The IASB has a project to improve information entities provide about their business combinations at a reasonable cost. The current focus of the project is a package of disclosure requirements about business combinations and changes to the impairment test of cash-generating unites containing goodwill in IAS 36.

The staff identified some suggestions for changes to the impairment test of CGUs containing goodwill that the staff considered warrant further consideration. The staff paper provided details of each suggestion and the staff's corresponding initial comments. The purpose of the discussion is to obtain feedback on some suggestions respondents to the Discussion Paper had for changes to the impairment test of CGUs containing goodwill. The questions for discussion include the following:  

• Comparison of past forecasts:
  • How useful will information from this comparison be?
  • Do you think this comparison would help to deter management over-optimism? Why or why not?
  • Would entities incur significant incremental costs if required to provide this comparison? Why? Would information on accuracy of past forecasts be commercially sensitive?
  • Is the information for this already available because of the review performed in applying paragraph 34 of IAS 36?
  • How long would you recommend requiring entities to provide this comparison? In your answer, take into consideration how long the comparison needs to be so that it is meaningful and the cost of providing the comparison
• Reasonable and supportable:
  • Would additional guidance or illustrative examples on the application of paragraph 33 of IAS 36 help the application and enforcement of that paragraph and help deter management over-optimism?
• Goodwill allocated to segments:
  • Do you think impairment assumptions and segment information can be compared? Why?
  • Would entities incur significant incremental costs if required to disclose the reportable segments that CGU(s) containing goodwill are included in on a continuing basis (i.e. not just the segment the CGU(s) are included in on acquisition)? Why?
  • Do you think the additional information would help users to better assess the reasonableness of the assumptions used in impairment tests of CGUs containing goodwill because of the ability to compare to information disclosed about reportable segments? Why or why not?
  • Do you think the additional information would help to deter management over-optimism? Why or why not?
• Indicators of impairment:
  • Should the IASB explore improving the list of indicators if:
    • It retains the requirement for an annual quantitative impairment test of CGUs containing goodwill?
    • It decides to provide relief from the annual quantitative impairment test of CGUs containing goodwill?
  • How would you suggest improving the list of indicators?
• Allocating goodwill to CGUs
  • Would the additional guidance suggested help improve the application and enforcement of the impairment test?
  • Should the IASB clarify that the reference to ‘operating segment’ in paragraph 80 of IAS 36 is a safeguard and if so, how?
  • Should the IASB clarify the term ‘monitoring’ and if so, how?
  • Could the level of goodwill to be tested for impairment be different to the level the business combination is monitored for the proposed disclosures?
  • Do you think the IASB should explicitly prohibit goodwill being tested for impairment at a level higher than the level the business combination is monitored for the proposed?
• Impairment test when entities reorganise:
  • Would entities have information/forecasts to perform an impairment test based on a previous reporting structure?
  • Would entities incur significant incremental costs if required to perform this impairment test? Why?
  • Conceptually, should an impairment be recognised based on the ‘old’ structure?
  • Do you think that requiring an entity to perform the impairment test on the ‘old’ reporting structure would provide useful information? Why or why not?
• Paragraph 99 of IAS 36:
  • In your experience, is paragraph 99 of IAS 36 applied frequently?
  • If not, why not? How could (and should) the IASB make it easier to apply?
  • Would paragraph 99 of IAS 36 (if applied) significantly reduce cost and complexity of the impairment test of CGUs containing goodwill, without reducing its effectiveness?
  • Do you think that when an entity applies paragraph 99 of IAS 36 it should be required to disclose additional information to that already required by IAS 36? If so, what additional information do you think would be useful?
  • If the IASB were to clarify or amend paragraph 99 of IAS 36, should similar clarifications or amendments be made for intangible assets with indefinite useful lives (paragraph 24 of IAS 36)? Why or why not?

IFRS IC discussion

IFRS IC members shared their views on each of the proposed suggestions.

For the suggestion to disclose a comparison of cash flow forecasts used in impairment tests in prior years with actual cash flows, most of the IFRS IC members considered such information as confidential and sensitive, and not necessarily useful to be disclosed in the financial statements. As the calculation of recoverable amount involves the denominator as well, solely disclosing the numerator (cash flow forecast) is not useful. The principle of IAS 36 already requires the use of reasonable assumptions in conducting forecasts. Entities should therefore already have used those, and it should have been discussed with and reviewed by their auditors. They considered that entities would incur significant incremental costs to prepare the disclosure and auditors would need to spend extra effort in evaluating the disclosures made by the entities. Some IFRS IC members commented that if the amount is material, the entity would make appropriate disclosure about the sensitivity of carrying amount to the assumption/estimations as required by IAS 1:129(b).

For the suggestion of providing additional guidance regarding the interaction between IAS 36:33(a) (requirement to base cash flow forecasts on reasonable and supportable assumptions) and IAS 36:33(b) (requirement to base cash flow forecasts on the most recent financial budgets or forecasts approved by management), the IFRS IC members commented that they did not see conflict between these requirements. However, this guidance is welcome because it would be an educational exercise which could encourage entities to look at information together and corroborate the expected forecast using external information.

Regarding the suggestion of disclosing goodwill allocated to segments on a continued basis, one IFRS IC member considered such disclosure is useful.

Regarding the suggested guidance on allocating goodwill to CGUs for impairment, some IFRS IC members commented that the segment level is already a very high level and agreed retaining the requirement of allocating goodwill to CGU not greater than a segment. They agreed that "monitoring" is difficult to define and did not recommend developing comprehensive guidance for that. One IFRS IC member suggested giving more guidance on the interaction of allocating goodwill to CGUs versus allocating goodwill to foreign currencies in IAS 36:83.

In response to respondents' comments on the potential delay in recognising impairment losses based on the list of impairment indicators in IAS 36:12, it is proposed to improve the list. Some IFRS IC members said the current standard is very clear that those indicators are examples only and they are useful to let people know when, at least, an impairment assessment has to be performed. A few IFRS IC members commented that some entities would know how remote the risk of impairment for a particular CGU with much headroom is. They were therefore supportive of removing the mandatory annual impairment assessment requirement but said that applying this relief would require judgement. One IFRS IC did not agree with this, and instead would accept interim relief in place of an annual relief.  

Regarding the suggestion to require entities to perform an impairment test based on its previous reporting structure before reallocating goodwill to different CGUs, the staff considered this could help limit opportunist behaviour to avoid goodwill impairment. Some IFRS IC members agreed with this because when acquisition happens, the new business integrates into a larger CGU and the reallocation would result in aggregation of CGUs. Such structural change would trigger reallocation of goodwill and would naturally identify impairment, if any. On the other hand, one IFRS IC member said that it is unintuitive to conduct an impairment assessment due to restructuring. It should instead be done when there is an impairment indicator.

For the suggestion of amending IAS 36:99 to make it easier to apply, one IFRS IC member said it could be used by sophisticated entities who understand well what drives impairment. However, it is not commonly applied by most entities because it requires the use of significant cost to identify such factors and communicate with auditors. Entities would rather do a full impairment assessment. A few IFRS IC members commented that such suggestion would be feasible if more guidance is given on which periodic previous period calculation could be used.