Cover paper (Agenda Paper 18)

In March 2020, the IASB published Discussion Paper 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 December 2022, the IASB agreed to move the project from the research programme to the standard-setting work plan.

The purpose of this meeting was to ask the IASB to make a tentative decision regarding its preliminary view to remove the requirement to perform a quantitative impairment test each year and to discuss improving the effectiveness of the impairment.

Reducing cost and complexity—removing the annual quantitative impairment test (Agenda Paper 18A)

In this paper, the staff set out their analysis and recommendations to the IASB.

In the DP, the IASB set out its preliminary view that to remove the requirement to perform a quantitative impairment test of cash-generating units (CGUs) containing goodwill annually, indefinite life intangible assets, and intangible assets not yet available for use (annual impairment test), and instead only perform the test if there are indicators of impairment.

Many respondents disagreed with this preliminary view, believing this would reduce the effectiveness and robustness of the impairment test and deliver limited cost savings.

Therefore, the staff recommended that the IASB should not proceed with its preliminary view and should retain the requirement for an entity to perform an annual impairment test.

The staff also recommended that the IASB do not pursue the alternatives to the annual impairment test suggested by respondents to the DP.

The IASB were asked to vote on each of these recommendations.

IASB discussion

IASB members were generally supportive of both staff recommendations.

With regard to the first recommendation, it was noted that the preliminary view not to require an impairment test annually was a narrow decision and possibly predicated on the reintroduction of amortisation.

As a tentative decision not to reintroduce amortisation has since been made, and the feedback from respondents indicated that there would be damage to the robustness of the impairment test and limited cost reduction from upholding the preliminary view, IASB members agreed with the staff recommendation to retain the requirement for an entity to perform an annual impairment test.

With regard to the second recommendation, IASB members agreed not to pursue any of the alternatives suggested, though it was noted that the relief available in IAS 36:99, to use the most recent detailed calculation of recoverable amount of a CGU to perform an impairment test of that CGU (provided certain conditions are met), is applied less than they expected.

IASB decision

The IASB were asked to vote on both recommendations simultaneously. When asked to vote, the IASB voted unanimously in favour of both recommendations.

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

In this paper, the staff asked the IASB to make a decision about the feasibility of designing an alternative impairment test that is significantly more effective than the current test in IAS 36.

As part of the DP, the IASB identified over-optimism and shielding as possible reasons for delays in recognising impairment losses on goodwill. To address shielding, the IASB identified that an impairment test could be designed to allocate a portion of any reduction in the recoverable amount of a CGU to the acquired goodwill, rather than allocating it first to any unrecognised headroom (the headroom approach).

However, the IASB’s preliminary view was that it is infeasible to design a different impairment test that is significantly more effective at a reasonable cost.

Most respondents agreed with this preliminary view, but some disagreed and suggested either pursuing some form of headroom approach or other forms of impairment test. The staff set out these approaches but identified drawbacks with them.

Therefore, the staff recommended that the IASB maintain its preliminary view that it is infeasible to design a different impairment test that is significantly more effective at a reasonable cost.

The IASB were asked to vote on this recommendation.

IASB decision

The IASB generally supported the staff recommendation and, when asked to vote, voted unanimously in favour with the staff recommendation.

Effectiveness of impairment test—criteria and application (Agenda Paper 18C)

In this paper, the staff explained the criteria developed and applied in considering which suggestions to improve the effectiveness of the impairment test received from respondents should be pursued.

The suggestions selected to be pursued further are detailed in Agenda Paper 18D.

The IASB were not asked to make any decisions on this paper.

IASB discussion

The IASB discussed Agenda Paper 18C and 18D at the same time; this discussion is summarised in the next section.

Other topics (Agenda Paper 18D)

In this paper, the staff summarised the feedback obtained from the IASB’s consultative groups on the suggestions considered after applying the criteria outlined in Agenda Paper 18C.

The staff categorised the suggestions into two categories: those that could reduce shielding, and those that could reduce management over-optimism.

Suggestions that could reduce shielding

The staff summarised the following suggestions that could reduce shielding and outline the feedback from the consultative groups on these suggestions:

• Provide additional guidance on allocating goodwill to CGUs
• Require an entity to perform an impairment test when it reorganises its reporting structure in such a way that changes the composition of CGUs to which goodwill is allocated

Suggestions that could reduce management over-optimisms

The staff summarised the following suggestions that could reduce management over-optimism and outline the feedback from the consultative groups on these suggestions:

• Require an entity to disclose a comparison of cash flow forecasts used in past impairment tests with actual cash flows
• Clarify that cash flow projections based on the most recent financial budgets or forecasts need to be based on reasonable and supportable assumptions
• Improve the list of indicators of impairment
• Require disclosure of the reportable segment in which CGUs containing goodwill are included

The IASB were asked if they have any comments or questions on the suggestions and feedback presented.

The IASB were not asked to make any decisions on this paper.

IASB discussion

The IASB discussed Agenda Paper 18C and 18D at the same time.

IASB members recommended that there should be limited focus on the suggestions identified by respondents that would result in minor improvements, as the time and resources of the IASB and its staff are limited.

In particular, several IASB members suggested that there would be limited benefit achieved by improving the list of indicators of impairment, clarifying that cash flow forecasts should be based on reasonable and supportable assumptions, and requiring an impairment test if an entity reorganises its reporting structure in such a way that changes the composition of CGUs to which goodwill is allocated.

A few IASB members also identified that some suggestions could result in requiring disclosure of commercially sensitive information, and therefore should not be pursued.

One IASB member observed that there is limited guidance and requirements with regard to the impairment testing of goodwill allocated to a group of CGUs in comparison to the impairment testing of goodwill allocated to one CGU, and that this could therefore be explored as a potential improvement.