Goodwill and impairment

Date recorded:

Next stage in the research project (Agenda Paper 18)


The Goodwill and Impairment research project has been added to the Board agenda as a follow-up of the post-implementation review of IFRS 3 Business Combinations.

In the previous Board meeting, the staff recommended that the Board issue:

  • An Exposure Draft (ED) proposing amendments to IAS 36 Impairment of Assets to remove the explicit requirement to use pre-tax inputs in calculating the value in use
  • A Discussion Paper (DP) inviting comments on the Board’s preliminary views on all other matters considered in the research project

The Board did not make a decision on the question and instead asked the staff to

  • Assess the advantages and disadvantages of developing a document to seek targeted feedback about the benefits and costs of using the unrecognised headroom of a cash-generating unit (or group of units) as an additional input in the impairment testing of goodwill
  • Identify the extent of work that would be required to enable the Board to develop and issue an ED on some or all of the following matters:
    • Removing the requirement to exclude from the calculation of value in use those cash flows that would result from a future restructuring or from a future enhancement
    • Introducing additional disclosures

Staff analysis

Future restructuring or future enhancement

The staff propose to clarify that cash flow projections should be based on a realistic prediction of what will ultimately happen. Effects of future restructuring and future performance enhancements should be included if it is more likely than not that the entity will undertake them.

Pre-tax inputs

In April 2018, the Board tentatively decided to remove the explicit requirement to use pre-tax inputs in calculating value in use. Requiring the discount rate(s) actually used in the value in use calculation would produce information that is useful to investors. The staff conclude that there is sufficient information and no further work is required for the Board to propose amendments to IAS 36 in this respect.

Additional disclosures

In December 2017, the Board tentatively decided to consider introducing additional disclosure requirements. The cost-benefit analysis of the disclosure of the headroom in a cash-generating unit to which goodwill is allocated for impairment testing is likely to be similar to the cost-benefit analysis of the headroom approach (see below).

The staff think that the Board could proceed with proposing the following disclosure requirements:

  • The breakdown of goodwill by past business combinations
  • The reasons for paying a premium that exceeds the value of the net identifiable assets acquired in a business combination as well as disclosing the key assumptions and subsequently, each year, a comparison of actual performance with those assumptions

Headroom approach

In December 2017, the Board has identified the likely benefits and costs of applying the headroom approach, however more information is needed to establish whether benefits of applying the headroom approach exceed the costs. Stakeholders have to be provided with further opportunity to debate the headroom approach for it to mature.

Consultation document

The staff propose to divide the project into two parts: the relatively straightforward improvements and the headroom approach. For the straightforward improvements, the staff recommend to propose amendments in an ED. For the headroom approach, the Board could consider issuing a Request for Information (RFI) or a DP to seek feedback.

Staff recommendation

The staff recommend to:

  1. pursue including expected cash flows from future restructuring and future performance enhancements that management is more likely than not to undertake in the value in use calculation
  2. divide the project into two parts (i.e. the straightforward improvements and the headroom approach)
  3. issue an ED on the straightforward improvements
  4. issue a DP or a RFI to seek feedback on the headroom approach

The staff ask the Board whether it agrees with the staff recommendations and if yes, whether the DP/RFI for the headroom approach and the ED for the relatively straightforward improvements should be processed in parallel or whether one of those should be prioritised.

Board discussion

The Chairman opened the discussion by sharing some general concerns about the project. He was particularly concerned about how evident it became in this project that the impairment test in IAS 36 is ineffective, flawed and expensive. As investors rely on book values more than expected, the carrying value of goodwill is very important. In the Chairman’s view, goodwill inflates balance sheets to an extent that there is a reputation risk for the IASB. If entities collapsed over these inflated balance sheets, the public would rightfully ask what the IASB had done to prevent this.

The headroom approach will not be able to fix this issue and hence will struggle to find support amongst constituents. Nonetheless, the work performed on the headroom approach is useful and could still be used in a DP. However, the Board should reconsider amortisation of goodwill or even an immediate write-off. This would take the pressure of the impairment test and the cost saved could be reinvested in disclosures. The Board should also consider to make goodwill more visible in financial statements, which could be done in the Better Communication in Financial Reporting project that the Board is currently undertaking. The Chairman also suggested a disclosure requirement that shows equity without goodwill as in some prominent collapses equity would have been negative without goodwill.

Board members shared the Chairman’s concern. The original intention was to amend IAS 36 only in minor parts and leave as much as possible untouched. However, it becomes more and more evident that the Board needs to step back and look at the impairment testing as a whole. In order to do that, the Board needs a clear objective about what it wants to achieve. Acquisitions become more and more aggressive and a profitable acquisition can lead to a significant amount of headroom which would then prevent impairment for less profitable acquisitions. However, one Board member said that the urgency of the issue negated a lengthy DP process. The Board member said that the sought information is already available from the post-implementation review and the DP stage could therefore be skipped.

It was suggested to require an impairment assessment for each separately recognised component of total goodwill (i.e. transaction-by-transaction) rather than testing “a pool” of goodwill recognised at different times. The Vice-Chair suggested to expose an entire package to the public, rather than piecemeal amendments. This was supported by several Board members. The package should include proposals for solid disclosures as many investors had mentioned that they need to better understand what is behind the numbers of an acquisition. One Board member supported that and said that at the moment it is unclear whether goodwill related to overpayment, unidentifiable intangibles or synergies. However, the Chairman noted that disclosures alone will not be accepted by constituents as a solution if nothing is done about the impairment mechanism. One Board member warned that mixing a fix for the mechanism and a fix for the information need would end in a messy solution.

The Chairman asked whether the Board supports issuing a DP or RfI to seek feedback on the headroom approach as the Board’s direction for a solution of the issue. Only 5 Board members voted in favour.

The Chairman conceded that the situation is frustrating but there is currently no obvious solution to the problem. The Technical Director proposed to issue a DP with all possible solutions, including the analysis done by the staff on the headroom approach. The Board supported that proposal and discussed how the DP could be structured and which presentation strategies should be pursued.

The Executive Technical Director suggested not to vote on whether a DP or ED would be the next step, but bring back the alternative solutions and a strategy. The Board agreed.

As regards whether the expected cash flows from future restructuring and future performance enhancements should be included in the value in use calculation, one Board member warned that the budgeting of these events could go from best estimates to stretch goals. The Vice-Chair said she would prefer if the drafting stated that the restructuring would have to be more likely than not to occur, rather than the cash flows from the restructuring being more likely than not. One Board member was concerned that a budget is not necessarily a realistic forecast and that fact should be taken into consideration when working on a solution. Other Board members expressed concerns about what ‘realistic’ means and how future cash flows could be reliably estimated.

The Chairman asked whether the Board supported the direction of this part of the project. 13 members voted in favour.

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