SHOULD GOODWILL STILLNOT BE AMORTISED?
ACCOUNTING AND DISCLOSURE FOR GOODWILL

J U LY2014© Accounting Standard Board of Japan, European Financial Reporting Advisory Group andOrganismo Italiano di Contabilità (Italian Standard Setter – OIC) (2014)
This paper is issued by the Accounting Standard Board of Japan (ASBJ), European Financial
Reporting Advisory Group (EFRAG) and the Italian Standard Setter, the Organismo Italiano diContabilità (OIC).

Accounting and Disclosure for Goodwill

DISCLAIMER

Should Goodwill still not be Amortised?

2This paper has been prepared by the following authors (collectively, the ‘Research Group’) to stimulate
the discussion about accounting requirements of goodwill acquired in business combinations.
- Tommaso Fabi, Technical Director of the OIC- Marco Mattei, Project Manager of the OIC- Filippo Poli, Deputy Research Director, EFRAG- Tomo Sekiguchi, Board Member of the ASBJ
The views presented in the paper are those of the Research Group’s only. The ASBJ, EFRAG and
the OIC have reviewed its content during the meetings in leading up to the publication of the paper
and reached the view that the paper would stimulate useful debate. The Research Group expresses
special appreciation for the helpful input from the Institute of Charted Accountants of India (ICAI).
Copies of the paper are available from the websites of those bodies issuing the paper. A limited
number of copies of the paper will also be made available in printed form, and can be obtained fromthe ASBJ, EFRAG and the OIC.

We invite comments on each of questions in pages 6 and 7. We would appreciate it ifcomments would be sent before 20 September 2014 to either of the following:
Accounting Standards Board of Japan
goodwill@asb.or.jp or by mail to:
ASBJ
Fukoku Seimei Building 20F
2-2-2, Uchisaiwaichou, Chiyoda-ward
Tokyo, Japan (100-0011)
European Financial Reporting Advisory Group
commentletters@efrag.org or by mail to
EFRAG, 35 Square de Meeûs, 1000 Brussels, Belgium
Organismo Italiano di Contabilità
goodwill@fondazioneoic.it or by mail to:
OIC, Via Poli 29, 00187 Roma, Italy

All comments received will be placed on the public record unless confidentiality is specificallyrequested.

Table of contents

4

QUESTIONS TO CONSTITUENTS

6

CHAPTER ONE: INTRODUCTION

8CHAPTER TWO:CHANGING ACCOUNTING REQUIREMENTS FOR GOODWILL

18

CHAPTER THREE:IMPROVEMENTS IN THE EXISTING IMPAIRMENT TEST33

CHAPTER FOUR:
IMPROVEMENTS TO DISCLOSURES IN IAS 36

40

CHAPTER FIVE:
ADDITIONAL CONSIDERATIONS

49

BIBLIOGRAPHY

51

3
Should Goodwill still not be Amortised?

FOREWORD

Accounting and Disclosure for Goodwill				Foreword

Ten years after the IASB replaced the previous ‘amortisation and impairment approach’ with the‘impairment-only approach’ in revising IFRS 3 Business Combinations and other related standards,
discussion around accounting and disclosure regarding acquired goodwill has become increasingly
lively. Many studies and reviews have been conducted on this area, and many of them have identified
shortcomings in the application of the impairment-only approach to a varying degree.

Accounting and Disclosure for Goodwill

In 2013, the International Accounting Standards Board (IASB) embarked on a post implementation
review (PIR) on IFRS 3, and it has become apparent that there is a common view in Europe, Japanand other areas, that accounting and disclosure requirements regarding goodwill merit further
consideration.

Should Goodwill still not be Amortised?

