Can the goodwill impairment test be improved? (don’t all reply at once!)

I tuned in a bit late to the EFRAG discussion paper Goodwill impairment test: can it be improved?, which was published last June

As always with such a title, there’s very little likelihood that the answer would turn out to be, basically, no it can’t. The paper – which is timely as the IASB is currently reconsidering the related aspects of IAS 36 and IFRS 3 – deliberately doesn’t consider big conceptual questions like whether to introduce amortization of goodwill, but rather looks at how effectiveness might be increased or complexity reduced, while basically staying within the current model. This is a summary of what it came up with:


Let’s consider just a couple of these points. One recurring complaint about IAS 36 is that it requires an entity to determine the recoverable amount of a CGU to which goodwill has been allocated at least annually, whether or not any indication exists of impairment. The paper suggests that this requirement might be lifted at least for cases where the likelihood of an impairment is assessed to be remote, and discusses events and circumstances that might support this assessment. Many entities would presumably realize some time and cost savings from such a step, to a degree that might be considered to justify the additional judgment entailed in assessing for remoteness.

EFRAG requested comments on the paper by December 31, 2017. Among the positive respondents on this  “zero-step” suggestion, the Confederation of Swedish Enterprise put it this way:

  • This could really save some work. We clearly understand that this could lead to unpleasant surprises for companies if not handled correctly but see no risk that our companies would not be able to handle this.

Other respondents though seemed to see only those potential unpleasant surprises, such as the Accounting Standards Committee of Germany:

  • … we do not support the introduction of a mandatory initial qualitative assessment (the ‘step zero’). In our view, the suggested reduction of cost due to less frequent calculations of the recoverable amount is outweighed by a loss of continuity and a slower acquisition of knowledge as to how to perform impairment tests, if preparers only occasionally attend to the quantitative impairment test… Furthermore, the procedural conditions for performing the quantitative impairment test have usually already been established by the entities. Hence, we question whether – in comparison – performing qualitative assessments and then discussing these judgements and assessments with an auditor would truly constitute relief for entities.

I suppose a partial response to that might be that there’s never a problem with an issuer doing more work than required. There’s something a bit depressing though about the premise that an issuer might need to keep churning out calculations that no one expects to yield any material result, just for the sake of continuity and of remembering how to do them.

Let’s move on to a more conceptually adventurous concept: The paper notes: “Since goodwill is not directly measurable and can only be tested at the CGU level, there are a number of ‘buffers’ that can potentially offset an impairment loss. One of these is due to the fact that after the business combination, the acquirer may generate additional goodwill through its efforts and investments. Conceptually, this is not part of the purchased (and paid for) goodwill.”

It therefore suggests:

  • IAS 36 should require entities to make an adjustment when testing purchased goodwill in order to eliminate the effect of the internally generated goodwill. The adjustment would be made by means of a ‘goodwill accretion’ and would be determined only for the purpose of the impairment test with no recognition in the financial statements. Each year, the entity would determine an accretion amount by applying a rate to the opening balance of goodwill. This amount would be added to the carrying amount of the CGU. If no impairment loss is recognised, the balance of accretion would be carried forward….

If the relatively simple idea addressed above couldn’t attract wholehearted enthusiasm, it’s no surprise that this one couldn’t either – even if you agree with the underlying premise, it seems like a crude basis at best for estimating such internally-generated goodwill. Several respondents, such as BNP Paribas, used their disagreement as a springboard for arguing that goodwill might better be regarded as an asset to be amortized:

  • If conceptually the Goodwill initially recognized in a purchase accounting should not be replaced by internally generated goodwill, it implies that this purchased Goodwill should decrease over time as any intangible asset with a definite life. In that case, and although not in the scope of this Discussion Paper, we would rather support an amortization model of the goodwill than the accretion method proposed.

At the time of writing though, the IFRS Foundation website reports that the IASB “has tentatively decided not to consider reintroducing amortization of goodwill.” So that whole train of thought will probably go nowhere…

The IASB currently anticipates issuing a discussion paper or exposure draft in the second half of this year, so we’ll certainly return to the topic then. In the meantime, EFRAG’s efforts and the related comments may provide some stimulating reading, both in thinking about the limitations of the current requirements, and in looking ahead to what might replace them…

The opinions expressed are solely those of the author

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