Insight

Subsequent accounting for goodwill: impairment 1; amortization 0!

IASB® abandons reintroducing amortization of goodwill in favor of retaining impairment-only model and new disclosures.

From the IFRS Institute - March 2, 2023

The International Accounting Standards Board (IASB) voted in November 2022 to retain the impairment-only model for the subsequent measurement of goodwill and not introduce an amortization approach. This decision aligns with the FASB’s conclusion that currently there is no clear case to change the accounting for goodwill. It also ends several years of heated public debate on the matter. The attention now turns to the IASB‘s project to improve disclosures about business combinations and the effectiveness of the goodwill impairment test.

Goodwill amortization vs. impairment under IFRS® Accounting Standards? History repeats

In 2004, the IASB issued IFRS 3¹ and revised IAS 36² to adopt the impairment-only model and require goodwill to be tested for impairment at least annually. Previously³, goodwill was amortized over its useful life with a rebuttable presumption that its useful life did not exceed 20 years.

In 2013, the IASB started a post-implementation review⁴of IFRS 3, and many participants in the review suggested reintroducing goodwill amortization, arguing the impairment test does not work as intended. In response to the feedback, the IASB then investigated whether it could improve the impairment test at a reasonable cost, and also whether it should reintroduce goodwill amortization.

In a Discussion Paper published in 2020, the IASB proposed to retain the impairment-only model but feedback was mixed, for conceptual and practical reasons. Those in favor of reintroducing amortization of goodwill reiterated that the impairment test does not work as intended. They also argued, among other things, that goodwill is a wasting asset, balances are too high, and amortization is simpler and would take the pressure off the impairment test. Those against amortization argued, for example, that goodwill is not a wasting asset with a determinable useful life, and that an impairment-only model makes management more accountable.

Eventually, the IASB concluded in November 2022 that there is not a compelling case to justify potentially reintroducing amortization of goodwill either to improve the information provided to financial statement users or to reduce costs and complexity.

The path to disclosing better information about business combinations

The IASB is now working on an Exposure Draft⁵ exploring how new disclosures would help financial statements users understand the benefits an entity’s management expects from a business combination and the extent to which management’s objectives for business combinations are being met. The IASB is also considering possible improvements to the effectiveness of the impairment testing of cash-generating units containing goodwill.

Disclosure proposals discussed to date include the following.⁵

New possible disclosures	For all material business combinations	Only for ‘strategically important’ business combinations (A)
Subject to a possible exemption (B)	In the year of acquisition, quantitative information about expected synergies disaggregated by category (e.g. total revenue or cost synergies), when the synergistic benefits are expected to start, and how long they are expected to last. This would expand the requirement to disclose qualitative information about factors making up goodwill.	In the year of acquisition, information about management’s: objectives; metrics; and targets.
No disclosure exemption proposed at this stage	In the year of acquisition, the strategic rationale for undertaking the business combination. This would replace the requirement to disclose the ‘primary reasons for the business combination’.	In subsequent periods, information about the extent to which management’s objectives are being met, using the above metrics.

New possible disclosures

For all material business combinations

Only for ‘strategically important’ business combinations (A)

Subject to a possible exemption (B)

In the year of acquisition, quantitative information about expected synergies disaggregated by category (e.g. total revenue or cost synergies), when the synergistic benefits are expected to start, and how long they are expected to last.

This would expand the requirement to disclose qualitative information about factors making up goodwill.

In the year of acquisition, information about management’s:

objectives;
metrics; and
targets.

No disclosure exemption proposed at this stage

In the year of acquisition, the strategic rationale for undertaking the business combination.

This would replace the requirement to disclose the ‘primary reasons for the business combination’.

In subsequent periods, information about the extent to which management’s objectives are being met, using the above metrics.

(A) ‘Strategically important’ business combinations would be those for which not meeting the objectives would seriously jeopardize the company’s achievement of its overall business strategy. These business combinations would be identified using quantitative and qualitative thresholds. For example, the quantitative threshold would be met if the acquired business represents more than 10% of the reporting entity’s revenue, operating profit or total assets. The qualitative threshold would be met if the business combination results in the acquirer entering a new geographical area or a new major line of business.

(B) A proposed disclosure exemption would be made available as illustrated in the above table to address certain practical concerns around commercial sensitivity and litigation risk. This exemption would be allowed if disclosing a particular item of information can be expected to seriously prejudice any of the entity’s objectives for the business combination.

Comparison to US GAAP

The US GAAP business combinations guidance was developed in a joint project with the IASB and is converged in many respects with IFRS Accounting Standards. For example, the two goodwill accounting models are both impairment-only, although they are not identical (see KPMG article Goodwill impairment: IFRS® Accounting Standards vs. US GAAP to understand differences).

The FASB received similar feedback from its stakeholders about the costs and benefits of the existing guidance on the subsequent accounting for goodwill and, over the last decade, has made several attempts at simplifying and improving this guidance.

In 2011, the FASB permitted companies, as an option, to assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.
In 2014, the FASB introduced accounting alternatives⁶ for private companies whereby goodwill can be amortized over 10 years or less, in which case the impairment test is simplified in addition to being trigger-based.
In 2017, the FASB simplified⁷ goodwill impairment testing requirements for all companies. The then existing two-step test was replaced by a single test for identifying and measuring impairment by comparing the fair value of a reporting unit with its carrying amount.
In 2018, the FASB considered permitting or requiring goodwill amortization and other changes for public companies. In June 2022, the FASB decided to remove this project from its technical agenda.

There is no equivalent under US GAAP to the new business combination disclosures currently being discussed by the IASB.

Takeaway:

Both Boards have decided not to reintroduce goodwill amortization at this time. Future decisions are expected from the IASB on the impairment testing for cash-generating units with goodwill and on business combinations to provide investors with more useful information at a reasonable cost. These changes could lead to potential divergence between US GAAP and IFRS Accounting Standards.

Footnotes