4

Against this background, members of the ASBJ, EFRAG and the OIC formed a Research Group to
carry out the research on this area. As a first step, the Research Group performed a survey to seekfor views on the usefulness of information resulting from the impairment-only approach, as well as
challenges relating to preparing and auditing the resulting information. As a result, the ResearchGroup learnt that many constituents questioned the usefulness of the information resulting fromthe impairment-only approach. It also found that preparers and auditors are concerned about thecost and subjectivity of the impairment testing in accordance with IAS 36 Impairment of Assets andwhether impairment losses are recognised in a timely manner. Furthermore, many have indicatedthat the impairment-only approach may have played a role in the financial crisis. That is, since
the current approach does not allow the depiction of yearly consumption of acquired goodwill,
impairment losses often come too late. This effect has been made evident in recent years in which
many entities recognised impairment losses of goodwill year after the financial crisis, when financial
markets, possibly, had already taken them into account.
Based on the findings, the Research Group has explored possible approaches to remedy theshortcomings and decided to publish its research outcome in a form of the Discussion Paper (DP).
The objective of this DP is to stimulate and progress the debate on this important subject, before
the IASB formally considers a standard-setting initiative.
Chapter 1 of this DP outlines the history and recent developments regarding the discussion of
accounting requirements for goodwill. This chapter also explains the shortcomings the ResearchGroup has identified, based on the surveys conducted by the EFRAG-OIC and the ASBJ in 2012.
Chapters 2 to 4 explain the Research Group’s analysis of how to solve these shortcomings. In thesechapters, the Research Group explores the following three different approaches, which are believed
to be not mutually exclusive:(a)Changing the accounting treatment of goodwill, including reintroduction of theamortisation (Chapter 2);(b)

Improving the requirements for impairment testing (Chapter 3); and(c)

Improving disclosure requirements in IAS 36 (Chapter 4).

As a result of its analysis, the Research Group concluded that reintroduction of goodwill
amortisation, would be appropriate, because it reasonably reflects the consumption of theeconomic resource acquired in the business combination over time, and can be applied in a way that
achieves an adequate level of verifiability and reliability. In addition, the Research Group concluded
that further improvement should also be considered in the area of disclosure requirements.

5
Should Goodwill still not be Amortised?

The Research Group hopes that this DP helps stimulate and progress the global discussion of
accounting and disclosure regarding acquired goodwill. The Research Group plans to sharethe feedback received on the DP with the IASB and other relevant bodies, and consider further
improvements in this area.

Accounting and Disclosure for Goodwill

Chapter 5 provides the Research Group’s observations if the IASB decides to reintroduce theamortisation and impairment approach. Specifically, the Research Group provides a brief analysis
on whether to modify the current requirements of separating intangible assets from goodwill and toextend amortisation to other intangible assets with indefinite useful lives.

Questions to Constituents

Accounting and Disclosure for Goodwill

1.

2.

Should Goodwill still not be Amortised?

6

3.

Do you agree that there should be a requirement to recognise goodwill as an asset andamortise it over subsequent periods? If so, do you support amortisation because:(a)goodwill existing at acquisition date is consumed and replaced with internallygenerated goodwill over time, thus it should be allocated to subsequent periods aspart of the cost of acquiring an entity;(b)

an impairment-only model is not sufficiently reliable due to the large use ofassumptions in the impairment test (future cash flows, terminal growth rate anddiscount rate); or(c)amortisation of goodwill, in addition to the impairment test, achieves an appropriate
cost-benefit balance.

Assuming that there was a requirement to amortise goodwill, do you think that the IASB
should:(a)indicate what the amortisation period should be?

(b)indicate a maximum amortisation period?

(c)provide guidance on how entities should assess the amortisation period (forinstance, by referring to the expected payback period or the useful life of the
primary asset)?

(d)allow entities to elect the amortisation period that they consider appropriate?

The DP suggests the need for improved guidance in a number of areas in IAS 36. Do you
think that the IASB should improve and/or provide additional guidance in relation to:(a)the methods to determine the recoverable amount of the goodwill;(b)

the application of the value-in-use method;(c)the identification of cash-generating units and allocation of goodwill to each unit;
and

(d)

the choice of the discount rate.

If not, please indicate why. Please state any specific suggestions for improvements if
you have.

