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Not a question but an observation. The IASB has released its Discussion Paper on Goodwill and Impairment in March. A key paragraph is IN38 which states:

"The Board’s preliminary view is that it should retain the impairment-only model and not reintroduce amortisation. However, the majority for this decision was small: eight of 14 Board members voted in favour. Therefore, the Board would particularly like stakeholders’ views on this topic."

Personally I have been convinced by the value relevance arguments which state that impairment contains market relevant information, whereas amortisation obfuscates it.

Over the next 14 months four Board Members (including the chairman) will leave the IASB, with one (Gary K. from the US) not being replaced it seems. At least one new Board Member has indicated publicly a preference for Amortisation where I suspect (without checking) his predecessor voted for impairment. This alone would have changed the complexion of the vote. So it will be interesting to see what happens with the Exposure Draft.

You can read the exposure draft, and comment here: https://www.ifrs.org/projects/work-plan ... mpairment/

Hi! Thanks for starting this discussion here Personally I'm strongly in favour of reintroducing amortisation of goodwill. I agree that impairment-only model is better conceptually speaking, but the reality makes it much worse than amortisation model. And there is only one reason for that: impairment is based on management forecasts which are impossible to challenge by auditors. I even sent a short comment letter to IASB and it seems that I'm the only one so far:)
http://eifrs.ifrs.org/eifrs/comment_let ... irment.pdf

My problem with amortisation is that you can't differentiate "good" acquisitions from "bad" ones. When everyone is amortising on an arbitrary basis there is no value relevance to the information beyond the originally recognised amounts.

What about just expensing it immediately? Only allow identifiable intangibles to be capitalised. I bet this would mean organisations "discover" a whole lot of identifiable intangibles they previously just lumped into goodwill, and would give us a lot better information than just "synergies". Also at least this might give us a better way to assess useful life estimates.

I personally don't think that financial statements should be the primary place where you look for information about the performance of a specific M&A.

What makes up goodwill? Mostly synergies, unrecognised intangibles, workforce. Then let's include their amortisation in P/L over time as you use those assets over time. Of course, useful life will possibly be more arbitrary than for other intangibles, but still it's better that way IMO.

I don't know if you've read this part of ED - the discussion on amortisation vs impairment is really deep and insightful, a real pleasure to read

I would like companies to have to decide and disclose what the goodwill actually represents, rather than an unknown benefit ascribed to overall general benefits. This could have the effect of bringing staff skills on to the balance sheet, but if that's what you pay an excess for then so be it. Auditors will then have a better handle on impairments.

it is a requirement to disclose what goodwill actually represents (IFRS 3.B64(e)), but usually it is ticked-off with boiler-plate blah blah

Agree but most companies I review don't bother. Which means it lingers for ever.

yep, so maybe you'll join me and write a short comment letter to IASB in favour for amortisation?

I suppose I'm in favour of robust identification of intangible assets and more aggressive/timely impairment rather than amortisation.

I think for now I have to stand with JRSB on this one.

I see, but do you believe it is even possible? I think that IFRS should take reality into account (e.g. how cash flow projections are prepared and how they proved impossible to be challenged by auditors)

In the words of Hans Hoogervorst (Chair of the IASB) in 2018:

“This does not mean that the accounting standards are infallible. Accounting is highly dependent on the exercise of judgment and is therefore more an art than a science. Good standards limit the room for mistakes or abuse, but can never entirely eliminate them. The capital markets are full of risks that accounting cannot possibly predict. For accounting standards to do their job properly, we need management to own up to the facts — and auditors, regulators and investors to be vigilant.”

Perhaps the issue is more around the standing or powers or expectations of auditors rather than the standards.

There is /was also a project very interesting from my point of view: the headroom aproach.
If i understood correctly, the goal was to exclude from the annual analysis the headroom (margin) indentified at the acquisition. In other word, if we made an impairment analysis in moment zero, what was the margin at that point? And then, all year, to the evaluation it sould be deducted the initial headroom /margin.

I think this would allow to identify the real gains of the M&A after the M&A and have a more realistic view of the incremental value bought by the M&A.

Regards.

The headroom approach was effectively abandoned at the IASB July 2018 meeting. Agenda paper 18 noted that:

"the Board observed that introducing the headroom approach would be a more significant change than the other changes. Having assessed the costs and benefits of applying the headroom approach and having discussed the headroom approach with some of the Board’s consultative bodies, the Board became concerned that:
(a) many stakeholders might not consider the headroom approach feasible;
and
(b) consequently, any follow-up by the Board that includes the headroom approach as the only significant improvement might not be considered by stakeholders as appropriate in the light of the feedback during and after the PIR of IFRS 3."

The IASB Update subsequently reported that the Board decided "to retain the existing model for impairment testing in IAS 36, instead of changing it to focus on assessing whether the carrying amount of acquired goodwill is recoverable." Nine of 14 Board members agreed and five disagreed with this decision."

I would love amortization I'm totally tired of bullsh*tting arbitrary numbers for the 'best estimate' of COVID-19 impact. Who knows? Impairment testing is too hard for the human being to implement.

Seriously speaking, I am actually convinced that the impairment model is the best approach to reflect the circumstances to P&L. But I'm concerned about balance sheet implications. In practice, a considerable amount of goodwill is virtually not tested for impairment because CGUs often obviously generate sufficient cash flows. And, as a goodwill gets older, it gets more likely not to be tested for impairment because of CGU aggregation and mere inflation. As a result, meaningless numbers such as 'historical cost of 30 year-old goodwill' remains on the face of balance sheets forever and they substantially skew many indicators like ROA P/B D/E blah blah. I believe there should be a mechanism that eliminates this kind of stuff automatically.

What about the Hybrid approach mention in the Discussion Paper then? Para 3.100

One other possibility is a hybrid approach, using an impairment-only approach for the first few years and then amortising goodwill in later years. This may have the advantage ... that an impairment test is performed when the information from it is most helpful. However,some of the concerns discussed ... would also apply to this approach, namely that the time period selected for the impairment-only approach may not be appropriate for all companies and that additional guidance may also be required.

The hybrid approach sounds really good. Time period selection might be the issue for the initial impairment periods as well as the useful lives for amortization. But from my experience, determining the useful lives of goodwill involves much less bullsh*t than annual impairment testing.

Even under an amortisation model those same human beings still need to identify and apply impairments in order to get to relevant information? So it doesn't completely resolve the issue.

There should be an amortisation approach with very short life say 5 years. This will lead entities to identify the underlying actual asset and assign them longer life to avoid aggressive amortisation of goodwill

But they might already know that it is the value of staff skills which can't be recognised but which might also be expected to bring benefits for 20 years?

neat summary of BIG4's views:

https://disclosurehub.org/2021/01/15/am ... -decision/