（Translation for reference purpose only）
Proposed amendments to ASBJ Modified Accounting Standard No.1 Accounting for
Goodwill in June 2015 (full version) ※New text is shaded.

JMIS Exposure Draft No.5

31 October 2017

[DRAFT]ASBJ Modification Accounting Standard No. 1

Accounting for Goodwill
30 June 2015
Amended DD MMMM YYYY
Accounting Standards Board of Japan

Contents

Paragraph

Objective・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・
Accounting Standard・・・・・・・・・・・・・・・・・・・・・・・・・・

1

Accounting・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・

4Disclosure・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・

6

Effective Date・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・

7

Approval by the Board・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・

8Basis for Conclusions・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・

9History of the project・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・

9Basis for Conclusions of the 2015 Standard・・・・・・・・・・・・・・・・・

11

Amortisation of goodwill acquired in a business combination・・
Amortisation of goodwill related to investments in associates orjoint ventures・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・
Disclosure relating to the amortisation of goodwill・・・・・・・・・・・

11

4

20
23

Other related issues・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・

24

Annual impairment test of goodwill・・・・・・・・・・・・・・・・・・・・・・・・

25

Identification of intangible assets acquired in a business combination・・・

27

Non-amortisation of intangible assets with indefinite useful lives・・・・・

30

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（Translation for reference purpose only）

Objective
1.

This Standard forms part of “Japan’s Modified International Standards (JMIS): Accounting Standards
Comprising IFRSs and the ASBJ Modifications”.

The objective of this Standard is to make‘deletions or modifications’ to the Standards and Interpretations (collectively referred to as‘Standards’) issued by the International Accounting Standards Board (‘IASB’) relating to theaccounting for goodwill acquired in a business combination and the accounting for goodwill relating
to an associate or a joint venture and related disclosures.
2.

The basis for conclusions accompanies, but does not form part of, this Standard.

3.

[This paragraph is not used for the English version.]

Accounting Standard
Accounting
4.

‘Deletions or modifications’ shall be made to the requirements regarding the accounting for goodwill
acquired in a business combination in IFRS 3 Business Combinations in the following manner (newtext is underlined and deleted text is struck through):54

In general, an acquirer shall subsequently measure and account for assets acquired,liabilities assumed or incurred and equity instruments issued in a business combination inaccordance with other applicable IFRSs for those items, depending on their nature.
However, this IFRS provides guidance on subsequently measuring and accounting for thefollowing assets acquired, liabilities assumed or incurred and equity instruments issued in abusiness combination:(a)reacquired rights;(b)contingent liabilities recognised as of the acquisition date;(c)indemnification assets; and(d)contingent consideration; and.

J-(e)goodwill.

Paragraph B63 provides related application guidance.

Goodwill
J-58A

The acquirer shall account for goodwill as follows:-2-

（Translation for reference purpose only）(a)

After initial recognition, goodwill shall be carried at the amount recognised at theacquisition date less any accumulated amortisation and any accumulated impairment
losses.

(b)

Goodwill shall be amortised on a systematic basis, using the straight line method orother reasonable method, over its useful life.

The useful life of goodwill is theperiod for which goodwill is expected to have an effect, which shall not exceed
20 years.

The amortisation charge shall be recognised in profit or loss.

(c)

Amortisation of goodwill shall begin at the acquisition date.

(d)

The amortisation method and the useful life for goodwill shall be determined
separately for each business combination.

B63

Examples of other IFRSs that provide guidance on subsequently measuring and accounting
for assets acquired and liabilities assumed or incurred in a business combination include:(a)

IAS 38 prescribes the accounting for identifiable intangible assets acquired in abusiness combination.

The acquirer measures goodwill at the amount recognised

at the acquisition date less any accumulated impairment losses.

IAS 36

Impairment of Assets prescribes the accounting for impairment losses.
(b)

IFRS 4 Insurance Contracts provides guidance on the subsequent accounting for an
insurance contract acquired in a business combination.

(c)

IAS 12 prescribes the subsequent accounting for deferred tax assets (including
unrecognised deferred tax assets) and liabilities acquired in a business combination.

