Cover paper (Agenda Paper 18)

In March 2020, the IASB published Discussion Paper DP/2020/1 Business Combinations—Disclosures, Goodwill and Impairment. The comment period for the DP ended on 31 December 2020.

In 2021, the IASB discussed the feedback received in response to the DP and decided to prioritise, amongst other things, performing further work to make decisions on the package of disclosure requirements about business combinations and to then redeliberate its preliminary view that it should retain the impairment-only model to account for goodwill.

In December 2022, the IASB agreed to move the project from the research programme to the standard-setting work plan.

The purpose of this meeting was to ask the IASB to make a tentative decision about which improvements to the impairment test should be proposed in the upcoming Exposure Draft. The IASB also continued its discussions on proposals to improve information disclosed about business combinations.

Effectiveness of the impairment test—analysis of suggestions (Agenda Paper 18A)

In this paper, the staff set out the analysis and recommendations of whether the IASB should propose any of the suggested improvements to the impairment provided by respondents to the DP.

The DP identified two broad reasons for possible delays in recognising impairments on goodwill: shielding and management over-optimism.

Respondents suggested ways to improve the application and effectiveness of the impairment test. The staff obtained feedback from the IASB’s consultative groups on suggestions that could mitigate either of these two main reasons and be implemented at a reasonable cost.

Suggestions to reduce shielding

The staff investigated the following suggestions that purported to help reduce shielding:

• providing additional guidance on how goodwill is allocated to CGUs; and
• requiring an entity to perform an impairment test when it reorganises its reporting structure in a wat that changes the composition of one or more CGUs to which goodwill is allocated.

From its analysis, the staff agreed that targeted changes to IAS 36:80 could be relatively simple to make and could improve the application of that paragraph and the allocation of goodwill for impairment testing purposes which in turn could help reduce shielding.

Suggestions to reduce management over-optimism

The staff investigated the following suggestions that purported to help reduce management over-optimism:

• Requiring an entity to disclose a comparison of cash flow forecasts used in impairment tests in prior years with actual cash flows
• Clarifying the requirement in IAS 36:33 to explain that cash flow projections based on the most recent financial budgets/forecasts still need to be based on reasonable and supportable assumptions
• Improving the list of impairment indicators set out in IAS 36:12
• Requiring an entity to disclose in which reportable segments the cash-generating units (CGUs) containing goodwill are included

From its analysis, the staff did not think the IASB should explore the first three suggestions further. However, the staff agreed that knowing which reportable segment goodwill has been allocated to in the year of acquisition could provide users with useful information that could, together with other information disclosed applying IFRS 3, help them assess management’s decision to acquire a business.

Staff recommendation

Based on the analysis, the staff recommended that the IASB:

• Replace ‘goodwill is monitored for internal management purposes’ in IAS 36:80(a) with ‘business associated with the goodwill is monitored for internal management purposes’
• Provide limited guidance on what is meant by monitoring the business associated with goodwill when an entity applies IAS 36:80(a)
• Clarify that the reference to operating segment in IAS 36:80(b) is intended as a ceiling to the level that an entity determines applying IAS 36:80(a)
• Clarify why IAS 36 permits allocating goodwill to groups of CGUs
• Include an illustrative example explaining the difference between management monitoring ‘strategically important’ business combinations for the purpose of subsequent performance disclosure and management monitoring a business associated with the goodwill for the purposes of impairment testing
• Require an entity to disclose in which reportable segments CGUs containing goodwill are included
• Not pursue further any of the other suggestions analysed

IASB discussion

IASB members broadly agreed with the staff recommendation overall. However, there was some challenge regarding particular proposals.

One IASB Member did not agree that an entity should be required to disclose in which reportable segments CGUs containing goodwill are included. The IASB member was not sure how this would improve the effectiveness of the impairment test. The staff members present at the meeting highlighted that this was an approach suggested by stakeholders as a means to address concerns over management overoptimism and would be a simple and low-cost requirement to implement.

