Goodwill and impairment

Date recorded:

Cover Paper (Agenda Paper 18)

In March 2020, the Board published Discussion Paper DP/2020/1 Business Combinations— Disclosures, Goodwill and Impairment which included the Board’s preliminary views to address feedback the Board heard during the post-implementation review of IFRS 3 including:

  • a. Disclosing information about business combinations
  • b. Testing goodwill for impairment—effectiveness and cost
  • c. Whether to reintroduce amortisation of goodwill
  • d. Recognising intangible assets separately from goodwill

The purpose of this meeting was to provide a summary of feedback on particular aspects of the DP—feedback from users of financial statements and feedback on disclosing information about business combinations, the effectiveness of the impairment test and whether to reintroduce amortisation of goodwill.

The staff presented agenda papers 18A–18G which are summarised below. 

Feedback overview (Agenda Paper 18A)

This paper was unchanged from Agenda Paper 18A presented at the March 2021 meeting.

Board discussion

There was no further discussion or questions for the Board during this meeting on Agenda Paper 18A.

Effectiveness of the impairment test (Agenda Paper 18B)

This paper was unchanged from Agenda Paper 18E presented at the April 2021 meeting.

Board discussion

Board members generally expressed great interest in the paper. Board members agreed conceptually with the suggestion to improve disclosure requirements around the test and its assumptions. However, some members warned against ‘scope creep’ into revising the general IAS 36 impairment model outside of goodwill.

There were also concerns raised that improvements to the effectiveness of the test may inordinately increase the cost and complexity to the preparers and that specifying disclosure requirements (e.g. the suggested “close call” requirement) may undermine the application of more general disclosure requirements found elsewhere in the Standards.

Further concerns were raised that the suggested “back-testing” disclosures could be perceived as undermining the management’s ability to forecast, deterring preparers from applying judgement. Board members were keen to stress that all forecasts from management require judgement and will be imperfect.

Subsequent accounting for goodwill (Agenda Paper 18C)

This paper was unchanged from Agenda Paper 18F presented at the April 2021 meeting.

Board discussion

Board members had mixed views on the subsequent accounting for goodwill. Observations were made there are no new conceptual arguments provided in the feedback, and that the feedback provided was diverse and in places irreconcilable. This makes it difficult to definitively conclude on the subsequent accounting or arrive at a compromise position.

Multiple Board members emphasised the importance of considering the interaction between improving the impairment test model and the potential reintroduction of amortisation for goodwill.

Some Board members expressed that there may be difficulty in reliably estimating the useful economic life of goodwill, though some Board members were less concerned about this, contrasting the judgement around useful economic life with the judgements involved in impairment tests.

Board members had mixed views on the perceived ‘high’ levels of goodwill balances, some thinking it is a problem potentially indicative of an ineffective impairment test, others arguing it could just be indicative of more acquisitive activity and increased consolidations.

Accounting for goodwill—Simplifying the impairment test (Agenda Paper 18D)

The key messages from this paper were:

  • Most respondents disagreed with the proposal to remove from IAS 36 the requirement for a mandatory annual impairment test for cash-generating units (CGUs) containing goodwill as the cost savings would not outweigh the reduction of the effectiveness and robustness of the test. Most respondents thought this cost-benefit could be re-evaluated if the amortisation for goodwill is reintroduced.
  • Many respondents agreed with the proposal to use post-tax cash flows and discount rates in value in use calculations and to remove the restrictions in value in use calculations around cash flows from future restructuring. However, others expressed concerns that removing these restrictions could exacerbate management over-optimism.

Board discussion

Board members had limited comments on the relief from an annual impairment test. It was argued that, though IAS 36 is a difficult standard to apply, looking for ways to make it easier should not give rise to overly simplified requirements. It was mentioned that a more appropriate option may be to prepare educational material rather than simplify requirements when it may be inappropriate to do so.

Some Board members discussed that, if relief is provided from conducting an annual impairment review, it should be considered how this can be compensated so that useful information is still disclosed, e.g. through defining clearly what a ‘qualitative assessment’ requires, or setting out a step-by-step procedure that may ultimately result in a full quantitative assessment.

Most of the discussion on this agenda paper centred around the proposal to allow cash flows from future restructuring in value in use calculations. It was noted that this may create difficulties for auditors when looking at management estimates and judgements in impairment tests. Further comments were raised about being mindful of the different conceptual bases between value in use and fair value less costs of disposal, namely that value in use is based on assessing an asset in its current condition.

Concerns were raised (as in earlier discussions) around ‘scope creep’, and the possibility of more general changes to IAS 36 that might come from these discussions, when the Board should maintain discipline by focusing on goodwill rather than general overall improvements/changes to IAS 36.

One point of interest is that, despite the assumption that management may be inappropriately optimistic if requirements are simplified, the empirical evidence to date indicates that this is not the case.

Feedback summary—Other topics (Agenda Paper 18E)

The key messages from this paper were:

  • Almost all respondents disagreed with the proposal to require an entity to present on its statement of financial position the amount of total equity excluding goodwill.
  • Most respondents agreed that there should not be a change in the recognition criteria for identified intangible assets acquired in a business combination.

Board discussion

Board members generally agreed that the overall information advantages of showing separately identifiable intangible asset outweighs the costs of valuing those assets, though some Board members argued that, as the assets are amortised and treated as wasting assets, the information given by showing these assets separately eventually obsolesces over time.

Some Board members also said that some of the issues raised in the feedback, though sensible to raise in these discussions, would be more appropriately discussed in the review of IFRS 10.

Academic evidence (Agenda Paper 18F)

Agenda Paper 18F summarised the literature published in the last 20 years on the topics included within the DP that has been reviewed by the staff.

Board discussion

Board members highly commended this agenda paper which brought together multiple sources of academic information.

It was recommended that the evidence and information procured through this literature review should be included where relevant to each issue being discussed, so that it can be considered as information alongside the Board’s view in Board deliberations.

Plan for redeliberations (Agenda Paper 18G)

This paper laid out the key areas to be redeliberated by the Board following the feedback on the DP.

The proposal is for the Board to reconsider the objective and scope of the project first to determine whether all of the topics covered in the DP should remain as one project. Subsequently, the paper suggested prioritising the redeliberations around reintroduction of amortisation of goodwill as this may impact other decisions.

The paper highlighted that the key considerations on whether to reintroduce amortisation of goodwill, and on other topics, will include the project objective, dependencies between topics in the project and convergence with US GAAP.

As a result of the dependencies the paper also suggested that the Board should have an initial discussion, at the same time as deciding on amortisation of goodwill, on:

  • a. Whether the information on subsequent financial performance of a business combination should be included in the financial statements
  • b. Whether any suggestions in relation to changing or improving the impairment test should be pursued

Board discussion

The Board generally approved of the plan presented for redeliberation, with the comments from members noting that stakeholders were asked to respond to a package of comments, therefore these deliberations should be conducted in an equivalent packaged manner.

The Board was not asked to make any decisions in relation to any of these papers.

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