As we last covered here, IASB has been evaluating the existing approach to accounting for goodwill in the wake of the 2014 Post-implementation Review (PIR) of IFRS 3 Business Combinations.

It voted last year to retain an impairment-only approach to account for goodwill, but this left plenty that might still be changed. Here’s an update from the May 2023 IASB Update:

• The IASB tentatively decided:
  • to retain the requirement to perform a quantitative impairment test annually; and
  • not to pursue any of the alternatives to it that were suggested by respondents to the IASB’s Discussion Paper Business Combinations—Disclosures, Goodwill and Impairment.
• All 14 IASB members agreed with these decisions.
• The IASB tentatively decided that it is not feasible to design a different impairment test that would, at a reasonable cost, be significantly more effective than the impairment test currently required by IAS 36.
• All 14 IASB members agreed with this decision.

Assuming things stay that way, the IASB may have just saved the world’s companies the small fortune that would otherwise have been entailed in implementing the alternatives. On the first issue, these are some of the points in the background agenda paper:

• Most respondents who commented on the potential effect of removing the annual testing requirement, said doing so would reduce the test’s effectiveness and result in further delays in recognizing impairment losses on goodwill.
• A few respondents (including many regulators) said removing the annual testing requirement would make it more difficult for auditors and regulators to enforce the impairment test. For example, if the quantitative impairment test is not performed annually, auditors and regulators might not have comparative information from impairment tests performed in previous years. This may undermine the ability of auditors and regulators to assess the reasonableness of assumptions used.
• Feedback suggests the disclosures from the annual quantitative impairment test are useful. Some respondents said removing the requirement to perform the annual quantitative impairment test might result in loss of information that could help users understand whether an impairment could occur in the future…
• Feedback on the extent of cost reduction that would result from removing the annual testing requirement was mixed. Some respondents said performing a qualitative assessment of indicators of impairment would be less costly than performing a quantitative impairment test annually because entities would not be required to estimate future cash flows for each CGU. However, some respondents disagreed. For example, a few respondents said any cost reduction would be relatively marginal because entities would likely continue to perform the test annually, even if not required to do so…

The IASB had previously identified two broad reasons why goodwill impairment might not be recognized promptly: management over-optimism (“management may sometimes be too optimistic in making assumptions for the cash flow forecasts needed to carry out the impairment test” and shielding (“goodwill does not generate cash flows independently and therefore cannot be measured directly. The impairment test therefore focuses on testing a CGU, or a group of CGUs, containing goodwill. These typically contain headroom (for example because of unrecognized assets and liabilities within a CGU, such as internally generated goodwill) (which) can shield acquired goodwill against the recognition of impairment losses.”). After much discussion and consultation, the IASB concluded that a “headroom approach” to impairment might reduce shielding but not eliminate it; could result in recognizing impairments that are, in some circumstances, difficult to understand; and would add cost.

Most respondents to the discussion paper basically agreed, although there was no shortage of alternative suggestions, all of which would of course have their own problems. These include ways of providing additional guidance on how goodwill is allocated to CGUs; requiring an entity to perform an impairment test in certain cases when it reorganizes its reporting structure; requiring an entity to disclose a comparison of cash flow forecasts used in past impairment tests with actual cash flows; clarifying the existing IAS 36 requirement that cash flow projections based on the most recent financial budgets/forecasts need to be based on reasonable and supportable assumptions; improving the current list of indicators of impairment; and requiring an entity to disclose the reportable segment in which CGUs containing goodwill are included. Presumably some of those will come to something; the IASB’s discussions continue.

In the meantime, I think the key point is and will continue to be the one made above about the usefulness of the accompanying disclosure: it’s less important to fixate on the amount assigned to a particular impairment charge than to understand the practices, assumptions and estimates underlying that amount, and what they communicate about the entity’s current state and prospects. Given the inherently convention-dependent and non-self-evident nature of many impairment charges, the IASB is most likely correct to focus on making incremental improvements to the existing model.

The opinions expressed are solely those of the author.