As the northern hemisphere continues to endure what can feel like a never-ending winter, this columnist is suffering the season’s constant companion – the never-ending cold.
A parallel can be drawn with certain accounting topics that feel like they are discussed over and over with no resolution. While the lease standard did finally come to fruition, it was discussed in conferences far more than many of us would care to remember, with the more cynical ones among us feeling it may never be resolved.
There would be significant costs and disruption, with no evidence that amortisation gives any better information
Goodwill impairment versus amortisation can also feel like that. Since my first column in 2016, I have written about it around five times, often with no updates but always with the sneaking suspicion that while the International Accounting Standards Board (IASB) doesn’t want to reintroduce amortisation for goodwill, it may well just end up doing it.
Well, at the end of 2022 the door was finally closed on the discussion. The IASB has decided once and for all to not reintroduce amortisation, sticking with the impairment-only approach for goodwill.
Too many negatives
One of the major reasons for not transitioning was the potential consequences for many entities. A staff paper noted that reintroducing amortisation could lead to negative equity in some entities, meaning that they were technically bankrupt and affecting their access to capital markets.
The problem of goodwill being impaired ‘too little, too late’ is still a real fear for users
All in all, it was felt that there would be significant costs and disruption for entities, with no real evidence that the amortisation model gives any better information for the users.
So, that’s it! A discussion we felt would be going around when many of us retired has now concluded. While the IASB has made a definitive decision on this, that does not mean that it feels there is no problem. The problem of goodwill being impaired ‘too little, too late’ is still a real fear for users and one that the board has not been able to resolve easily.
As well as the reintroduction of amortisation being rejected, the board also rejected new calculations around goodwill impairment (thankfully, with the pre-acquisition headroom approach being one of the more complex suggestions).
It seems like the problem of over-optimistic cashflow forecasts, which is often the cause of impairment being recognised too little and too late, is not one that can easily be resolved by standard setting. Instead, it is felt that the current standard gives enough guidance to preparers and auditors to make impairment decisions.
The likely way forward for the project is to require more disclosures
At this point, it may feel a little like the project has come to an end and that the board has recognised that nothing can be done. This is not the case, and the project has been added to the standard-setting programme. It is worth noting that the project name has changed from ‘Goodwill and Impairment’ to the slightly less ambitious ‘Business Combinations – Disclosures, Goodwill and Impairment’.
As it sounds, the likely way forward for the project is to require more disclosures (which does admittedly feel like quite a common solution). One such possibility is to have goodwill disclosed by reportable segment, which could be more cost-effective than doing it for each entity and would at least allow questions to be asked over the performance of specific segments.
In addition to this, there are also other disclosure changes that have been tentatively proposed, such as requiring an entity to disclose the strategic rationale for undertaking the business combination and, in the year of a business combination, requiring an entity to disclose quantitative information about expected synergies.
One of the larger disclosure proposals relates to ‘strategically important’ business combinations. These would be those for which not meeting the objectives would seriously put at risk the entity achieving its overall business strategy.
The problem of whether the impairment model is working remains
To identify these, the tentative proposals include quantitative measures where the acquiree’s profits, revenue or assets are more than 10% of the acquirer’s most recent results. They also include qualitative measures, where the combination results in an entity entering a new geographical area of operations or a new major line of business.
For these ‘strategically important’ business combinations, the entity would have to disclose their objectives for the business combination, the metrics and targets they will use to monitor if these are being met, and in subsequent periods the extent to which those objectives are being met.
So, the goodwill project may have finally closed the door to the amortisation discussion, but the problem of whether the impairment model is working still remains. It may be worth stocking up on tissues, as there’s a good chance the accounting version of the never-ending cold has got some legs in it yet.
See Adam Deller’s video series on the fundamentals of IFRS