(d)

IFRS 2 provides guidance on subsequent measurement and accounting for the
portion of replacement share-based payment awards issued by an acquirer that is
attributable to employees’ future services.

(e)

IFRS 10 provides guidance on accounting for changes in a parent’s ownershipinterest in a subsidiary after control is obtained.

5.

‘Deletions or modifications’ shall be made to the requirements regarding the accounting for goodwill
relating to an associate or a joint venture in IAS 28 Investments in Associates and Joint Ventures in
the following manner (new text is underlined and deleted text is struck through):32

An investment is accounted for using the equity method from the date on which it becomesan associate or a joint venture.

On acquisition of the investment, any difference between-3-

（Translation for reference purpose only）

the cost of the investment and the entity’s share of the net fair value of the investee’s
identifiable assets and liabilities is accounted for as follows:(a)

Goodwill relating to an associate or a joint venture is included in the carrying amountof not presented separately with the investment.
not permitted.

Amortisation of that goodwill is

An entity shall account for goodwill relating to an associate or a

joint venture as follows:(i)

Goodwill relating to an associate or a joint venture shall be amortised on asystematic basis, using the straight line method or other reasonable method,over its useful life.

The useful life of goodwill is the period for which

goodwill is expected to have an effect, which shall not exceed 20 years.
The amortisation charge shall be recognised in profit or loss.
(ii)

Amortisation of goodwill relating to an associate or a joint venture shallbegin at the time when an investee becomes an associate or a joint venture.

(iii)

The amortisation method and the useful life for goodwill relating to an
associate or a joint venture shall be determined separately for each
investment in an associate or a joint venture.

…

40

After application of the equity method, including recognising the amortisation charge forgoodwill relating to an associate or a joint venture in accordance with paragraph 32 andrecognising the associate’s or joint venture’s losses in accordance with paragraph 38, theentity applies paragraphs 41A-41C to determine whether there is any objective evidence
that its net investment in the associate or joint venture is impaired.

42

Because goodwill that forms part of the carrying amount of the net investment in an
associate or a joint venture is not separately recognised, it is not tested for impairment
separately by applying the requirements for impairment testing goodwill in IAS 36
Impairment of Assets.

Instead, For a net investment in an associate or a joint venture, theentire carrying amount of the investment is tested for impairment in accordance with IAS
36 as a single asset, by comparing its recoverable amount (higher of value in use and fairvalue less costs to sell) with its carrying amount whenever application of paragraphs 41A41C indicates that the net investment may be impaired. An impairment loss recognised inthose circumstances is not allocated to any asset, including goodwill, that forms part of thecarrying amount of the net investment in the associate or joint venture.

-4-

Accordingly, any（Translation for reference purpose only）

reversal of that impairment loss is recognised in accordance with IAS 36 to the extent thatthe recoverable amount of the net investment subsequently increases.

In determining thevalue in use of the net investment, an entity estimates:
…

J-42A

An impairment loss for a net investment in an associate or a joint venture shall be allocatedfirst to any remaining goodwill relating to the associate or the joint venture.

J-42B

After the recognition of an impairment loss, the amortisation charge for goodwill relating
to an associate or a joint venture shall be adjusted in future periods to allocate the goodwill’scarrying amount to which the impairment loss was allocated in accordance with paragraph
J-42A on a systematic basis over its remaining useful life.

J-42C

The increased carrying amount of a net investment in an associate or a joint venture
attributable to a reversal of an impairment loss shall not exceed the carrying amount thatwould have been determined had no impairment loss been allocated to the net investment
other than goodwill relating to the associate or the joint venture in prior years.

J-42D

An impairment loss allocated to goodwill relating to an associate or a joint venture shall not
be reversed in a subsequent period.

Disclosure
6.

‘Deletions or modifications’ shall be made to the requirements regarding disclosures relating to
goodwill acquired in a business combination in IFRS 3 in a following manner (new text is underlined
and deleted text is struck through):
B64

To meet the objective in paragraph 59, the acquirer shall disclose the following informationfor each business combination that occurs during the reporting period:…
(e)a qualitative description of the factors that make up the goodwill recognised, suchas expected synergies from combining operations of the acquiree and the acquirer,
intangible assets that do not qualify for separate recognition or other factors.

