As we discussed here, in March 2024 the IASB published for comment the Exposure Draft Business Combinations—Disclosures, Goodwill and Impairment.

In the exposure draft, the IASB (among other things) addressed some reasons for concerns that impairment losses on goodwill are sometimes being recognized too late, including:

• the design of the impairment test can shield goodwill from impairment. Goodwill can be shielded from impairment by, for example, the headroom of a business with which an acquired business is combined. Headroom is the amount by which a business’s recoverable amount exceeds the carrying amount of its recognized net assets. When an entity tests the combined business for impairment, a reduction in the recoverable amount of the combined business is first absorbed by this headroom and an impairment of acquired goodwill can be masked.

The exposure draft proposes amending IAS 36 to clarify that when goodwill acquired in a business combination is assigned to cash-generating units for purposes of impairment testing, the units to which the goodwill is allocated represent the lowest level within the entity at which the business associated with the goodwill is monitored for internal management purposes. This requires an entity to identify the cash-generating units or groups of cash-generating units expected to benefit from the synergies of the combination; and to then determine the lowest level for which there is financial information about the cash-generating units that management regularly uses to monitor the business associated with the goodwill. But PwC are among those who doubt this would make much difference, noting (not illogically) that “if the proposed insertions are merely clarifications and not substantive changes to the existing requirements of IAS 36, we would expect that there will not be changes to the goodwill allocation unless entities had previously applied the requirements erroneously.” This is one of their alternative suggestions:

• Under IAS 21.47, goodwill should be allocated to the level of each functional currency of the acquired foreign operation. As it stands, this means that the level to which goodwill is allocated for foreign currency translation purposes is typically lower than the level at which the goodwill is tested for impairment. Currently entities follow the requirements in IAS 36 to determine the level at which goodwill is tested for impairment. If the IASB wanted to reduce shielding, it could amend IAS 36 and require companies to test for impairment at the IAS 21 allocated level. If there are no foreign operations acquired, the same principles could be used to allocate goodwill to acquired entities or acquired operations in local currency. On that basis, goodwill would be allocated to subsidiaries or operations acquired irrespective of whether these are foreign or have the same functional currency using the principles in IAS 21.

Accountancy Europe also “are not convinced that the new proposals will appropriately address shielding. We regret that the IASB has not gone further to address this situation, and we believe this is a missed opportunity.” They suggest among other things that the Board continue to explore alternative methods to allocate goodwill at lower levels (without specifically making the same point as PwC though). They also “disagree with the IASB that management over-optimism is better dealt with by enforcers and auditors, we believe that those charged with governance are the first group responsible for the correctness of financial information, including the reasonableness of assumptions used for the measurement of goodwill impairment.”

FAR, the Institute for the Accountancy Profession in Sweden, mused on the proposals as follows:

• Issues may arise about which level of management, below key management personnel, to look at. Controllers may analyze detailed information on very low levels. An entity may have a head controller. Below key management personnel, an entity may have segment managers and below this several levels of management. Can it be presumed that if controllers analyze certain information, then this is done because a manager at some level may rely on it for it monitoring? Is a head controller ‘management’? What level of management should be considered to be ‘management’?
• FAR realizes that it is not possible to be specific about these questions, since entities are organized differently. However, since these aspects may affect the effectiveness of the new requirements, FAR believes that the application of the requirements would benefit from further reasoning about and emphasis on this aspect; potentially with illustrative examples.

There may seem then (and that’s only a tiny sample) to be as many shadings of opinion as there are stakeholders (some are still fighting the last war, with Eumedion for instance proposing “to alleviate reporting entities from the cumbersome and costly goodwill impairment tests and give them full discretion to impair any goodwill.”) Maybe the IASB will conclude that this is a case where, as no one is entirely happy with its proposals, they’re probably about as good as they’re going to get…

The opinions expressed are solely those of the author.