Goodwill and impairment
The IASB will be joined by video by the FASB for a joint education session, their first joint meeting since September 2015. The focus of the sessions is their work on business combinations, following on from their respective post-implementation reviews of their converged standards. Both boards have projects focusing on the goodwill and intangible assets recognised in a business combination.
The staff of the two Boards will provide updates on the current status of their projects, but the boards are not being asked to make any technical decisions.
There are five papers for discussion, two prepared by IASB staff and three by FASB staff, plus a joint cover paper:
- 18 (Joint) Cover paper
- 18A (IASB): Progress report: Goodwill and other intangible assets in a business combination
- 18B (IASB): Progress report: Improving the impairment requirements
- 18C (FASB): Goodwill and Impairment - Identifiable Intangible Assets in a Business Combination for Public Business Entities and Not-for-Profit Entities
- 18D (FASB): Goodwill and Impairment - Accounting for Goodwill for Public Business Entities and Not-for-Profit Entities
- 18E (FASB): Goodwill and Impairment – Accounting for Goodwill Impairment
Intangible assets – initial recognition in a business combination
The IASB has been considering four ways to react to the perception that the initial recognition of intangible assets in a business combination is complex and not cost-beneficial. These are set out in paper 18A.
The IASB could leave the requirements unchanged (approach T1 in the papers) but create some new guidance or examples for intangible assets that feedback suggests are difficult to identify and measure, for example customer relationship intangible assets. Some ideas for how to do this are included in Appendix C of the paper.
The IASB could create some exceptions to its recognition principle so that some intangible assets are not recognised separately but are subsumed in goodwill. The exceptions could be determined using cost-benefit reasons (approach T2) or on the grounds that the IASB decides that they cannot be measured reliably (approach T3).
For cost-benefit candidates, the IASB staff are looking mainly at assets that the PIR and feedback suggested were difficult, indefinite life intangible assets that are difficult to value on an individual basis and the types of intangible assets that would not be capitalised if they were internally generated. Candidates therefore include: customer-related intangible assets, brand names, non-contractual intangible assets and intangible assets that are not capable of being sold or licensed separately. The FASB is also considering these types of assets, as well as non-competition agreements, customer-related intangible assets that are not capable of being sold or licensed independently, intangible assets for which there is no active market and intangible assets in the early stage of development (see paper 18C).
If reliability was the basis the IASB could remove statement in IFRS 3/IAS 38 that an acquirer can always reliably measure the fair value of identifiable intangible assets acquired in a business combination (i.e. reverse the change made in 2008).
The fourth approach (T4) would be to relax the conditions for when a group of complementary intangible assets can be recognised and measured as a single asset, allowing for more individual assets to be accounted for as a portfolio. This is currently permitted only if they have similar useful lives.
The FASB paper notes that subsuming intangibles in goodwill could influence the debate on whether amortisation should be reintroduced.
Subsequent accounting for goodwill
The IASB has been considering three approaches to the subsequent accounting for goodwill, and these are also discussed in paper 18A. One approach would be to reintroduce amortisation, supported by an impairment test (approach G1). Another approach would be to write off goodwill at the acquisition date (approach G2), as an expense in profit or loss or in other comprehensive income (OCI) or directly within equity. Or the IASB could retain the impairment only model (approach G3).
Approaches to address users’ presentation and disclosure concerns
The IASB has been assessing whether it should amend IFRS 3 to require additional disaggregation of amortisation of intangible assets on the face of the financial statements, to distinguish between acquired intangible assets that would not be capitalised if internally generated (e.g. customer relationships) and those that would (e.g. software).
They have also been considering whether to require entities to provide the IFRS 13 disclosures about the valuation methods and assumptions used for significant intangible assets acquired in a business combination.
Notwithstanding these issues, the IASB staff will be undertaking a more general review of the existing disclosure requirements in IAS 36/IFRS 3.
The detailed staff analysis of these disclosure approaches is in March 2016 IASB Agenda Paper 18B.
Improving the impairment requirements
Both boards have also been examining ways to improve and/or simplify the impairment testing requirements. The current impairment tests are not converged, but both boards have similar concerns about complexity and effectiveness.
The IASB paper (18B) sets out the four approaches the IASB has been considering. One approach is to move to one measurement basis for the impairment test, rather than fair value or value-in-use. This would involve specifying one of these methods or specifying that the method depend on how the entity expects to recover the asset (approach I1).
Another approach would be to relieve entities from having to undertake an annual test, by introducing a qualitative assessment of whether there are indications of an impairment (approach I2). The FASB has already introduced such a filter, which they discuss in paper 18D.
The third approach (I3) is to improve the value in use calculation to address some of the concerns highlighted to the IASB, such as removing the requirement to use a pre-tax discount rate and not requiring management to make adjustments to their forecasts to exclude planned but uncommitted restructuring activity. The IASB will also consider whether educational material could be used to help preparers.
