Improvements to business combinations disclosures and accounting for goodwill
The IASB is seeking views on its proposed improvements to the way that organisations disclose information about their acquisitions, and how they account for goodwill, in a recently issued discussion paper.
The International Accounting Standards Board (IASB) has published, for public comment, a Discussion Paper on Business Combinations – Disclosures, Goodwill and Impairment. The proposals result from the IASB’s post-implementation review of IFRS 3 Business Combinations (Report and Feedback statement published June 2015).
Summary of IASB conclusions
The IASB’s preliminary view is that it should retain the impairment-only approach to accounting for goodwill and develop proposals to improve disclosures about acquisitions. While the Board accepts that both the impairment-only and amortisation models for accounting for goodwill have limitations, in their opinion, there is no compelling evidence to justify changing accounting for goodwill and the costs that such a change would entail. This Discussion Paper provides stakeholders with an opportunity to explain whether they agree with that preliminary view.
Proposed improvements
There are two key elements to the proposed improvements.
1.Better disclosures about acquisitions
The acquisition of another business is a common part of many companies’ growth strategies. However, acquisitions do not always perform as well as might have been anticipated by management in subsequent years. Investors would like to know more about how an acquisition is performing in relation to such expectations, not least so that they can hold a company’s management to account for its acquisition decisions.
In response to this feedback, the Board is suggesting changes to IFRS Standards that would require a company to disclose information about its objectives for an acquisition and, in subsequent periods, information about how that acquisition is performing against those objectives.
2.Accounting for goodwill
The IASB has been considering whether to change how a company accounts for goodwill. Companies must test goodwill for impairment annually, but stakeholders have mixed views about whether this test is effective. Some argue that the impairment test informs investors about an acquisition’s performance. Others say that the test is costly and complex, and that impairment losses on goodwill are often reported too late.
The IASB has tried to identify a better impairment test in a form that would require a company to report at an earlier date if its goodwill had lost value. The current test provides information to investors, but it involves testing a broader set of assets than just goodwill. The IASB has concluded that there is no alternative that can better target goodwill specifically and at reasonable cost. It expects that the new disclosure requirements would provide investors with the information needed on the performance of an acquisition.
Some stakeholders have suggested that the IASB should reintroduce amortisation which entails the gradual write-down of goodwill over time, which was the requirement in IFRS Standards until 2004. Having considered the pros and cons of amortisation, the IASB’s preliminary conclusion is that it should retain the impairment-only approach, because there is no clear evidence that amortising goodwill would significantly improve the information that companies report to investors.
Further information
The IASB website has further information, including the full text of the Discussion Paper, along with a helpful video that explains the Board’s current thinking. The public comment period is open until 15 September 2020. Feedback will help the IASB decide whether and how to develop detailed proposals in the next stage of the project.