Date posted: 2/03/2020 5 min read

Goodwill – are we moving back to an amortisation model?

Accounting standard-setters the IASB and FASB are deep in discussion about accounting for goodwill following a business combination – with the possible return to an amortisation model.

In Brief

  • The IASB and FASB are considering options to account for goodwill after a business combination
  • One possibility could be to revert accounting for goodwill to an amortisation model

The IASB and FASB accounting standard-setters are looking at ways to account for goodwill after a merger or acquisition (business combination) and a possibility may be to revert to an amortisation model.

Our summary of current discussions, with links to supporting documentation, aims to better inform valuation practitioners who may then wish to contribute to the debate.

We have also included links to FASB's recent update on the goodwill project, and a summary of FASB hosting public roundtable meetings where the subsequent accounting for goodwill, the accounting for certain identifiable intangible assets, and the scope of the project were discussed. You can also find minutes from the public roundtable meetings here.

The IASB is also investigating possible ways to improve the IFRS 3 Business Combinations and IAS 36 Impairment of Assets based on feedback from the post-implementation review of IFRS 3. In particular, the IASB is looking at how companies can provide financial statement users with better information about business combinations at a reasonable cost – and how companies should account for goodwill after a business combination.

The IASB has finalised its preliminary views, which will be included in a discussion paper currently in draft and due for publication in March 2020. Once the paper is published, you will be able to read it here.

In a September 2019 article, IASB board member Tom Scott discussed IASB's preliminary views and explained how stakeholders could help by commenting on its upcoming discussion paper.

This topic has also been the focus of a series of papers issued by the business valuation board of the International Valuation Standards Council (IVSC). The first article asks the question, Is goodwill a wasting asset – and concludes that it isn't. This assumption, which is supported by empirical evidence, is based on a functional analysis of the components of goodwill and a consideration of how businesses are valued and priced for transactions.

The second paper in the IVSC series, Information Value of the Current Impairment Test: Leading or Lagging Indicator? explores the content of the goodwill impairment test and highlights reasons for its perceived flaws and limitations as a leading indicator.

The article suggests that while the current goodwill impairment framework provides inconsistent results as a leading indicator, reverting to an amortisation model would not improve results. It also provides a general overview of some practical solutions to enhance the information value of the goodwill impairment test. These possible solutions will be covered in more detail in the upcoming third article in the series.

Finally, the European Financial Reporting Advisory Group (EFRAG) recently published a literature review on intangibles as part of its work to provide better information on the topic. It provides insights on areas such as frameworks and models for measuring and reporting on intangibles, and their impact on company performance, market value and users. The paper provides further useful context and background on the topic of goodwill and goodwill amortisation.

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