J-(ea) the amortisation method and the useful life (or lives) adopted for goodwill and theline item(s) in the statement of profit or loss and other comprehensive income that
include the amortisation charge for goodwill.

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（Translation for reference purpose only）…

B67

To meet the objective in paragraph 61, the acquirer shall disclose the following informationfor each material business combination or in the aggregate for individually immaterial
business combinations that are material collectively:…
(d)a reconciliation of the carrying amount of goodwill at the beginning and end of thereporting period showing separately:(i)the gross carrying amount and accumulated impairment losses amortisation(aggregated with accumulated impairment losses) at the beginning of thereporting period.

(ii)

additional goodwill recognised during the reporting period, except goodwill
included in a disposal group that, on acquisition, meets the criteria to beclassified as held for sale in accordance with IFRS 5 Non-current Assets Heldfor Sale and Discontinued Operations.

(iii)

adjustments resulting from the subsequent recognition of deferred tax assets
during the reporting period in accordance with paragraph 67.

(iv)

goodwill included in a disposal group classified as held for sale inaccordance with IFRS 5 and goodwill derecognised during the reporting
period without having previously been included in a disposal group classified
as held for sale.

(v)

impairment losses recognised during the reporting period in accordance with
IAS 36. (IAS 36 requires disclosure of information about the recoverable
amount and impairment of goodwill in addition to this requirement.)

J-(v-a) any amortisation charge recognised during the period.
(vi)

net exchange rate differences arising during the reporting period in
accordance with IAS 21 The Effects of Changes in Foreign Exchange Rates.

(vii)

any other changes in the carrying amount during the reporting period.

(viii) the gross carrying amount and accumulated impairment losses amortisation(aggregated with accumulated impairment losses) at the end of the reporting
period.
…

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Effective Date
7.

An entity shall apply this Standard as issued in June 2015 (the ‘2015 Standard’) to consolidated
financial statements for annual periods ending on or after 31 March 2016.

Regarding quarterly

financial reporting, an entity shall apply this Standard to consolidated interim financial statements forquarters within annual periods beginning on or after 1 April 2016.
7-2. An entity shall apply this Standard as amended in MMMM YYYY (the ‘YYYY Amendments’) to
consolidated financial statements for annual periods which IFRS 9 Financial Instruments (2014)(‘IFRS 9 (2014)’) listed in Appendix 1 of Application of “Japan’s Modified International Standards”
as amended in MMMM YYYY is first applied. Regarding quarterly financial reporting, an entity
shall apply the YYYY Amendments to consolidated interim financial statements from the first quarterof that annual period.

Approval by the Board
8.

…

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（Translation for reference purpose only）

Basis for Conclusions
History of the project9.

The Accounting Standards Board of Japan (‘ASBJ’) started the endorsement process of International
Financial Reporting Standards (‘IFRS’) in line with “The Present Policy on the Application ofInternational Financial Reporting Standards (IFRS)” issued in June 2013 by the Business Accounting
Council, an advisory body to the Financial Services Agency of Japan.

The scope of the initialendorsement process covered the Standards issued by the IASB as at 31 December 2012.
10. In the initial endorsement process, based on the discussions at its Board meetings, the ASBJ decided
to make ‘deletions or modifications’ to the Standards issued by the IASB relating to the nonamortisation of goodwill because the ASBJ determined that the thinking in IFRS is critically different
from the fundamental thinking on accounting standards generally accepted in Japan (see paragraphs
11-32).
10-2.The YYYY Amendments did not make any ‘deletions or modifications’ regarding goodwill in theendorsement process, but the YYYY Amendments amended the wordings of the requirements subject
to ‘deletions or modifications’ as well as their Japanese translations in order to reflect the amendments
to IAS 28 made by IFRS 9 (2014).

