Goodwill and impairment

Date recorded:

Cover paper (Agenda Paper 18)

In March 2020, the IASB published DP/2020/1 Business Combinations—Disclosures, Goodwill and Impairment. The comment period for the DP ended on 31 December 2020.

In 2021, the IASB discussed the feedback received in response to the DP and decided to prioritise, amongst other things, performing further work to make decisions on the package of disclosure requirements about business combinations and to then redeliberate its preliminary view that it should retain the impairment-only model to account for goodwill.

In its October 2022 meeting, the IASB discussed feedback on its preliminary view to retain the impairment-only model and additional information or evidence and developments since the closure of the comment letter period for the DP on this topic.

The purpose of this meeting was to ask the IASB to tentatively decide whether to proceed with its preliminary view to retain the impairment-only model for the subsequent accounting for goodwill, or whether to explore reintroducing amortisation of goodwill.

Subsequent accounting for goodwill—Staff recommendation (Agenda Paper 18A)

In this paper, the staff set out their recommendation to the IASB.

The staff recommended that the IASB should proceed with their preliminary view to retain the impairment-only model, as their research had not gathered sufficient evidence that the reintroduction of amortisation would improve information provided to users or reduce the cost to entities of preparing financial statements.

The IASB were asked to vote on whether they agree with this recommendation. If they do not agree with the recommendation, and wish to explore further the reintroduction of amortisation, the IASB will be asked to vote on the objective of reintroducing amortisation, namely, improving information or reducing costs.

IASB discussion

IASB members generally agreed with the recommendation and rationale set out by the staff, observing that the entrenched views of stakeholders, users, and preparers that have not moved over the course of the discussion. IASB members also noted that, generally, the evidence obtained has not highlighted new or compelling information that will definitively convince proponents of the impairment-only approach.

Many IASB members commented that the best way forward with regard to current information and thinking is to improve the impairment test and disclosure requirements. However, one IASB member disagreed, highlighting that many respondents to the post-implementation review of IFRS 3 commented that they would prefer to reintroduce amortisation, and therefore that developing an amortisation model on the grounds of reducing costs of preparation of financial information should be explored.

IASB decision

When asked to vote, 10 of the 11 members of the IASB voted in favour of the staff recommendation to retain the impairment-only model for the subsequent accounting of goodwill.

Subsequent accounting for goodwill—Possible ways forward (Agenda Paper 18B)

This paper was a reproduction, for reference, of Agenda Paper 18B from the October 2022 IASB meeting.

In this paper, the staff set out the possible ways forward for the IASB when deciding whether to retain the impairment-only model for the subsequent accounting for goodwill, namely, confirming the preliminary view to retain the impairment-only model or exploring the reintroduction of amortisation of goodwill.

Exploring the reintroduction of amortisation

The staff noted that there are two broad objectives for those who suggest reintroducing amortisation of goodwill: improving information and reducing cost.

Improving information

The staff highlighted that the proponents of this objective are in favour of reintroducing amortisation of goodwill because:

  • The impairment test is not working as intended
  • Goodwill is a wasting asset
  • Amortisation would result in an income statement expense that reflects the consumption of goodwill
  • Amortisation would directly target goodwill, unlike impairment
  • The improved disclosures suggested by the IASB’s preliminary views would not solve what is in essence a measurement issue due to limitations of the impairment test

Reducing costs

The staff highlighted that the proponents of this objective are in favour of reintroducing amortisation of goodwill because:

  • The impairment test is not working as intended
  • The impairment test is costly and complex
  • The IASB’s amended preliminary views will provide users with better information about subsequent performance than possible under the impairment test
  • An amortisation-based model will reduce costs and reduce the overall cost of any package of amendment proposed by the IASB, allowing them to meet the project objective

Retaining the impairment-only model

The staff highlighted that the proponents of retaining the impairment only model would argue:

  • A compelling case for change has not been identified
  • Stakeholder views are strongly held and divergent
  • Both models have limitations
  • Reintroduction of amortisation does not resolve concerns around timely recognition of impairment losses
  • Reintroduction of amortisation would not represent a significant improvement in financial reporting that would justify divergence from US GAAP

This paper was not discussed.

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