While the shining new International Sustainability Standards Board scoops up all the change-making attention, maybe the most the IASB can hope for is to get noticed for not shaking things up too much.
This is from a recent news release:
- At its November 2022 meeting, the International Accounting Standards Board (IASB) has today voted to retain the impairment-only approach to account for goodwill. This tentative decision culminates a thorough evaluation that began with the Post-implementation Review (PIR) of IFRS 3 Business Combinations in 2014.
- In making its decision, the IASB considered stakeholder feedback from the PIR of IFRS 3, the discussion paper the IASB published in March 2020 and subsequent research. The IASB concluded that extensive evidence collected did not demonstrate a compelling case to change its previous decision about accounting for goodwill.
- In September 2022, the IASB also voted to add disclosure requirements to IFRS 3 on information about the subsequent performance of an acquisition, in response to investors’ feedback on the PIR. In designing these disclosure requirements, the IASB also responded to feedback from companies about the challenges of providing this information.
- The IASB will next consider whether to publish these proposals in an exposure draft. If so, the IASB will finalize details of its proposals to require better disclosure on the subsequent performance of acquisitions and explore potential improvements and simplifications to the impairment test before it publishes such an exposure draft.
You may recall that the discussion paper referred to there concluded “that there is no alternative that can target goodwill better and at reasonable cost.” Among other things, the Board reasoned 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 main arguments against reintroducing amortization included 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.
Similarly, the underlying staff paper for the recent meeting provided some discussion of the different (perhaps irreconcilable) views of goodwill, and of why moving to an amortization-based model would be unlikely to consistently yield more useful information:
- comments about the impairment test not working and goodwill balances being ‘too high’ could be due to unrealistic expectations of the impairment test of cash-generating units containing goodwill. Stakeholders that consider goodwill to be a wasting asset expect the subsequent accounting for goodwill to result in a steady decline in the value of goodwill and a regular expense to be recognized in the income statement representing the consumption of that goodwill. The impairment test of cash-generating units containing goodwill is not designed to do this. It is designed to ensure goodwill and the other assets in the cash-generating units goodwill is allocated to, are carried at no more than their combined recoverable amount.
- …stakeholders that consider goodwill to have an indefinite life say an amortization-based model creates a disconnect with the underlying economics of a business combination—in their view, such a model cannot reflect the indefinite nature of goodwill, the benefits of which are reduced only by events that do not usually occur consistently over time.
And so on, Indeed, any major change now would resemble one of those egregious US Supreme Court decisions based more in personal ideology than in rigorous or necessary reinterpretation of the Constitution (don’t get me started…) As we previously noted, even if a consensus had been reached that an amortization-based model is by some measure technically superior, the work of making the change might not be worth it at this advanced stage in accounting history. As another staff paper summarized:
- 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 reported 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.” Well, it looks like that won’t be necessary after all. So there it is, resolved and agreed upon, the issue likely never to be reopened again in our remaining lifetimes. And that’s even if, thanks to the ISSB, our remaining lifetimes end up being really long!
The opinions expressed are solely those of the author