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IASB retains impairment-only goodwill model in M&A

Author: ICAEW Insights

Published: 06 Mar 2023

ICAEW welcomes the rejection of a reintroduction of amortisation of goodwill following evidence gathered in the IASB’s Business Combinations project.

Despite mixed feedback from stakeholders, the IASB has decided to retain the impairment-only model to account for goodwill in mergers and acquisitions rather than to propose reintroducing amortisation of goodwill, in a move welcomed by ICAEW.

In an update on the IASB’s Business Combinations – Disclosures, Goodwill and Impairment project, IASB member Rika Suzuki said that despite pros and cons of both approaches, the decision hinged on whether evidence gathered since IFRS 3 Business Combinations was issued in 2004 provided a compelling case for change. 

“We were not trying to decide whether the impairment‐only model or an amortisation‐based model would be better to account for goodwill, as if we were introducing the requirements for the first time. This is because frequent changes back and forth between the different approaches, resulting in costs of change, would not help our stakeholders. 

“On balance, having considered the wealth of evidence we were provided with, we decided we had no compelling case to justify exploring reintroducing amortisation of goodwill – either to improve the information provided to investors or to reduce costs and complexity. We therefore decided to retain the impairment‐only model to account for goodwill,” Suzuki said.

ICAEW’s response to the IASB’s 2020 discussion paper supported the IASB’s proposal to maintain the impairment-only approach for goodwill. “In our view, the impairment test continues to be an important tool in holding management to account for acquisition decisions and can provide useful information for users,” ICAEW’s Financial Reporting Faculty said at the time. 

The IASB’s Business Combinations project aims to help companies provide users of financial statements, notably investors, with more useful information about the mergers and acquisitions companies make, at a reasonable cost.

To achieve this aim, the IASB is examining how companies could disclose better information about business combinations, after investors complained that they do not get enough useful information, particularly about the subsequent performance of business combinations that would allow them to better hold management to account for those business combinations. 

The IASB’s 2020 discussion paper set out preliminary plans to require a company to disclose, in the year of acquisition:

  • the amount of synergies expected from a business combination; 
  • management’s objectives for a business combination; and 
  • the metrics and targets management plan to use in its internal reporting to monitor whether these objectives are being achieved.

However, stakeholders raised concerns in relation to the potential commercial sensitivity of the information that would be disclosed, the risks of using forward‐looking information and the difficulty of reporting some information post integration. Further to this feedback, the IASB has decided to amend its plans by proposing to exempt companies from disclosing some of the information required in specific circumstances. 

“A company could choose not to disclose information about management’s objectives, the metrics and targets management plans to use to monitor the business combination, and quantitative information about expected synergies,” the update says. “The company would, however, still be required to disclose information about the performance of the business combination in subsequent periods. We intend to allow a company to use this exemption only if disclosure of that information can be expected to seriously prejudice the achievement of the objectives of the business combination.”

The Business Combinations project has now formally moved from the research phase into the standard-setting phase. However, the IASB still has much work to do before it will be in a position to issue an exposure draft setting out a final package of proposals. In particular, it is still in the process of finalising the proposals for improving the disclosures about business combinations, and considering whether improvements can be made to the impairment test of cash-generating units containing goodwill. 

Sarah Dunn, Senior Manager in ICAEW’s Financial Reporting Faculty, said: “We welcome the fact that the IASB has listened to stakeholder concerns and is continuing to work to address these at an early stage in the project. We will continue to monitor developments and look forward to reviewing the final proposed amendments when they are published in due course.”

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