Basis for Conclusions of the 2015 Standard
Amortisation of goodwill acquired in a business combination (paragraph 4)
11. IAS 22 Business Combinations as revised in 1998 (‘IAS 22 (1998)’) required the amortisation of
goodwill arising on acquisition over its useful life, with a rebuttable presumption that the useful lifeof goodwill will not exceed twenty years from initial recognition.

IFRS 3 Business Combinations

issued in 2004 (‘IFRS 3 (2004)’) superseded IAS 22 (1998) and prohibited amortising goodwill
acquired in a business combination and instead introduced annual impairment testing for goodwill.
In addition, IFRS 3 (2004) clarified the definition of the term ‘identifiable’ and introduced thecontractual-legal criterion and the separability criterion for the separate recognition of intangible
assets.
12. In developing IFRS 3 (2004), proponents for amortising goodwill generally argued the following(IFRS 3 (2004), paragraph BC139):(a) acquried goodwill is an asset that is consumed and replaced with internally genarated goodwill;(b) conceptually, amortisation is a method of allocating the cost of acquired goodwill over the period-8-

（Translation for reference purpose only）

it is consumed and is consistent with the approach taken to tangible fixed assets; and(c) the useful life of acquired goodwill cannnot be predicted with a satisfactory level of reliability,
nor can the pattern in which that goodwill diminishes be known.

Nevertheless, systematic

amortisation over an albeit arbitrary period provides an appropriate balance between conceptual
soundness and operationality at an acceptable cost.
13. However, the IASB decided to prohibit amortising goodwill acquired in a business combination for
the following reasons (IFRS 3 (2004), paragraphs BC140 and BC142):(a) the useful life of acquired goodwill and the pattern in which that goodwill diminishes are
generally not known.

Straight-line amortisation of goodwill over an arbitrary period fails toprovide useful information;(b) if goodwill is an asset, in some sense it must be true that goodwill acquired in a businesscombination is being consumed and replaced by internally generated goodwill, provided that anentity is able to maintain the overall value of goodwill (by, for example, expending resources onadvertising and customer service).

However, the IASB remained doubtful about the usefulnessof an amortisation charge that reflects the consumption of acquired goodwill, whilst the internallygenerated goodwill replacing it is not recognised; and(c) if a rigorous and operational impairment test could be devised, more useful information would
be provided to users of an entity’s financial statements.
14. In the discussions at the ASBJ and among Japanese constituents, both views for and against the nonamortisation of goodwill were heard.
15. Opponents of non-amortisation of goodwill argue that goodwill should be amortised, primarily for thefollowing reasons:(a) goodwill constitutes the cost paid to acquire the assets and liabilities of the acquiree in a businesscombination. Because the acquirer’s profit after the business combination should be viewed as
the excess recovered beyond the cost invested, goodwill should be amortised from the viewpointof appropriately recognising in each period the income and the corresponding cost of theinvestment.
(b) assuming certain portions of goodwill represent excess earning power, the value of such power
normally diminishes due to the competitive environment.

Non-amortisation of goodwill

neglects to account for such phenomenon.
(c) regarding the view described in paragraph 13(a) that the useful life of acquired goodwill isgenerally unknown, an entity should generally be able to estimate the useful life of goodwill
because an acquirer typically decides to undertake the acquisition after diligent analysis of the-9-（Translation for reference purpose only）

acquiree.

In addition, although some may argue that the pattern in which goodwill diminishes

cannot be predicted reasonably, it would be more reasonable to amortise goodwill on a systematic
basis over a certain period rather than adopting an approach that may not recognise the decreasein the value of goodwill at all in certain periods.
Furthermore, the difficulty in estimating the useful life or the pattern of amortisation or
depreciation exists not only in accounting for goodwill, but also in accounting for tangible fixed
assets.

In fact, determining the useful life of a tangible fixed asset requires the consideration ofmany factors, including expected physical wear as well as technical obsolescence arising fromchanges or improvements in production.

Moreover, the determination of the depreciation

method also requires an entity to reflect the pattern in which the asset’s future economic benefits
are expected to be consumed by the entity.
(d) regarding the view described in paragraph 13(b), paragraph OB7 of the Conceptual Framework
for Financial Reporting issued by the IASB states that general purpose financial reports are notdesigned to show the value of a reporting entity, which implies that the recognition of internallygenerated goodwill is not relevant for general purpose financial reporting.

