Impairment Of Goodwill: Will The IASB Reintroduce Previous Requirements?

With the adoption of IFRS 3 Business Combinations in 2004, the International Accounting Standards Board (IASB) abolished the amortization of goodwill and introduced an impairment-only approach. In the years after the adoption, however, the Board soon noticed a couple of problems. Firstly, the mandatory impairment test is both costly and subjective. Secondly, impairment losses on acquired goodwill are often recognized too late, due to the shielding of unrecognized headroom (excess of the recoverable amount over the carrying amount of a cash-generating unit or CGU), both at the acquisition date and subsequently. The above facts were the reason why the IASB has been considering including the requirements for impairment testing of goodwill, as well as the subsequent accounting thereof, in its post-implementation review (PIR) of the standard.

So, will you be able to amortize goodwill in the future again? Some of you might jump for joy when hearing this, while others won't...

Pros and cons of the reintroduction

The PIR revealed that investors have mixed views on whether goodwill should be amortized again or not. Those in favor of the amortization believe that goodwill acquired in a business combination is supported and replaced by internally generated goodwill over time. However, the IASB opposes the view that the timeline over which amortization should occur is impossible to determine and that the information value of amortization is very low for investors.

Investors in favor of the impairment-only approach, meanwhile, argue that the non-amortization of goodwill and the absence of impairment charges help them to verify whether an acquisition is working as expected. But it should be considered, as was highlighted by the IASB, that a company must burn through all of the headroom (unrecognized goodwill) before the acquired goodwill becomes visibly impaired. This means that the results of the impairment test will mostly be "too little, too late" and the balance sheet may thus give an overly optimistic representation of a company's financial health.

Mandatory annual impairment test

The PIR also revealed that the estimation of the value in use (VIU) to be performed as part of the impairment test is too costly and complex.

The main challenge for companies in relation to the impairment testing of goodwill is clearly the calculation of the VIU of an asset or CGU. This is due to...