Goodwill accounting – is it a never-ending story or is a compromise possible?

Last November the International Accounting Standards Board (IASB) voted to retain the impairment-only approach for goodwill accounting. This was the end of a process that began with the Post-implementation Review of IFRS 3 ‘Business Combinations’ in 2014. It followed in the wake of decisions made at the September 2022 IASB meeting where its members voted to require more disclosure requirements in IFRS 3 about the subsequent performance of a business combination. Currently the IASB is considering whether to publish these proposals in an exposure draft.

In forming this vote the IASB reconsidered the arguments in favour of reintroducing goodwill amortisation to improve information:

• The impairment test is not working as intended—the IASB’s decision to move to the impairment-only approach was contingent on a sufficiently rigorous and operational impairment test and evidence suggests it is not—this is the compelling case for change.
• Goodwill is a wasting asset. There is now evidence that it is feasible for entities to make reliable estimates of the useful life of goodwill and an amortisation expense based on the useful life of goodwill can provide useful information.
• Amortisation would result in recognising an expense in the Statement of Profit or Loss that would reflect consumption of the benefits associated with the goodwill.
• Amortisation can hold management to account better than the impairment-only model.
  Unlike the impairment-only model, amortisation would directly target goodwill.
• Disclosure should not be a tool to solve what is essentially a measurement issue—that is, limitations of the impairment test.

These arguments were contrasted to those arguments in favour of retaining the impairment-only model: 

• A compelling case for change has not been identified.
• Stakeholder views continue to be strongly held and divergent
• Both the impairment-only model and an amortisation-based model have their limitations.
• Eeach model suits a different view of the nature of goodwill.
• Reintroducing amortisation would not resolve concerns about impairment losses not being recognised on a timely basis.
• Reintroducing amortisation would not represent a significant improvement in financial reporting that justifies the disruption and cost of change.

The Agenda Paper 18b for the IASB meeting in November 2022 presented these two opposite positions very clearly and summarised the current situation:

“The conceptual debate of what is the most appropriate model for accounting for goodwill remains. There are valid views, supported by well thought out evidence, on both sides. These reflect different perspectives of the nature of goodwill and therefore the appropriate model for the subsequent accounting for goodwill. The evidence suggests that these views continue to be divergent and strongly held and are unlikely to be reconciled rather than suggesting a compelling case for change.”

Where to go to from here?

Prof. Dr.Thomas Senger, Partner, Audit & Assurance Services, Grant Thornton Germany, shares his point of view regarding goodwill accounting.

I do not believe it makes sense to regularly change fundamental accounting rules. In this respect, the retention of the impairment-only model is fully justified in my view.

Furthermore, the IASB's position on retaining the impairment-only model has shown that the proponents of reintroducing scheduled goodwill amortisation were unable to formulate a robust transition solution.

If goodwill were to by systematically amortised it would have had to answer the question of retrospective or prospective application. The answer to this question is crucial insofar as the resulting equity effects have consequences not only on the structure of the statement of financial position, but also on existing financing covenant arrangements, earnings forecasts and evaluating the economic success of business combinations. 

In addition, there are considerations regarding additional disclosures in the notes to the financial statements, which should make it possible to assess the success of a business combination for a foreseeable period after the acquisition date. It is noteworthy that this assessment period is almost always significantly shorter than any discussed period associated with the useful life of goodwill. In some jurisdictions around the world, the acceptance of scheduled goodwill amortisation has always been dependent on (a) the resulting charges to earnings and (b) aligning with legislative requirements that specify what the useful life of a goodwill needs to be. The price paid for this, however, has been putting to one side the business model and processes that have been put in place to preserve the value of the reporting entity.

To summarise, I believe a perfect answer for goodwill accounting is not possible today and it will not be possible in the foreseeable future. Given this, my preference is to accept an imperfect but stable compromise rather than to repeatedly question the fundamental aspects of the IFRS framework. Ultimately, accounting is a language that does not live from being conceptually perfect, but from being generally accepted and 'understandable'.