(a)assist users in understanding the robustness of the modelling and the entity’scurrent assumptions;(b)provide confirmation of the ‘reasonableness’ of the entity’s past assumptions; and(c)assist users in predicting future impairment.

IAS 38 requires that intangible assets with indefinite useful lives are not amortised
but tested for impairment at least annually. Assuming that there was a requirement toamortise the goodwill, do you think that the same requirement should be extended
to other intangible assets with indefinite useful lives? In addition, assuming that there
was a requirement to amortise goodwill, do you think that the current requirements ofidentifying intangible assets separately from goodwill should be reconsidered? If so,how?

Accounting and Disclosure for Goodwill

5.

The DP suggests a number of possible new disclosures about impairment testing for
goodwill. Do you think that the IASB should consider improving requirements to:7
Should Goodwill still not be Amortised?

4.

Chapter One: Introduction

OBJECTIVE OF THE DISCUSSION PAPER

Accounting and Disclosure for Goodwill

1.

Should Goodwill still not be Amortised?

8

The objective of this DP is to:(a)summarise the current and previous discussions around the accounting
requirements for goodwill acquired in a business combination including the
feedback from stakeholders on the surveys conducted by EFRAG/OIC and ASBJ
(Chapter 1);(b)

explore alternative approaches regarding the accounting and disclosure
requirements of acquired goodwill (except for those relating to negative goodwill)and draw a tentative conclusion on how to address shortcomings identified bystakeholders (Chapters 2 to 4); and(c)provide additional considerations regarding the accounting treatment of intangible
assets (Chapter 5).

CURRENT STATUS AND RECENT DEVELOPMENTS
2.

Under IFRS 3 and IAS 36, goodwill acquired in a business combination (acquired goodwill)
shall be tested for impairment. A cash generating unit (CGU) to which goodwill has been
allocated should be tested for impairment at least annually, and whenever there is anindication that the unit may be impaired; an impairment loss is recognised when the
carrying amount of the CGU, including the goodwill, is lower than its recoverable amount.
However, the existing standard does not permit amortisation of goodwill (hereinafterreferred to as the ‘impairment-only approach’). In addition, IAS 28 Investments in
Associates and Joint Ventures requires that goodwill relating to an associate or joint
venture shall be included in the carrying amount of equity investments accounted forusing the equity method, and does not permit the amortisation of goodwill.

IASB’s PIR regarding Business Combinations Standards
3.

At its July 2013 Board meeting, the IASB decided to adopt a comprehensive approachto the IFRS 3 post-implementation review (PIR), including reviewing experiences relating
to changes in accounting requirements for goodwill that were modified in 2004.

Level 1

Activity

TimingPhase I of the PIR

July 2013–November 2013

Publication of Request for Information

January 2014

Phase II of the PIR
Published in January 2014 with comment
period ending May 2014

Public consultation (120 days)
Analysis of public
extensive outreachcomments

Publication of Feedback Statement

andUndertaken during 1st half of 2014
3rd or 4th quarter of 2014

Developments in the U.S.
5.

In January 2014, the FASB issued the Accounting Standards Update (ASU) No.2014-02,
Intangibles-Goodwill and Other (Topic 350), Accounting for Goodwill. This ASU allows
private companies an accounting option to amortise goodwill relating to each businesscombination or reorganisation event that results in fresh-start reporting (amortisable unitof goodwill), on a straight-line basis over 10 years or less if the entity demonstrates
that another useful life is more appropriate1. An entity that chooses this accounting
alternative may elect to test goodwill for impairment at either the entity level or thereporting unit level. In addition, the ASU requires that goodwill be tested for impairment
when a triggering event occurs that indicates that the fair value of an entity (or a reportingunit) may be below its carrying amount. Further, when a triggering event occurs, anentity has the option to first assess qualitative factors to determine whether quantitative
impairment testing is necessary.

6.