Although the viewdescribed in paragraph 13(b) rejects the amortisation of goodwill on the grounds of being
inconsistent with the accounting treatment for internally generated goodwill, the accounting
treatment for advertising costs and the subsequent measurement of goodwill acquired in abusiness combination are entirely different issues.
(e) regarding the view described in paragraph 13(c), the impairment test for goodwill cannot be
considered a substitute for the amortisation of goodwill because they differ in their objectives inthat the amortisation of goodwill focuses on the periodical allocation of costs whereas theimpairment test of goodwill focuses on recoverable amounts.

In addition, because therecoverable amount would inevitably include the value of internally generated goodwill arising
after the business combination, impairment tests would sometimes fail to represent the decreasein the value of goodwill acquired in a business combination.
16. In addition to the reasons listed in paragraph 13, other constituents support the non-amortisation of
goodwill for the following reasons:(a) in considering the importance of ensuring equal footing with foreign entities in the accounting
for business combinations, non-amortisation of goodwill is beneficial for entities; and(b) some users analyse financial statements on the basis of free cash flows and ignore goodwill
amortisation charges, which is a non-cash item.

Accordingly, non-amortisation of goodwill

would not affect the analysis undertaken by such users.
17. As a result of the discussions at its Board meetings, the ASBJ decided to make ‘deletions or- 10 -

（Translation for reference purpose only）

modifications’ to the Standards issued by the IASB to require the amortisation of goodwill, because
the thinking in IFRS not to amortise goodwill and the fundamental thinking on accounting standards
generally accepted in Japan to amortise goodwill are critically different, in the light of the significanceon the determination of profit or loss after the business combination as described in paragraph 15.
18. When making the ‘deletions or modifications’ so that goodwill is to be amortised, one of the major
issues was how to prescribe the determination of the useful life for the amortisation of goodwill.
Possible methods of prescribing the determination of the useful life for the amortisation of goodwill
included: (a) requiring amortisation over the period reasonably estimated as a period over which
goodwill will have effect, without specifying any upper limit; (b) requiring amortisation over a
specified useful life, but permitting a shorter or longer period if it can be justified; (c) requiring
amortisation within a specified upper limit of the useful life for goodwill; (d) requiring amortisation
within a specified upper limit of the useful life for goodwill, but permitting a longer period if it canbe justified; (e) requiring amortisation over the period reasonably estimated as a period over which
goodwill will have effect, but within a specified upper limit when such a period cannot be reliably
estimated.
19. Regarding whether the upper limit of the useful life is necessary, the ASBJ considered it reasonable
to set an upper limit for the useful life, given the difficulty in reliably estimating the period for which
goodwill is expected to have an effect, especially when that period is long. Regarding the specificlength of the upper limit, considering that setting a too short of a period would make it difficult toreflect economic reality, the ASBJ decided that the upper limit should be 20 years, by reference to therequirements in IAS 22 (1998) and existing Japanese accounting standards.

Amortisation of goodwill related to associates or joint ventures (paragraph
5)
20. To be consistent with the ‘deletions or modifications’ requiring the amortisation of goodwill acquired
in a business combination, the ASBJ decided to make ‘deletions or modifications’ to IAS 28 to require
goodwill related to an associate or a joint venture to be amortised in a consistent manner.
21. IAS 28 treats the entire investment in an associate or a joint venture as a single asset and does notseparately recognise goodwill related to an associate or a joint venture.

To be consistent withrequiring the amortisation of goodwill related to an investment in an associate or a joint venture, thisStandard takes the view that an investment in an associate or a joint venture consists of the goodwill
portion and the remaining portion, which would be accounted for separately but presented together.
22. Accordingly, the ASBJ decided to make ‘deletions or modifications’ to the Standards issued by the
IASB to require that impairment losses on a net investment in an associate or a joint venture shouldbe, consistent with impairment losses on goodwill in IAS 36 Impairment of Assets, allocated first to- 11 -

（Translation for reference purpose only）

goodwill related to the associate or the joint venture, and to prohibit the reversal of the impairment
losses allocated to goodwill.

