IASB publishes discussion paper on goodwill and impairment

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19 Mar 2020
The International Accounting Standards Board (IASB) has published a comprehensive
discussion paper DP/2020/1 'Business Combinations — Disclosures, Goodwill and Im-
pairment'. The IASB's related project aims at improving the information companies
provide to investors, at a reasonable cost, about the businesses those companies buy
and would help to hold management to account for its decisions to acquire those busi-
nesses. In this context, the IASB is investigating possible improvements to IFRS 3
'Business Combinations' and IAS 36 'Impairment of Assets'. The comment period on the
discussion paper was extended until 31 December 2020.
 

Background

The IASB's project on goodwill and impairment results from the post-implementation review of
IFRS 3  Business Combinations.
The feedback on the post-implementation review had revealed that impairment of goodwill is not
always recognised in a timely fashion and that disclosures required by IFRSs do not provide
enough information to understand whether the acquired business is performing as was
expected at the time of the acquisition. There were also comments that the impairment test
required for goodwill under IAS 36 Impairment of Assets is costly and complex. Some respon-
dents also suggested reintroducing amortisation of good will.
In February 2015, to address the concerns mentioned and investigate possible improvements
to IFRS 3Business Combinations and IAS 36, the IASB added to its research agenda the
following areas of focus, which later evolved into the goodwill and impairment project:
o improving the impairment test in IAS 36;
o subsequent accounting for goodwill (including the relative merits of an impairment-only
approach and an amortisation and impairment approach); and
o identification and measurement of intangible assets acquired in a business combination.

The discussions leading to the discussion paper published today were taken up in September
2015.
 
Summary of preliminary views

The discussion paper DP/2020/1 Business Combinations — Disclosures, Goodwill and Impair-

ment presents preliminary views on the following topics:
Improving disclosures about acquisitions. The IASB believes that companies should be
required to disclose the strategic rationale for an acquisition, the objectives for the acquisition,
and the metrics for monitoring achievement of objectives. This should be disclosed at the acqui-
sition date. After the acquisition date the performance against the objectives should be
disclosed. Companies would disclose information management uses internally to monitor acqui-
sitions, therefore, they would not need to create information solely for external reporting
purposes. Disclosure would be required for as long as the performance is monitored by man-
agement. If the company ceases to monitor the performance or if the metrics for monitoring the
performance are changed, the reason for doing so would be disclosed. The Board also believes
that it should develop additional proposals that would require companies to disclose the amount,
or range, of synergies expected from the acquisition, to disclose the amount of defined benefit
pension liabilities and debt of the acquiree, and to disclose both actual and pro-forma revenue,
operating profit and cash flows from operating activities.
Improving accounting for goodwill — Can the impairment test be made more
effective? The Board believes that significantly improving the effectiveness of the test at a rea-
sonable cost is not feasible. It also points out that shielding cannot be eliminated because
goodwill has to be tested for impairment with other assets. The discussion paper also notes that
an impairments test cannot always signal how an acquisition is performing, but that does not
mean that the test has failed. When performed well, the test can be expected to achieve its
objective of ensuring that the carrying amount of the cash-generating unit as a whole is not
higher than its combined recoverable amount. The disclosure ideas discussed above could help
provide investors with the information about the performance of acquisition they need. Finally,
the discussion paper notes that if estimates of cash flows are too optimistic, this is best
addressed by auditors and regulators, not by changing IFRSs.
Improving accounting for goodwill — Should amortisation of goodwill be reintro-
duced? Having concluded that the impairment test cannot be significantly improved at a rea-
sonable cost, the Board considered whether to reintroduce amortisation of goodwill (an impair-
ment test would still be required). The discussion paper notes that Board members have
different views on this topic, but by (narrow) majority came to the preliminary view that the
Board should retain the impairment only approach because there is no compelling evidence that
amortisation would significantly improve financial reporting. The impairment test is believed to
provide more useful information than an arbitrary amortisation charge and is more effective at
 holding management to account for acquisition decisions. The Board believes that it would not
be appropriate to reintroduce amortisation solely because of concerns that the impairment test
is not being applied rigorously or simply to reduce goodwill carrying amounts. In this context, the
Board also came to the preliminary conclusion that it should develop a proposal to require
companies to present on their balance sheets total equity before goodwill.
Improving accounting for goodwill — Simplifying the impairment test. The Board is of the
preliminary view that it should provide relief from the mandatory annual quantitative impairment
test. A quantitative impairment test would be required only if there is an indication of impairment.
The Board believes that the reduction in robustness of the test would be marginal because it is
unlikely that material impairment losses occur with no indicator. Similarly, the Board is of the
opinion that the benefit of performing the test when there is no indicator is marginal. The Board
also intends to improve the calculation of value in use. This would be achieved by removing the
restriction in IAS 36 that prohibits companies from including uncommitted restructuring and
asset enhancement cash flows and by allowing companies to use post-tax inputs and post-tax
discount rates in calculating value in use.
Other topics. The discussion paper also sets out the Board's preliminary view that it should
continue to require identifiable intangible assets to be recognised separately from goodwill. The
Board believes that there is no compelling evidence that the requirements in IAS 38 should be
amended. Considering whether to align the accounting treatments for acquired and internally
generated intangible assets would be beyond the scope of the project.
The comment period on the discussion paper was extended until 31 December 2020.
 

Additional information

o Press release on the IASB's website

o Discussion Paper DP/2020/1  Business Combinations — Disclosures, Goodwill and Im-
pairment (link to IASB website)
o IASB Snapshot introducing the DP (link to IASB website)
o IFRS in Focus newsletter outlining the key concepts of the DP
o IAS Plus project page on Goodwill and impairment