Early last year, the IASB published “a Discussion Paper on possible improvements to the information companies report about acquisitions of businesses to help investors assess how successful those acquisitions have been.”
To recap, the discussion paper “concluded that there is no alternative that can target goodwill better and at reasonable cost.” Among other things, the Board concluded that “the risk of (management) over-optimism cannot be avoided, given the nature of the estimates required. If estimates of cash flows are sometimes too optimistic in practice, the Board considers that this is best addressed by auditors and regulators, not by changing IFRS Standards.” The board also considered the merits of reintroducing a form of amortization for goodwill, concluding that it shouldn’t go that way, but only by the narrowest possible majority – eight out of fourteen members. The main arguments against such a move include that “the useful life of goodwill cannot be estimated, so any amortization expense would be arbitrary,” and the absence of “compelling evidence that amortizing goodwill would significantly improve the information provided to investors or, particularly in the first few years after an acquisition, significantly reduce the cost of performing the impairment test.
Comments were requested by December 31, 2020 – let’s look today at some of the feedback on the amortization issue. The following extract from Deloitte’s letter succinctly acknowledges and weighs the issues noted in the paper, while nevertheless reaching a different conclusion:
- We do not support the preliminary view of the Board not to reintroduce amortization of goodwill. Whilst we continue to recognize the conceptual merits of the impairment-only model, we note that there continues to be a perception that too little impairment is recognized too late. The success of an impairment model depends on the availability of nearly perfect information about the future. Predicting future cash flows is an inherently difficult exercise which, coupled with a complex model, results in persistent difficulties in practical application by preparers and auditors alike. Further, as explained in the DP, shielding is a known problem of the current model. We agree with the conclusion in the DP that it does not appear feasible to design an impairment test that is significantly more effective at the timely recognition of impairment losses on goodwill at a reasonable cost. Therefore, in order to reduce the risk associated with overstatement of goodwill, we consider that a mixed model – amortization supported by an impairment test when there is an indicator of impairment – would be preferable. We consider that this is an appropriate solution since we believe that goodwill amortization has conceptual merits for the reasons presented in the DP. We further believe that a suitable amortization period can be established by an entity, in line with the objectives for an acquisition.
But to immediately prove that the world’s greatest IFRS minds may differ, here’s PricewaterhouseCoopers:
- We have not identified significant new arguments for the reintroduction of amortization of goodwill, and we therefore support retaining the impairment-only model. However, we acknowledge the existence of divergent views within the PwC network.
One wonders what degree of in-fighting might underlie that last sentence. KPMG also indicated a range of internal opinion:
- In considering the Board’s preliminary view on reintroducing goodwill amortization, we acknowledge that the impairment-only model for subsequent accounting for goodwill may theoretically be better than a mixed impairment-amortization model in providing more relevant information to users about the performance of a CGU. However, considering the application of this model in practice, we have mixed views with a slight preference towards reintroduction of amortization. We encourage the Board to cooperate with the FASB on this issue, given its pervasiveness, for the sake of consistency from which users would benefit.
Whereas, to round out the big four, Ernst & Young went the other way again:
- We believe that reintroducing amortization of goodwill, whilst more practical, is unlikely to have a significant impact on the recognition of impairment of goodwill in a timely manner…the current impairment test is only able to address whether a chosen set of assets and liabilities, including goodwill, has a recoverable amount that is greater than the net book value of those assets and liabilities. Whilst amortizing goodwill would alleviate some of the issues by reducing the net book value of the assets and liabilities, this would generally only have a significant effect a number of years after the acquisition. Also, under an amortization approach, there may still be concerns about (perceived) management optimism and the issue of ‘too little, too late’.
So, if you had to classify those in one camp or the other, you have Deloitte and KPMG supporting reintroduction of amortization (with different degrees of assertiveness), and EY and PwC against it. It’s a useful divide in reminding us of the subjectivity underlying some of these core questions, and of the challenge in making the resulting information – whatever direction one takes – meaningful to investors.
More on this in future posts…
The opinions expressed are solely those of the author.