The last approach (I4) is to develop guidance on allocating goodwill to CGUs, to ensure that goodwill is allocated at the appropriate level.
Pre-acquisition headroom (PH) approach
The IASB has also been developing a new approach to goodwill testing. This approach picks up on the thought that newly acquired goodwill allocated to an existing CGU is sometimes sheltered from impairment by the unrecognised difference between the carrying amounts and recoverable amounts of the assets already in that CGU, i.e. it gives the entity some impairment headroom. The objective of the PH Approach is to remove this sheltering effect, by incorporating the pre-acquisition headroom in the impairment calculation. The mechanics of the PH Approach are set out in Appendix C of the paper. This topic was also discussed in April 2016 IASB Agenda Paper 18A.
Improving the information disclosed about goodwill and impairment
This subject was discussed at the February and March 2016 IASB meetings. The IASB staff are focusing on four areas. Disclosing key performance targets such as the benefits of the acquisition during the period over which anticipated performance targets are expected to be achieved could help explain and support the purchase price (approach D1 in the paper). Extending this, the IASB could require an entity to compare actual performance against the targets in Approach D1 (approach D2 in the paper). A third approach would be to disaggregate goodwill to show the amounts related to each acquisition (approach D3). The fourth approach would be to requiring for each significant acquisition in the breakdown in Approach D3, an explanation to justify why the amount of goodwill is recoverable (approach D4).
The IASB staff plan to develop the PH Approach further. They will consider the pros and cons, including behavioural implications of allocating an impairment loss between acquired goodwill and the PH. They will also develop examples to assess the approach when there is a pre-acquisition deficit and when an impairment loss is caused by an increase in the discount rate.
The papers state that there are no fundamental arguments to support making significant changes to IFRS 3 for goodwill and other intangible assets. Stakeholders have always had opposing and strongly held views on subsequent accounting for goodwill, particularly on amortisation. The IFRS 3 PIR showed that the diverse view prevail. Furthermore, the data research presented by the ASBJ/EFRAG staff did not provide evidence of a problem with reported goodwill.
The IASB staff think that the IASB should give priority to improving the impairment requirements, followed by developing better guidance about intangible assets acquired in a business combination. And finally, look at ways to improve the information provided to investors about goodwill and other significant intangible assets acquired in a business combination.
The discussion was focused on the IASB’s agenda paper 18A and 18B. No technical decisions were made. Also, the IASB did not provide any indication as to what direction the project might take. The comments expressed by IASB Board members were similar to those expressed in previous sessions when the staff presented the issues discussed in agenda paper 18A and 18B.
IASB Board members provided the following comments:
- The presentation that took place last month did not give any indication that there was a “bubble” building up in terms of goodwill; still there could be indications that goodwill was not being sufficiently written off; also it was mentioned that there were no direct evidence that the system was broken.
- In general IASB members agreed that goodwill provided valuable information to users and the staff pointed out that even academic studies support the notion that there was information value in the impairment testing.
- There were mixed views about the value of the “day-one” goodwill write off approach suggested by the staff. It was pointed out that a lot of information could be lost and management would not be accountable for the performance of the acquired companies. One IASB member indicated that only the impairment test could drive meaningful discussions by management.
- In relation to the PH approach proposed by the staff there were some concerns noted (similarly as those expressed in prior sessions). For example the possibility of bias by not allocating goodwill to existing CGUs; complexity and costs. However, there were many comments pointing out that the approach should be further explored. The staff noted that they would conduct field testing to test the feasibility of the approach.
FASB Board members provided the following comments:
- There were concerns related to the need to focus on identifying and clarifying what the boards were trying to measure (i.e. whether it was the decline in goodwill from the acquisition date). Another concern was that it was necessary to agree on the objective of the project, and that the problem had not been well defined.
- There were concerns that there was no clear consensus from users as to the economic value of what goodwill represented; for example, one FASB member indicated that in his view it represented the first 2 years of profits before the acquired company could be integrated. It was pointed out that there seemed to be minimum benefits in the information provided by goodwill. It seemed that even if amortisation of goodwill were to be introduced, such amortisation would be disregarded by investors.
- Some FASB members favoured the day-one write off approach. In relation to one IASB comment that the IASB need to focus on stewardship, one IASB member responded that day-one write off did not mean that a company would lose its ability to evaluate how management operated, for example there could be disclosures, breakdown of goodwill by acquisition, information about associated cash flow etc.
- Another concern was that adding amortisation to goodwill will potentially add more problems in the current environment of extensive use of non-GAAP measures.
- In relation to the PH approach proposed by the IASB staff, there were concerns by FASB members related to the potential additional cost to implement the approach; also it was noted that the approach did not appear to be feasible.