In addition, the FASB initiated a project to review the accounting for goodwill for
public business entities and not-for-profit entities, to consider the following alternative
approaches: (a) the alternative approach permitted for private companies, (b) amortisationof goodwill over its useful life not to exceed a maximum number of years, (c) direct writeoff of goodwill or (d) the simplified impairment test. In its meeting of March 2014, the
FASB decided to defer further discussion until after the IASB has completed and issued
its findings on the PIR of IFRS 3.

1

These revised US requirements are broadly consistent with the relevant requirements in International Financial Reporting Standards
for Small and Medium Sized Entities (IFRS for SMEs). IFRS for SMEs requires the acquirer of a business combination to measureacquired goodwill at cost less accumulated amortisation and accumulated impairment losses. It also requires an entity to allocate
the depreciable amount of acquired goodwill on a systematic basis over its useful life, which is presumed to be 10 years if an entity is
unable to make a reliable estimate of the useful life of acquired goodwill.

Accounting and Disclosure for Goodwill

In January 2014, the IASB published the Request for Information, Post-Implementation
Review: IFRS 3 Business Combinations. The IASB’s plan for the PIR can be summarised
as following:

9
Should Goodwill still not be Amortised?

4.

Chronology of requirements for goodwill
7.

The following paragraphs summarise the history of accounting requirements for goodwill(including its amortisation) to help identify alternative approaches. The Research Groupconsidered the history of U.S. accounting standards as well as IFRSs, because thediscussion about whether to amortise goodwill was carried out as part of the convergenceproject between the IASB and the FASB2.

Accounting and Disclosure for Goodwill

Year

Category

Key Developments

U.S. GAAP

The APB issued Opinion No. 17, which required theamortisation of goodwill over a period not exceeding 40
years.

1983

IASs

The IASC issued IAS 22 Business Combinations, which
permitted systematic amortisation of acquired goodwill
over its useful life not exceeding 20 years while also
allowed goodwill to be immediately charged to equity on
the acquisition date.

1993

IASs

The IASB revised IAS 22, to eliminate the option to
immediately charge acquired goodwill to equity on theacquisition date.

1999

U.S. GAAP

The FASB issued an Exposure Draft, proposing to shorten
the maximum amortisation period of goodwill from 40
years to 20 years.

2001

U.S. GAAP

The FASB issued SFAS 141/1423, which prohibitedamortisation of goodwill and required regular impairment
testing, coupled with the abolition of the pooling-ofinterest method.

2004

IFRSs

The IASB issued IFRS 3 and its related standards, throughwhich the accounting requirements relating to goodwill
were generally aligned with those in U.S. GAAP4.

U.S. GAAP

The FASB voted to permit amortisation of goodwill for
private companies, and directed its staff to explore
whether to permit the same approach for public business
entities.

1970

Should Goodwill still not be Amortised?

10

2013

2

3
4

Japanese accounting standards require an entity to amortise acquired goodwill over a period for which goodwill is expected to have aneffect with a maximum period of 20 years, while requiring an entity to recognise impairment losses when a specified threshold is met.
SFAS represents the Statement of Financial Accounting Standard in the pre-Codification standards.
Requirements for goodwill in IAS 28 were amended to conform to the requirements of revised IFRS 3.

Prior to the publication of FASB Statement No. 142, Goodwill and Other Intangible Assets(SFAS 142), APB Opinion No. 17, Intangible Assets required that goodwill recognised in abusiness combination be amortised systematically over a period not exceeding forty years.

9.

In 2001, the FASB published SFAS 142, which introduced an impairment-only approachbased on the following arguments:(a)many analysts stated that they ignored goodwill amortisation expense in theiranalysis, and many entities ignored goodwill amortisation expense in measuring
operating performance;(b)

the increases in reported earnings in periods after amortisation of goodwill iscompleted may not be considered to provide faithful representation, because suchincreases in earnings arise from the cessation of prior ‘doubling-up’ of expenses
related to goodwill; and(c)non-amortisation of goodwill with adequate impairment testing and appropriate
disclosure promotes transparency in financial reporting, and thus provides useful
information to those who rely on financial statements.

