Goodwill and impairment – still no compelling evidence?

Let’s look in on the IASB’s Goodwill and Impairment project!

In September 2021 the IASB decided to prioritize making tentative decisions on a package of disclosure requirements about business combinations, as described in a March 2020 discussion paper, and analyzing specific aspects of the feedback on the subsequent accounting for goodwill. It recently discussed whether it’s feasible to estimate the useful life of goodwill and the pattern in which it diminishes.

The discussion was supported by a staff paper. Here are some of its key messages:

  • Outreach indicates that there are several factors and methods entities would use to estimate the useful life of goodwill. For some entities, making this estimate would be relatively straightforward given the finite nature of the businesses they acquire. For other entities, making this estimate would be more subjective and entities may need to consider several factors or use proxies when doing so.
  • This diversity of factors and methods might be a result of different facts and circumstances of each business combination, different judgements of what goodwill is or different preferences in the method(s) selected.
  • Many of the preparers we spoke with also commented on how to estimate the pattern in which goodwill diminishes. Of those who commented:
    • many said the pattern should not necessarily be straight-line with some suggesting linking the pattern to that used for the primary asset(s) acquired (for example, oil reserves); and
    • many said a straight-line approach should be adopted as a practical solution, but some suggested entities should be able to apply a different pattern if more appropriate.
  • Many stakeholders commented on whether the IASB should specify an upper limit for the useful life of goodwill (a cap). Many preparers we spoke with said a cap was needed either for practical reasons or to prevent excessively long useful lives being used. Also, many auditors said a cap is necessary to make an amortization model operable and auditable. However, many auditors also said a cap may become an unintended default period.

The last time we visited this project, we noted the IASB’s view that “there is no alternative (to the existing model) that can target goodwill better and at reasonable cost.” It wasn’t the most resolute consensus though – while the board voted against reintroducing a form of amortization for goodwill, it was only by the narrowest possible majority – eight out of fourteen members. The main arguments against such a move were:

  • although the impairment test does not test goodwill directly, recognizing an impairment loss provides important confirmatory information, even if delayed, that confirms investors’ earlier assessments that those losses have occurred, helping hold management to account. The useful life of goodwill cannot be estimated, so any amortization expense would be arbitrary. Therefore, investors would ignore it and amortization could not be used to hold management to account for its acquisition decisions.
  • the Board should not reintroduce amortization solely because of concerns that the impairment test is not being applied rigorously or simply to reduce goodwill carrying amounts. In the view of some Board members, goodwill could be increasing for many reasons—for example, because of the changing nature of the economy and greater value being generated by unrecognized intangible assets.
  • the Board has no 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.

Still, given the narrowness of that vote, and subsequent changes in IASB membership, I suppose a change in direction might still be theoretically possible. The staff paper summary cited above doesn’t suggest much evolving consensus on the matter though. Even if a consensus were to be reached that an amortization-based model is technically superior, the work of making the change might not be worth it at this advanced stage in accounting history. A second staff paper summarizes:

  • goodwill represents a significant balance for many entities, and transitioning to an amortization-based model would be a significant challenge because it could:
    • result in negative equity and affect entities’ access to capital markets.
    • result in negative equity which might result in some entities being declared ‘technically bankrupt’ in some countries.
    • affect entities’ ability to pay dividends.
    • affect existing contractual agreements.

The paper reports that “one regulator group said transitioning to an amortization-based model could create additional costs, temporary disruption and could confuse users” and “recommended investigating the potential effects of transition on financial stability.”

Anyway, the next step is for the IASB to “complete its research on the practical concerns raised by stakeholders with regard to the preliminary views described in the Discussion Paper on potential improvements to the disclosure requirements about business combinations. The IASB will then make decisions about: (a) the package of disclosure requirements about business combinations; (b) its preliminary view to retain the impairment-only model for the subsequent accounting for goodwill; and (c) other topics within the scope of the project….”

The opinions expressed are solely those of the author.

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