Some IASB Members expressed concern at the proposed illustrative example explaining the difference between management monitoring ‘strategically important’ business combinations for the purpose of subsequent performance disclosure and management monitoring a business associated with the goodwill for the purposes of impairment testing. They highlighted that such an illustrative example may imply that there is only one way to apply these requirements, and result in de facto requirements that are not intended. There were mixed views from the IASB regarding how these concerns could be addressed. Some suggested more illustrative examples to make clear that there are multiple acceptable approaches depending on facts and circumstances; others suggested including wording in the drafting making it clear that this example is to illustrate only that the requirements operate independently, rather than an indication of how such disclosure should be made.

IASB decision

The IASB firstly voted on the staff recommendation exclusive of the proposals to:

• Include an illustrative example explaining the difference between management monitoring ‘strategically important’ business combinations for the purpose of subsequent performance disclosure and management monitoring a business associated with the goodwill for the purposes of impairment testing
• Require an entity to disclose in which reportable segments CGUs containing goodwill are included.

When asked to vote on this recommendation, the IASB voted unanimously in favour.

When asked to vote on the proposal to require an entity to disclose in which reportable segments CGUs containing goodwill are included, 13 of the 14 members of the IASB voted in favour.

When asked to vote on the inclusion of an illustrative example explaining the difference between management monitoring ‘strategically important’ business combinations for the purpose of subsequent performance disclosure and management monitoring a business associated with the goodwill for the purposes of impairment testing that is drafted in a way addressing the concerns expressed in the meeting, 11 of the 14 members of the IASB voted in favour.

Effectiveness of the impairment test—analysis of suggestions (Agenda Paper 18B)

Agenda Paper 18B (a copy of Agenda Paper 18D from the IASB’s May 2023 meeting) reproduced a description of suggestions and feedback from stakeholders and ways to improve the application and effectiveness of the impairment test.

This paper was not discussed at the meeting and supplemented Agenda Paper 18A.

Disclosure requirements for specific types of entities (Agenda Paper 18C)

In this paper, the staff presented the analysis and recommendations on whether the IASB should:

• Require subsidiaries without public accountability to disclose information that would be required by the IASB’s tentative decisions in this project
• Require private and unlisted entities to disclose information about the subsequent performance of business combinations

In this paper, the staff recommended that the IASB:

• Require an eligible subsidiary applying the forthcoming Subsidiaries without Public Accountability Standard to disclose quantitative information about expected synergies, subject to the same exemption as entities applying IFRS 3
• Does not make other amendments to the forthcoming Subsidiaries without Public Accountability Standard relating to tentative decisions made by the IASB in this project

The staff also recommended that the IASB does not exempt unlisted entities that apply full IFRS Accounting Standards from requiring an entity to disclose information about the subsequent performance of its business combinations.

IASB discussion

IASB members broadly agreed with the recommendation to require an eligible subsidiary applying the forthcoming Subsidiaries without Public Accountability Standard to disclose quantitative information about expected synergies, subject to the same exemption as entities applying IFRS 3. However, there was significant discussion regarding the recommendation to not make any further amendments to this forthcoming Standard, with some IASB members expressing surprise at certain exemptions in relation to IFRS 3 disclosure requirements available in the forthcoming Subsidiaries without Public Accountability Standard.

IASB members had mixed views regarding the project in which such decisions are in scope.

IASB decision

The IASB agreed not to vote on the second part of the first recommendation without further analysis on the matter, as well as discussion with the staff working on the Subsidiaries without Public Accountability project about how to proceed with this mater.

When asked to vote on the first recommendation, exclusive of the recommendation to make no further amendments to the forthcoming Subsidiaries without Public Accountability Standard, the IASB voted 13 of 14 in favour.

The IASB agreed unanimously with the second recommendation not to exempt unlisted entities from the proposed disclosure requirements.