits of the proposed improvements to disclosures could be outweighed by the costs arising from the commercial sensitivity of the information, the challenges of preparing and disclosing forward looking information, the auditability of the information, and the difficulty in providing useful information about the subsequent performance of an acquired business after integration of the acquired business with the existing business.

The staff set out in their analysis the discussion around these matters, and set out possible ways forward, as follows:

  • With respect to the concerns around commercial sensitivity, the staff considered that the Board could:
    • Proceed with its preliminary views with some clarifications
    • Adopt a comply or explain approach
    • Permit qualitative disclosures
    • Be prescriptive in the metrics to be disclosed
  • With respect to the concerns around the forward-looking nature of the proposed requirements, the staff considered that the Board could develop illustrative examples of the information to be discussed, demonstrating how the information can be provided in a factual and historical way. The information that would be required is not considered by the Board to be forward-looking in nature, though the staff think that some aspects of the proposals may be forward-looking.
  • With respect to the concerns around the auditability of the information, the staff agree that the Board’s preliminary views, if implemented, could increase the auditing costs for an entity, but think the benefit of better accountability for management’s decisions, as well as potential reduction in the cost of equity for preparers resulting from better meeting users’ information needs would outweigh those costs. The staff considered that the Board could:
    • Clarify that the information required in the disclosure would not be subjective by highlighting the link between that information and the transaction price
    • Clarify that the information is not unverifiable because entities are expected to have documented the strategic rationale and management’s objectives for, as well as expected synergies from, major business combinations
    • Explore with relevant stakeholders whether and how the auditability of the proposed disclosures could be improved
  • With respect to the concerns around the integration of the acquired business with the existing business, the staff think that respondents may have misunderstood the Board’s preliminary views. The staff think the Board could, through illustrative examples or other means, ensure its view about how and in what situations disclosing information about the combined business would satisfy the disclosure requirements is clear.

Location of information

Many respondents said the Board should not require disclosure of information about management’s strategy, targets, the progress in meeting those targets and expected synergies in financial statements. Instead, those respondents said entities should provide this information in management commentary, and the Board could consider this as part of its Management Commentary project.

The staff set out in their analysis the discussion around these matters, and set out possible ways forward, such as proceeding with the preliminary view to include the information in the financial statements, permitting an entity to incorporate information disclosed elsewhere by cross-reference, incorporating its preliminary views into the Practice Statement Management Commentary, or considering further alternative ways to provide this information, such as requiring disclosure of qualitative, rather than quantitative, information.

Board discussion

All Board members thought the staff had prepared a comprehensive paper presenting and analysing the feedback in a balanced way.

The Board generally agreed that the proposed disclosures would provide useful and beneficial information to users, but there was some divergence of opinion in specific areas:

  • Some thought that some of the concerns around forward-looking information were not warranted, highlighting the arguments put forward in the DP, whilst others thought the proposed disclosures regarding plans for an acquired business was in essence forward-looking information, which may have additional legal implications.
  • Some thought that the information required would not be considered commercially sensitive as it is already disclosed or included in other documents and publications, whilst others thought the significant concerns in this area highlighted by respondents were warranted.
  • Some thought that, in order to be pragmatic and maintain as many of the disclosures as possible, it might be acceptable to have some of the information in management commentary, or elsewhere, and some information in the financial statements, whilst others thought the information would be best placed, and more meaningful, if required to be disclosed in the financial statements.

Some Board members thought that introducing requirements to cover specific metrics could lead to ‘boiler-plate’ disclosures. It was thought instead that it may be useful to produce an illustrative set of disclosures to demonstrate to stakeholders what the Board expect the proposed disclosures to look like in practice, and therefore get feedback and comments on the feasibility of these disclosures.

Effectiveness of the impairment test — background and feasibility of designing a different impairment test (Agenda Paper 18B)

In this paper, the staff provided the Board with their analysis on the feedback received about improving the effectiveness of the impairment test, considered whether there is a problem with the timeliness of recognition of impairment losses, and considered suggestions on designing a different impairment test to the one in IAS 36.


In response to the PIR of IFRS 3, many stakeholders said that impairment losses on goodwill are often recognised too late. To address this, the Board has considered whether it could design a different impairment test, but came to the preliminary view that it is not feasible to design a different impairment test that is significantly more effective than the existing impairment test at recognising impairment losses on goodwill on a timely basis at a reasonable cost.

Staff analysis

Timeliness of impairment loss recognition

Many respondents agreed with the reasons identified by the Board that there are concerns around the effectiveness of the impairment test, with further respondents who disagreed with the Board’s preliminary view to maintain and impairment-only model highlighting these concerns.