10. However, there were considerable concerns over the FASB’s conclusions, primarily
because acquired goodwill is deemed to be a ‘wasting asset’ whose value will be
consumed in subsequent periods. It was argued that the impairment-only approach inessence allows entities to capitalise ‘internally generated goodwill5’ created in the same
reporting unit to which the goodwill has been allocated.
IFRS 3 (2004)
11. In 2004, the IASB amended IAS 22, primarily to achieve convergence with the US
standards. In considering the subsequent treatment for goodwill, the IASB examined thefollowing three approaches:(a)straight-line amortisation with an impairment test whenever there was an indicationthat the goodwill might be impaired;(b)

non-amortisation but with a yearly impairment test or more frequent if events orchanges in circumstances indicated that the goodwill might be impaired; and(c)an accounting option between approaches (a) and (b).

12. The IASB decided to adopt the impairment-only approach. The IASB rejected approach(c) because it felt that both comparability and reliability would be diminished.
5

IAS 38 prohibits an entity from recognising internally generated goodwill. In some cases, expenditure is incurred to generate future
economic benefits, but it does not result in the creation of an intangible asset that meets the recognition criteria. Such expenditure isoften described as contributing to internally generated goodwill. Internally generated goodwill is not recognised as an asset because it
is not an identifiable resource controlled by the entity that can be measured reliably at cost.

11
Should Goodwill still not be Amortised?

8.

Accounting and Disclosure for Goodwill

Publication of SFAS 142 by the FASB

Accounting and Disclosure for Goodwill

13. During the consultation process, stakeholders generally preferred an amortisation andimpairment approach, primarily for the following reasons:Should Goodwill still not be Amortised?

12

(a)

acquired goodwill is an asset that is consumed and replaced by internally generated
goodwill. Therefore, amortisation ensures that acquired goodwill is recognised in
profit or loss and not offset by internally generated goodwill, in accordance with theprohibition to recognise internally generated goodwill in IAS 38 Intangible Assets;(b)

amortisation of goodwill is consistent with the approach taken for other intangible
and tangible assets that do not have indefinite useful lives. Indeed, entities are
required to determine the useful lives of items of property, plant and equipment,
and depreciate the assets on a systematic basis over their useful lives. There is noconceptual reason for treating acquired goodwill differently; and(c)systematic amortisation provides a practical solution for the subsequent treatmentof goodwill at an acceptable cost.

14. However, the IASB rejected the amortisation and impairment approach, primarily because
it is not possible to reliably determine the useful life and the pattern of consumption of
goodwill, so that the amortisation charge over any given period is only an arbitrary estimate.

OUTREACH TO CONSTITUENTS
15. Given the discussions around the accounting treatment of goodwill, the Research Group
presented a research project plan in 2012 at the IFASS meeting in Kuala Lumpur. As afirst step of the project, the OIC and EFRAG launched an international survey and the
ASBJ launched a domestic survey on the topic. The results of the surveys conducted by
OIC/EFRAG and ASBJ were discussed at the IFASS meeting of Sao Paulo in April 2013.
EFRAG and OIC survey
16. EFRAG and OIC received 47 replies. The results provided useful indications on existing
views on the topic.
17. The survey was conducted through a questionnaire that included five parts. Part 1
included questions on the usefulness of the financial information based on the current
accounting for the subsequent measurement of acquired goodwill. This part was primarily
targeted at users.
18. The responses show that respondents have different opinions on what goodwill normallyconsists of. The responses also show that some of respondents do not use the information
on goodwill presented in financial statements, whereas others do.

