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.

The purpose of this meeting was to initiate the IASB’s discussion on the subsequent accounting for goodwill.

The IASB was not asked to make any decisions at this meeting.

Subsequent accounting for goodwill—Overview of feedback and research (Agenda Paper 18A)

In this paper, the staff reminded the IASB of their preliminary decision to retain the impairment-only model for the subsequent accounting of goodwill.

The staff also provided an overview of respondents’ feedback on the DP and a summary of additional information and recent developments since the feedback on the DP.

Overview of feedback to the DP

The staff outlined how respondents’ views were mixed, with many agreeing with the IASB’s preliminary view, and many others instead supporting the reintroduction of amortisation.

The staff also outlined that many of these conceptual and practical reasons for and against the reintroduction of amortisation are often diametrically opposed, for instance some respondents holding out that goodwill is a wasting asset while others believe the opposite.

Additional information and recent developments

The staff outlined additional information, evidence, and recent developments since the feedback on the DP.

Feedback on convergence and developments on FASB project

The staff highlighted that the International Organization of Securities Commissions (IOSCO) provided feedback on the importance of convergence of IFRS Accounting Standards and US GAAP. Similarly, the Accounting Standards Advisory Forum (ASAF) have commented that convergence between IFRS Accounting Standards and US GAAP is important. On the other hand, the Capital Markets Advisory Committee (CMAC) have commented that, though divergence is not desirable, different models for the subsequent accounting for goodwill are manageable.

The staff also noted that the FASB have deprioritised their project to review the subsequent accounting for goodwill and remove it from their technical agenda.

Additional staff research

The staff summarised the results of their research into the feasibility of estimating the useful life of goodwill and the pattern in which it diminishes, and the reliability of such information, highlighting that there were again mixed views from respondents regarding the feasibility, auditability, and usefulness of such estimates.

The staff also summarised their research into the impact of transitioning to an amortisation-based model, again finding mixed views, with many respondents suggesting there would be a significant impact on entities’ financial position and performance due to the size of historical goodwill balances and conversely many other respondents saying the consequences of transition would be limited and should not by themselves prevent reintroduction of an amortisation-based model.

Other developments

The staff summarised the findings of the research conducted by the UK Endorsement Board (UKEB) into the subsequent measurement of goodwill.

Although some of the findings correspond to feedback obtained by the IASB staff, there were some findings which differed, namely, that the UKEB found a majority of respondents said it would be possible to estimate a useful life of goodwill. A majority of respondents stated that a maximum or minimum useful life would partially negate the anticipated improved reporting outcomes, and that transition to an amortisation-based model have limited adverse impact on financial stability.

The staff also summarised the tentative decision taken by the IASB in the September 2022 meeting to proceed with the amended version of their preliminary views regarding disclosures about business combinations.

The staff also provided an update on feedback regarding the usefulness of the existing disclosure requirements of IFRS 3.

IASB discussion

The IASB was asked if they had enough information to make a tentative decision to either retain the impairment-only model or to explore reintroducing amortisation of goodwill at a future meeting. IASB members generally agreed that sufficient information had been obtained to be able to decide, highlighting the polarised mixed views in the feedback, but also the lack of any substantially new arguments.

One member noted that one argument in favour of retaining the impairment-only model that had not been explored was the improvement performing the test annually had caused in corporate governance and controls. Another noted that there could be more analysis of costs and benefits of either approach. In particular, it was noted that the costs of applying the impairment test to smaller entities had not really been considered.

Some members observed that, with the future project on intangible assets, there is the possibility that the decision on reintroducing amortisation could be deferred until then, to avoid coming to a decision now which may prejudice that project. This would also allow the staff to progress more quickly with the disclosure package.

One IASB member also reminded the IASB of requirements under a local GAAP, which allowed an entity the accounting policy choice of applying an impairment-only or amortisation based approach, and whether such a policy choice could also be considered in this project.

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

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.

IASB discussion

Following the previous discussion, the IASB also considered deferral and the introduction of an accounting policy choice as possible ways forward.

The IASB members’ views were mixed on the deferral option, with some members highlighting that there is already an implicit deferral by virtue of the decision being to “explore reintroducing amortisation of goodwill” rather than to decide on its reintroduction, while others believed this was not a ‘true’ deferral, as it will still require the staff to conduct research.

IASB members were generally against exploring an accounting policy choice, believing it would negatively impact comparability, understandability, and reliability of the financial statements if preparers were given a choice. Others also felt it would add a further layer of complexity, and potentially turn users away from using the annual report. However, some IASB members highlighted that it may be worth exploring the view of users and preparers around an accounting policy choice.

When summarising, the staff confirmed that the IASB had sufficient information to decide at a future meeting, and that they had planned to reference to the accounting policy choice available under ‘old UK GAAP’ in an agenda paper to that meeting.