The staff suggested that the Board could address these concerns by either:

  • Clarifying the purpose of the impairment test and introducing additional disclosures around the subsequent performance of a business combination which could be used as an indicator that goodwill may be impaired and might therefore mitigate against over-optimistic forecasts
  • Suggesting improvements to the application of the impairment test as currently in IAS 36 (discussed in Agenda Paper 18C)
  • Designing a different impairment test

Designing a different impairment test

Most respondents agreed it is not feasible to design a different impairment test that is significantly more effective than the existing impairment test at a reasonable cost. Some respondents suggested alternative tests for impairment, which are considered in the staff analysis.

The staff considered that none of these approaches are sufficiently compelling to consider further, and that a fundamental review of IAS 36 is beyond the scope of this project.

For the Board discussion on this paper, please see Agenda Paper 18C.

Effectiveness of the impairment test — improving the application of the impairment test (Agenda Paper 18C)

In this paper, the staff provided the Board with their analysis on feedback about improving the application of the impairment test, and their considerations of whether the reintroduction of amortisation is conditional on the feasibility of such improvements.

Key messages from feedback

Many stakeholders expressed concerns about the effectiveness of the impairment test, saying that impairment losses on goodwill are often recognised too late, long after the events that caused those losses. The two principle reasons identified for these issues are management over-optimism, and the shielding effect of headroom generated by a cash-generating unit. Stakeholders urged the Board to make the test more effective at recognising impairment losses on goodwill on a timelier basis.

Staff analysis

Management over-optimism

Many respondents disagreed with the Board’s preliminary view that management over-optimism is best addressed by auditors and regulators, rather than through standard-setting. Suggested possible amendments that would help address this issue included:

  • Improving the disclosure requirements associated with the impairment test. The most commonly suggested improvements included:
    • Disclosing accuracy of past forecasts
    • Disclosing assumptions used
    • Disclosing analyses of ‘close-call’ situations
    • Disclosing terminal values of cash-generating units (CGUs)
  • Providing additional guidance about assumptions used in that test. Suggested additions we particularly focussed on:
    • The interaction between the requirements to base cash flow forecasts on both reasonable and supportable assumptions, and budgets or forecasts approved by management which may, by nature, be over-optimistic because they are also used to incentivise management
    • Consistency of assumptions used with external evidence and/or other assumptions
    • The factoring of less optimistic scenarios in cash-flow forecasts
    • The estimation of terminal value
    • The appropriate reflection of risks in a discount rate

The staff generally agreed that improving existing disclosure requirements might reduce the risk of management over-optimism. However, the staff noted that there are costs associated with introducing new disclosure requirements and these costs would need further investigation.

The staff also agreed that the use of reasonable and supportable assumptions in estimating value in use can be challenging and difficult to enforce for auditors and regulators. The staff thought the Board could consider whether additional requirements or more clarity about the existing requirements could help resolve these challenges.

However, the staff thought further work would need to be performed to understand what additional specific requirements or guidance the Board can provide compared to that already in IAS 36, and note that it is important to consider the scope of this project, being to respond to feedback on the PIR of IFRS 3.


Many respondents agreed with the Board’s preliminary view that it should not develop additional guidance on identifying CGUs and the allocation of goodwill to those CGUs, but many others disagreed and suggested providing guidance on how to allocate (and reallocate) goodwill to CGUs and reconsidering the level at which the test is performed in order to help reduce the effect of shielding.

A few respondents suggested:

  • Providing additional guidance on the reallocation and disposal of goodwill
  • Providing guidance on what ‘largely independent’ cash inflows means
  • Requiring entities to disclose the amount of headroom in material CGUs containing goodwill at acquisition and for a few years afterwards

The staff generally did not think these suggestions would be effective in addressing the issue of shielding.

Other aspects of IAS 36

Some respondents provided feedback on other areas of IAS 36, such as introducing the ability to reverse impairment losses on goodwill and expanding the list of impairment indicators.

The staff did not find sufficient evidence for pursuing permitting reversals of impairment losses but did think updating the list of impairment indicators warranted further consideration.

Board discussion

The Board discussed AP18B and AP18C in unison.

Most Board members agreed with the staff analysis that the alternative models suggested are not worth pursuing.

It was generally thought that incremental changes to the existing impairment model, such as improving requirements and guidance around CGU allocation, reasonable and supportable forecast inputs, consistent growth assumptions, and sensitivity disclosures, would be preferable to a fundamental overhaul of IAS 36.

