Attempt to reintroduce goodwill amortization to IFRS is rejected

The International Accounting Standards Board (IASB) on Dec. 14, 2017, rejected by an 11-3 vote the idea of reintroducing the amortization of goodwill to International Financial Reporting Standards (IFRS) as part of its project to amend the guidance for goodwill.

IAS 22, Business Combinations, required goodwill to be amortized on a systematic basis over the best estimate of its useful life. IFRS 3, Business Combinations, superseded IAS 22 and disallowed the amortization.

The international accounting board has not coalesced around a central way to improve information about declines in goodwill, which is typically used to measure the premium above book value the buyer pays when buying another business. Essentially, goodwill classifies the overpayment as an intangible asset that measures the “future economic benefits” that will flow to a business, the IASB said. Many board members expressed skepticism that the IASB can make a change that financial reporting professionals will accept.

“Many participants think the impairment test is complex, time consuming, expensive and involves significant judgments. Nothing we are talking about here removes any of that — it adds to it,” IASB member Gary Kabureck said.

The board also rejected other ideas for amending the accounting for goodwill: providing relief from the mandatory annual impairment testing; allowing goodwill to be tested for impairment at the business-level or at the level of reportable segments; requiring disclosure of the payback period of an investment in a business combination; and changing the current requirement for determining the recoverable amount of an asset.

The board plans to discuss the issue again when it meets in February.

The IASB agreed that when it releases a discussion paper — an early-stage proposal document — it will include a section on an accounting method for goodwill that the board is calling the “headroom” approach. Headroom essentially is a buffer — the amount by which the recoverable amount of a unit or asset exceeds the amount reported on the balance sheet. Headroom typically consists of internally generated goodwill or intangible assets that are not material enough to be recognized individually. The current impairment testing of goodwill does not include an adjustment for such a buffer, the IASB’s research staff said.

Businesses and auditors have expressed skepticism about this approach when IASB representatives discuss it with them informally, but they said it was still worthwhile to explore the concept, board members said. IASB Chairman Hans Hoogervorst also expressed mixed feelings that the headroom approach would be an improvement over the current accounting.

“I should be happy because I proposed it and support it, but I have one big question mark here: If we’re going to do this, it’s going to be a lot of resources to do this properly, and if it’s going to lead to a clear answer is highly questionable. We have to be aware of that,” Hoogervorst said. “That’s what worries me.”

Because goodwill can decline in value, companies must test its value periodically to see if they must report an impairment. Investors and analysts often view an impairment as a sign that a buyer’s earnings will not grow rapidly enough to justify an acquisition’s cost.

The impairment test guidelines are outlined in IAS 36, Impairment of Assets, but the impairment test is often criticized by companies that call it too complicated and dependent upon too many subjective assumptions that must be documented to satisfy external auditors. Investors also complain about a delay between the actual decline in value of the goodwill and when the impairment gets recorded on the balance sheet.

The criticisms surfaced during the IASB’s June 2015 post-implementation review (PIR) of IFRS 3, which raised questions about subsequent accounting for goodwill, the extent to which other intangible assets should be separated from goodwill and whether the board needed to amend the IAS 36 impairment test.

Hoogervorst said a discussion paper laying out the potential paths for improving the impairment test would be a good exercise.

“First of all, to make clear to everyone just how broken the current system is and to make clear that this would be the only possible way to approach it — through impairment,” he said.

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