Goodwill and impairment

Date recorded:

Goodwill and Impairment research project — cover paper — Agenda paper 18

This was an education session.

The Staff discussed the following papers in this meeting:

  • Relief from the mandatory annual quantitative impairment testing of goodwill: AP 18B
  • Improving disclosures about goodwill and impairment: AP 18C

The purpose of this session was to update the Board on the discussions that the Staff had with the Capital Markets Advisory Committee (CMAC) and the Global Preparers Forum (GPF) in June 2017. The Staff also provided the Board with an oral update of their meeting with the Accounting Standards Advisory Forum (ASAF) held earlier in July 2017.

Two other papers have been included for information purposes only:

  • Summary of discussions to date: AP 18A
  • Improving the effectiveness of the impairment testing model in IAS 36: AP 18D. This is a reproduction of past agenda papers.

Update from previous suggestions

Based on the Board’s May 2017 discussions, the Staff confirmed that they will no longer pursue:

  • using a single method as the sole basis for determining the recoverable amount of an asset or a CGU; and
  • removing the restrictions imposed by IAS 36 on cash flow estimates used in a VIU calculation.

Feedback from the ASAF meeting

There was limited feedback from the ASAF meeting. Some ASAF members suggested extending the possibility of using a single method for determining the recoverable amount to individual assets (i.e. not to limit this consideration to goodwill only), with mixed views on whether fair value or VIU should be kept. The ASAF did not provide any comments on the pre-acquisition headroom approach as that was not the focus of the discussion.

A Board member cautioned the Board against re-opening the debate about whether or not to use a single method to determine the recoverable amount. She noted that this would be a significant change to the fundamental objectives and principles of an impairment test. It is also not a topic that should be compared to US GAAP lightly because the latter has different impairment requirements from IFRS.

Relief from the mandatory annual quantitative impairment testing of goodwill — Agenda Paper 18B

Staff analysis

In light of the feedback received from the CMAC and GPF discussions, the Staff identified four possible approaches for providing relief from annual testing:

  1. to use an indicator-based approach in all circumstances
  2. to require mandatory testing in the year of the business combination and switch to indicator-based testing thereafter
  3. to require mandatory testing in the first few years after the business combination (e.g. three to five years) and switch to indicator-based testing thereafter
  4. to require mandatory testing less frequently (e.g. every three years) and use an indicator-based approach in the intervening periods

The Staff also provided some preliminary thoughts on the factors that could be considered in selecting the appropriate approach, including:

  • The mandatory annual impairment test was introduced in light of the non-amortisation of indefinite life intangible assets and goodwill;
  • Feedback from investors that impairment losses are often recognised too late even with mandatory annual testing. Removing it could delay the recognition of impairment losses even more;
  • Is performing annual testing truly costly? This is because the VIU model is set up in the first year and it is merely updated with a fresh set of inputs in subsequent years;
  • An indicator-based approach coupled with disclosure of the reasons that triggered the impairment test could enhance disclosure effectiveness, because the entity could focus on communicating information that really matters;
  • Introducing the following as a possible indicator of impairment: assessing whether actual performance is in line with the key targets supporting the purchase price paid in a business combination. However, the period over which such an indicator would be effective has yet to be assessed;
  • Mandatory testing of goodwill for impairment in the first few years after a business combination may not be useful. This is because there is typically no impairment in the initial years especially if there have been no significant changes in circumstances.

The Staff will bring back further analysis for discussion at a future meeting.


This was a disjointed session. A few members were supportive of an indicator-only approach subject to further research and others had mixed views. A few Board members explained that they were in a quandary because neither the CMAC nor the GPF gave the Staff a clear message of what they want. Without a clear diagnosis of the problem it is difficult for the Board to find a fix for it.

Some members were wary of an indicator-only approach for the reasons given in the Staff analysis, while others reiterated that it can be stressful to perform a quantitative impairment test every year. This is because businesses are dynamic and the business units – and the benefits embodied in the goodwill that originated from the acquisition of those businesses – change in response to economic conditions. However, IAS 36 does not cater for such a dynamic re-allocation of goodwill and could even be said to underestimate the difficulty in tracking goodwill acquired for the purposes of re-allocation.

Some Board members saw merit in the US GAAP’s optional qualitative approach as a screening test for the quantitative assessment, and suggested that the Staff consider adapting the factors in US GAAP or creating the IASB’s own factors when assessing whether facts and circumstances indicate that goodwill may be impaired.

The Board did not specifically discuss the four alternatives put forward by the Staff. However, one member questioned the usefulness of alternative two because it is unlikely that goodwill would be impaired in the year of acquisition due to all the due diligence performed by management and their having been convinced to pay the purchase price. This is especially true if the deal is concluded close to year-end. Also, since the feedback from some GPF participants indicated that goodwill is unlikely to be impaired in the first few years after an acquisition, pursuing alternatives two and three would be meaningless.

A board member requested that the Staff bring back a more streamlined paper for future discussion.

Improving disclosures about goodwill and impairment – Agenda Paper 18C


This paper builds on AP 18D to the May 2017 Board meeting. In that paper, the Staff suggested requiring the following additional disclosures about goodwill:

  • What are the reasons for paying a premium over and above the fair value of the net identifiable assets acquired in a business combination?
  • What are the key performance assumptions or targets set by the entity for recovering the premium?
  • A comparison of actual versus target performance for a specified number of years following a business combination; and
  • A disaggregation of the carrying amount of goodwill by each acquisition and an explanation of why each amount is recoverable.

The Staff did not offer any views in this paper.

Feedback from the CMAC and GPF discussions

The CMAC members were generally supportive of the Staff’s suggestions. However, the GPF members raised the following concerns:

  • It is unlikely that the proposed disclosures would result in the provision of meaningful information. This is because to do that, an entity would likely have to disclose commercially sensitive information.
  • it would be difficult to provide a comparison of actual versus target performance by each acquisition because of post-acquisition integration;
  • it would be difficult and costly to isolate the benefits arising from old acquisitions in order to provide disaggregated information on why goodwill is still considered recoverable by each acquisition;
  • the disclosure of a pre-tax discount rate is not useful as that rate is not observable and is generally not used for valuation purposes;
  • a few GPF members suggested disclosing the headroom available in the impairment assessment. Investors can then identify whether there is a declining trend in the headroom and perform their own assessment of the situation.


Overall, some Board members believe that the Board should revisit the objectives of the IAS 36 disclosures and assess whether the existing disclosure requirements are achieving those objectives. The fact that the disclosures given in practice are boilerplate due to management’s reluctance to disclose commercially sensitive information is a moot point, and if the problem of ineffective disclosures stems from an enforcement issue, then the Board should be talking to regulators and other bodies rather than aimlessly introducing new disclosures.

There were mixed views about the usefulness and operationality of requiring a breakdown of goodwill by acquisition for the same reasons given by the CMAC and the GPF. One Board member shared his observations from the CMAC and GPF joint meeting in which the participants agreed that providing such a breakdown is good in theory but is not operational. Another Board member supported the idea of disclosing the headroom available in the impairment assessment.

A couple of Board members also supported the CMAC’s suggestion that the Board consider requiring an entity to disclose total assets and liabilities for each reportable segment. This would allow stakeholders to assess the return generated in each reportable segment and compare it with the average cost of capital.

One Board member expressed his frustration at the discussion. He attributed this, once again, to a lack of clear direction from the CMAC and the GPF on how they want to improve disclosure effectiveness. He is not convinced that any of the ideas suggested by the Staff would add value to users. In short, he thinks the project should be dropped.

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