Some Board members suggested that the issue of “too little, too late”, though a valid concern, may be exaggerated compared to its strength and prevalence in practice.

Some Board members thought that a different emphasis could be provided with a requirement for management to provide a positive affirmation of the recoverability of goodwill, and disclosure of the bases of this assessment, prior to a detailed impairment test.

Subsequent accounting for goodwill — reintroducing amortisation (Agenda Paper 18D)

In this paper, the staff presented their analysis of feedback and options for how the Board could proceed with respect to the subsequent accounting of goodwill and the reintroduction of amortisation.


On issuing IFRS 3 in 2004, the Board introduced the impairment-only model for the subsequent accounting for goodwill because of the limitations of the amortisation model. During their June 2019 meeting, the Board narrowly voted in favour of retaining the impairment-only model, but requested feedback that provides new practical or conceptual arguments from both sides on this topic.

Staff analysis

In their analysis, the staff set out key aspects included in the feedback received. In particular, they reviewed:

  • New arguments, which the staff note was not forthcoming, with respondents raising matters that had previously been considered by the Board
  • Identifiable trends, including the development of divergent and strongly held views, growing stakeholder support for the reintroduction of amortisation, and a shift in stakeholders’ views regarding the ability to estimate a useful life of goodwill
  • The shift in user views in favour of reintroducing amortisation, though the overall balance remains mixed
  • Views on whether amortisation can resolve concerns about timely recognition of impairment losses on goodwill
  • Other factors, such as the stability of the accounting framework, the effect of transitioning to an amortisation model on entities’ financial position and stability, and capital markets, and potential convergence with US GAAP

Outline of options going forward

The staff set out the options that appear to be available to the Board, which were presented as:

  • Retaining the impairment-only model, because of:
    • The lack of compelling new evidence
    • The fact the impairment test is meeting its objective
    • The fact that amortisation does not resolve concerns about the timely recognition of impairments
    • Amortisation does not represent an improvement in financial reporting
    • The fact that convergence with other frameworks is not itself sufficient to warrant a change
  • Exploring the reintroduction of amortisation of goodwill in general, because:
    • The impairment test is not working
    • The benefits of the impairment test do not outweigh its cost
    • There have been shifts in stakeholder views
    • Reintroducing amortisation of goodwill appropriately responds to the limitations of the impairment test
    • Reintroducing amortisation of goodwill leads to convergence with US GAAP
  • Exploring the reintroduction of amortisation of goodwill in general, contingent on:
    • Providing disclosures about the subsequent performance of business combinations
    • Not being able to improve the effectiveness of the impairment test of cash-generating units containing goodwill
    • The details of the amortisation model that is proposed

Other approaches

The paper also summarised some approaches suggested by respondents that did not support reintroducing the amortisation model, though noted the majority of these approaches had already been considered and rejected by the Board previously.

Board discussion

The Board had mixed views on the subsequent accounting for goodwill, and the reintroduction of amortisation:

  • Some thought that the determination of a useful economic life would not be arbitrary, whilst others did
  • Some thought that the assertion the impairment model does not provide useful information was incorrect
  • Some thought that reintroducing amortisation of goodwill would be meaningless, as it would just be added back to non-GAAP KPIs
  • There was divergence of views from the Board on whether goodwill is a ‘wasting asset’ or not, and indeed on what the definition of ‘wasting asset’ should be

Some members thought that the language of “new” and “old” arguments could be amended, as it may preclude the consideration of incremental knowledge and experience that has been gained over time which may be considered “old”, or “not new”.

Many Board members thought that the decision to change or maintain the impairment-only model was secondary to improving the disclosures as discussed in earlier papers. It was observed that users in different jurisdictions find ways of interpreting the performance of an acquired business regardless of the subsequent accounting of goodwill, and therefore having substantive disclosures about a business combination and its subsequent performance will provide the most useful information to users.

Some Board members agreed that the reintroduction of amortisation should not be made conditional on not improving the impairment test, as it was considered unlikely that substantive changes to the impairment test would be introduced.

The Chair observed that that it will be challenging to even tentatively vote on the subsequent accounting for goodwill, based on the comments heard. It was proposed that an indicative, non-binding ‘directional’ vote to assist staff in progressing with the project should be held.

The staff responded that the intention for September was always going to be a directional, indicative vote, to determine the sequence for bringing things back to the Board and progressing the project. The staff will take the comments away and think carefully about how the question is asked for voting.

The Chair observed that there is also a need to consider any potential future divergence between FASB and IASB as this will have an impact on the cost-benefit equation if preparers need to account for both requirements.

Related Topics

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.