21. Part 2 considered the consistency of the discontinuation of the amortisation of goodwill
with the treatment of internally generated goodwill and the effects of goodwill impairment
in times of financial crises. This part was primarily targeted at standard setters andregulators.
22. A slight majority of respondents (including those from national standards setters)
agreed that conceptually not recognising any reduction of value – other than that due
to recognition of impairment losses – on the acquired goodwill means that internallygenerated goodwill is recognised to replace the acquired goodwill that had been‘consumed’. Moreover many thought that there were no significant conceptual reasons
to adopt a different approach for other intangibles and goodwill.
23. In relation to the perceived effects of goodwill impairment in times of financial crises, amajority of respondents (including national standards setters) thought that it could havepro-cyclical effects. Different views were expressed on whether effect on the macro
economy should be considered when developing accounting standards. However, those
who thought that impairment requirements were pro cyclical explained that:(a)no amortisation would lead to higher prices for entities; and(b)

impairment losses were usually recognised very late when business prospects had
already worsened.

24. Part 3 enquired about the costs and complexity of the impairment test and was primarily
targeted at preparers of financial statements.

13
Should Goodwill still not be Amortised?

20. Respondents were also asked about the usefulness of the accounting information on the
impairment of goodwill. Some thought the information was useful, for example, because
it provided information on key planning assumptions for each CGU. Others noted thatusers had expected impairment losses before they were recognised in the financial
statements, and the information was therefore considered of limited use.

Accounting and Disclosure for Goodwill

19. Respondents provided many different reasons for using or not using information about
goodwill. Some of the respondents that did not use the information thought that it was too
uncertain (since it is unclear what goodwill includes, or the calculation was consideredunreliable) or did not find the information useful for their projections. Other respondents
used the reported goodwill or the goodwill disclosures when assessing risks, future cash
flows and stewardship. A group of respondents suggested that goodwill should be bothamortised and reviewed for impairment in order to make the information more useful.
Other suggestions included additional disclosures, immediate write-off of goodwill
against equity or measuring goodwill as the difference between the book value of equity
and the (long-term) market value of equity.

Accounting and Disclosure for Goodwill

25. A slight majority of preparers responding to this question thought that costs to comply
with IAS 36 were significant. These costs were mainly due to the perceived complexityof IAS 36 requirements. Some thought the costs could be reduced by taking one or a
combination of the following approaches:

Should Goodwill still not be Amortised?

14

(a)

allowing/requiring amortisation of goodwill;(b)limiting the impairment test to when there was an indication of impairment;(c)reducing the frequency of the impairment test;(d)only requiring an impairment test when the book value of equity compared with themarket capitalisation of the company exceeded a given threshold;(e)introducing a less prescriptive approach or a standardised approach; and(f)clarifying the requirements.

26. Moreover, a slight majority of the preparers indicated that, according to their experience
with the application of IFRSs, they considered the estimation of the recoverable amountof goodwill more challenging – and burdensome – than the estimation of the pattern ofconsumption of goodwill (including estimation of the useful life).
27. Part 4 enquired about the auditability of the application of impairment testing and was
primarily targeted at auditors.
28. Some respondents found that while it was possible to challenge management’s
assumptions, it was difficult to disprove them conclusively even when the assumptions
seemed unduly optimistic or were not supported by historical performance. This was
because management were directly involved in the business and clearly had the best
and most current and relevant knowledge about their industry and the entity’s plans.
Others thought it was not more difficult to challenge the impairment test than othertypes of estimates included in the financial statements. Different suggestions on how
to improve the auditability were provided by respondents, with many suggesting more
disclosures.
29. Part 5 enquired about academic or institutional research relating to the impairmentof goodwill, and was primarily targeted at academics. Respondents provided somereferences.
30. A feedback statement is available at the following link http://www.efrag.org/Front/p2651-272/Consultations---Questionnaire-on-goodwill-impairment-and-amortisation.aspx.

ASBJ survey

the ASBJ’s questionnaire was designed for those people who have sufficientknowledge and experience about Japanese accounting standards. Japanese
accounting standards require an entity to amortise acquired goodwill over a
maximum period of 20 years. It also requires an entity to recognise impairment
losses when a specified threshold is met;(b)

the ASBJ’s questionnaire included a section designed for all stakeholders. In
this section, questions were asked about stakeholders’ views on general matterssuch as theoretical benefits and drawbacks of the amortisation and impairment
approach as well as the impairment-only approach.

