Goodwill and impairment

Date recorded:

As a result of the post-implementation review (“PIR”) of IFRS 3 Business Combinations the IASB decided to examine issues related to the subsequent accounting for goodwill; improving the impairment test in IAS 36; and the identification and measurement of intangible assets in a business combination.

Goodwill and impairment project- Cover Paper- Agenda paper 18


As a result of the post-implementation review (“PIR”) of IFRS 3 Business Combinations the IASB decided to examine issues related to the subsequent accounting for goodwill; improving the impairment test in IAS 36; and the identification and measurement of intangible assets in a business combination.  The IASB discussed the first two topics in October and the third in November 2015.  In February the Board instructed the staff to provide quantitative information about the amount and trends of reported goodwill, impairment and intangible assets over recent years. The staff would present this information at the May 2016 IASB meeting. In March 2016, the Board instructed the staff to further develop their proposal for a possible modification to the impairment test. The staff would present their analysis in agenda paper 18A to be discussed in this session.  

No technical decisions have been made so far by the Board. 

The staff has been performing research in the following areas (i) customer relationships; and (ii) information provided to investors about performance indicators related to acquisitions.

Staff proposal for continuing the project

The staff proposed to continue the project in two phases:

Phase one: To discuss the following topics jointly with the FASB: (i) whether to include any intangible assets in goodwill rather than recognising them separately and (ii) subsequent accounting for goodwill (in particular whether reintroducing amortisation of goodwill would improve financial reporting).

Phase two: To have IASB-only discussions to consider improvements to the impairment testing and disclosures.

The timetable proposed by the staff is as follows:

  • May 2016: Presentation of quantitative information and update on research activities
  • June 2016: Joint education session with the FASB.

Goodwill and impairment project- The pre-acquisition headroom approach to impairment testing- Agenda paper 18A


The agenda paper was an updated version of Agenda paper 18C discussed in March 2016. The staff indicated that significant changes had been made. This agenda paper only developed the main approach discussed in March 2016 (day 0 impairment testing) which was the one preferred by the Board. The approach was renamed by the staff for this discussion and was described as pre-acquisition headroom (PAH). The staff also changed the reference from internally generated goodwill to the difference between a cash generating unit’s (CGU)’s recoverable amount and its carrying amount before including the acquisition as ‘pre-acquisition headroom’ (or ‘PAH’). The staff also developed the PAH approach further for this discussion.

The staff would bring an analysis of possible approaches to improve and simplify the impairment testing at future meetings.

Staff analysis

The staff indicated that the requirement in IAS 36 Impairment of Assets requires goodwill acquired in a business combination to be allocated, from the acquisition date, to each of the acquirer's cash-generating units (CGUs). If goodwill was allocated to an existing unit of the acquirer and that unit’s recoverable amount exceeded its carrying amount, the excess would provide an instant buffering effect against recognition of an impairment loss of the goodwill allocated to the unit. The staff considered that the PAH approach would incorporate into the impairment test the calculation of any excess, existing at the date of acquisition, of the recoverable amount over the carrying amount of the existing CGUs (or groups of CGUs) to which goodwill was allocated and would help eliminating any buffering effect.

The agenda paper included a detailed analysis of the approach proposed by the staff. The Board was not asked to make any decisions but was asked to provide feedback to the staff on the proposed approach.

A summary of the approach proposed by the staff was:

(i) Step one: Determine which of the acquirer's CGUs, or groups of CGUs, were expected to benefit from the synergies of the combination and determine how the goodwill would be allocated (as was currently required by IAS 36). For example, assume goodwill was expected to be allocated to units A, B and C of the acquirer (the units could be an individual CGU or a group of CGUs).

(ii) Step two: Before allocating goodwill or any other assets of the acquiree, calculate the recoverable amount of each of units A, B and C, at the date of acquisition, using pre-acquisition assumptions in the calculation. The excess of a unit’s recoverable amount over its carrying amount at the date of acquisition using pre-acquisition assumptions was the ‘pre-acquisition headroom’ (or ‘PAH’) in that unit.

(iii) Step three: Allocate the goodwill and any other assets from the acquiree to units A, B and C, as required by IAS 36.

(iv)  Step four: Calculate impairment test as follows:

  1. The recoverable amount of each unit would be determined as normal in accordance with IAS 36 (i.e. post-acquisition assumptions and after the allocation of goodwill and any other assets of the acquiree).
  2. The recoverable amount of each unit determined in (a) would be compared to the total of: 1) the carrying amount of that unit (including the allocated goodwill and any other allocated assets of the acquiree); plus 2) the PAH existing in that unit determined in step two.
  3. If the recoverable amount of a unit exceeded the total of 1 and 2, no impairment loss would be  recognised for that unit.
  4. However, if the total of 1 and 2 exceeded the recoverable amount, that excess would be recognised as an impairment loss.
  5. Any impairment loss would be allocated 1) first to reduce the carrying amount of the recognised goodwill allocated to the unit; 2) then secondly against the PAH (this is a notional allocation because the PAH is not recognised in the financial statements); and 3) then to other assets of the unit by applying the existing requirements of IAS 36.

The main changes introduced in the proposal as compared to the existing requirements of IAS 36 were: (i) the incorporation of step two and (ii) the requirement to consider PAH in step four. 

The staff also proposed the following:

  1. The unadjusted amount of PAH (‘frozen’ PAH) should continue to be incorporated in future impairment tests of the unit while goodwill remains in that unit.
  2. There would be no requirements to remeasure PAH because the staff considered that it would add costs and complexity.
  3. An entity should be required to perform a revised calculation of the unit’s PAH if it made a second acquisition and further goodwill was allocated to the same unit.
  4. The requirements in IAS 36 for disposals would be maintained; and accordingly,  the PAH should be allocated on the basis of the relative values of the operation disposed of and the portion of the CGU retained unless the entity can demonstrate another basis is more appropriate.


There was general support for the staff recommendation and the Board instructed the staff to continue developing the proposal. The Chairman indicated that it was a practical idea which did not appear too costly.  He acknowledged that it would still be necessary to address other issues that made impairment testing too complex.

The concerns noted were similar in nature as to those discussed in the last meeting, in March. Some Board members pointed out that there were still limitations in the proposal; particularly, such as when there was more than one acquisition. Other concerns noted were (i) the proposal would not address all situations in which there was an overpayment; (ii) other situations that lead to late recognition of impairment; and (iii) the risk that it could also open the door for manipulation because management could allocate goodwill to a new CGU.  On the other hand, others believed that it would be an opportunity to have CGUs determined at lower levels.

Few Board members believed that the proposal would add complexity and would not solve the issue. Others also noted that headroom also existed in other assets including land with unrealized gains.

The staff was instructed to explore how the proposal would apply in different scenarios.

The Chairman concluded that there was general support for the staff recommendation and instructed the staff to consider the recommendations raised by the Board.

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