Disclosure relating to the amortisation of goodwill (paragraph 6)
23. To be consistent with the ‘deletions or modifications’ requiring the amortisation of goodwill acquired
in a business combination, the ASBJ decided to add disclosure requirements to provide users offinancial statements with information about the amortisation of goodwill.

Specifically, the ASBJ

decided to require the disclosure of the amortisation method, the useful life (or lives) adopted for
goodwill and the line item(s) in the statement of profit or loss and other comprehensive income inwhich the amortisation charge for goodwill is included.

The ASBJ also decided to modify thedisclosure requirements regarding the reconciliation of the carrying amount of goodwill at the
beginning and end of the reporting period.

Other related issues
24. In connection with the decision to require the amortisation of goodwill acquired in a businesscombination, the ASBJ also considered whether to make ‘deletions or modifications’ relating to thefollowing issues:(a) annual impairment test of goodwill;(b) identification of intangible assets acquired in a business combination; and(c) non-amortisation of intangible assets with indefinite useful lives.

Annual impairment test of goodwill
25. IAS 36 requires an entity to test goodwill for impairment annually (and more frequently if events orchanges in circumstances indicate that it might be impaired).

The ASBJ considered whether any‘deletions or modifications’ should also be made to this requirement in conjunction with requiring
amortisation of goodwill.
26. Some argued that if goodwill were to be amortised, the recoverability of goodwill should be tested
only when there is an indication that it may be impaired, similar to the impairment of other types ofassets under IAS 36, because the requirement of annual impairment test for goodwill is an exception
as a consequence of not amortising goodwill.

Nevertheless, the ASBJ decided not to make ‘deletions

or modifications’ in relation to this issue in order to minimise ‘deletions or modifications’ to the extent- 12 -

（Translation for reference purpose only）

possible.

Identification of intangible assets acquired in a business combination
27. IFRS 3 states that an intangible asset acquired in a business combination is identifiable if it meets
either the separability criterion or the contractual-legal criterion, and IFRS 3 requires an entity torecognise identifiable intangible assets separately from goodwill.

The ASBJ considered whether any‘deletions or modifications’ should also be made to this requirement in conjunction with requiring
amortisation of goodwill.
28. Some argued that ‘deletions or modifications’ should also be made to the requirement to identify
intangible assets acquired in a business combination for the following reasons:(a) it would be relevant to identify intangible assets separately from goodwill only when they havebeen considered in determining the consideration for the business combination, such as when
acquiring those intangible assets was one of the purposes of undertaking the businesscombination; and(b) if goodwill were to be amortised, the identification of intangible assets would be less needed
because the effect on profit or loss would be limited to the difference in the amount ofamortisation caused by the difference in the useful lives of the intangible assets and goodwill.
29. Nevertheless, the ASBJ determined not to make ‘deletions or modifications’ on this issue in order tominimise ‘deletions or modifications’ to the extent possible.

Non-amortisation of intangible assets with indefinite useful lives
30. IAS 38 Intangible Assets prohibits an entity from amortising intangible assets with indefinite useful
lives and IAS 36 requires an entity to test those intangible assets for impairment annually (and more
frequently if events or changes in circumstances indicate that it might be impaired).

The ASBJ

considered whether any ‘deletions or modifications’ should also be made to this requirement inconjunction with requiring amortisation of goodwill.
31. Some argued that ‘deletions or modifications’ should be also made to non-amortisation of intangible
assets with indefinite useful lives because distinguishing goodwill from intangible assets withindefinite useful lives (such as certain brands) would be difficult and, thus, amortising one but not theother might create structuring opportunities.
32. However, others argued that those intangible assets need not always be treated in a manner similar to
goodwill because an intangible asset with an indefinite useful life would have been determined to haveno foreseeable limit to the period over which the asset is expected to generate cash flows, based on- 13 -

（Translation for reference purpose only）

the analysis of all of the relevant factors, whereas goodwill is merely a residual.

In the light of thisview, the ASBJ decided not to make ‘deletions or modifications’ on this issue.

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