32. Notwithstanding a very short comment period, the ASBJ received twenty-six responses(12 from financial statement preparers, 8 from financial statements users, 4 from auditors,
and 2 from academics), which demonstrates the strong interest in this topic among
Japanese stakeholders. In parallel, the ASBJ organised a roundtable, and invited key
stakeholders (4 financial statements users, 4 financial statements preparers, two auditorsand one academic) to attend. The key findings from the questionnaire and round table
are explained in the following paragraphs.
33. Views as to the amortisation and impairment approach vs. the impairment-only approach:
Stakeholders expressed mixed views as to whether goodwill should be amortised.
For example, a financial statement user stated that amounts of amortisation (a noncash flow expense) were disregarded in his analysis, while others expressed concernthat impairment charges were untimely. On the other hand, most financial statement
preparers stated that non-amortisation did not properly portray the economic substanceof acquired goodwill subsequent to the business combination, primarily because
acquired goodwill would be consumed and replaced with internally generated goodwill
over time, and non-amortisation failed to reflect the matching relationship between costs
and incomes in subsequent periods.
34. Use of financial information relating to goodwill: Various examples were cited as to how the
goodwill information is used. One user stated that the information was used to determine
or confirm the entity’s capital adequacy, the appropriateness of the management’s
judgment on the purchase consideration and the appropriateness of management’s
expectation about future cash flows from the acquired business. In addition, one userstated that sources of goodwill were carefully examined in determining whether anentity’s capital was adequate, noting that adequate disclosures were important in thisrespect.

6

The ASBJ’s questionnaire consists of (a) Part 1: questions to all stakeholders, (b) Part 2: questions to financial statements users, (c)Part 3: Questions to financial statements preparers, (d) Part 4: Questions to auditors, (e) Part 5: Questions to academics.

15
Should Goodwill still not be Amortised?

(a)

Accounting and Disclosure for Goodwill

31. The ASBJ conducted its own survey using a similar format. However, the ASBJ’squestionnaire6 differs in the following respects:

35. Cost and complexity of the impairment test: Stakeholders were not particularly
concerned about the cost and complexity, because the requirement in Japanese GAAP
to amortise the goodwill over a period not exceeding twenty years lessened the burden
and sensitivity of the test.
36. Difficulties in auditing the impairment test: Stakeholders noted a number of challenges dueto the high level of judgment used in impairment testing and made several suggestions
to improve auditability.

Accounting and Disclosure for Goodwill

37. A feedback statement is available at the following link (available only in Japanese)
https://www.asb.or.jp/asb/asb_j/press_release/domestic/sme21/sme21.pdf.

Should Goodwill still not be Amortised?

16

Other surveys
38. As requested by the Ministry of Corporate Affairs of India, the Institute of Chartered
Accountants of India (the ICAI) conducted a study of goodwill recognised in consolidated
financial statements in respect of the top 100 listed companies in India for the financial
year 2012-2013. The relevant existing Indian Accounting Standard (AS 21) dealing withconsolidated financial statements does not specifically require or prohibit amortisationof goodwill arising from the acquisition of a subsidiary. Under the existing Indian
Accounting Standards the impairment of goodwill is covered by the Accounting Standard
corresponding to IAS 36.
39. The observations are summarised hereunder:(a)out of 100 companies included in the sample, data for 98 companies was available;(b)

60 companies reported goodwill in their consolidated financial statements;(c)

58 companies tested goodwill for impairment and 2 companies amortised goodwill;(d)

8 companies recognised an impairment loss out of 58 companies that tested
goodwill for impairment;(e)only 1 company justified the basis for arriving at the impairment loss; and(f)none of the 50 companies that did not recognise any impairment loss on goodwill,
disclosed the basis for their conclusion.

40. In April 2014, KPMG published the report titled ‘Who cares about goodwill impairment?’
The report identified challenges for the current impairment model in IAS 36, and suggested
alternative approaches including reintroduction of the straight-line amortisation
approach. The report explained that the reasons provided by interviewees included
simplicity, prudence and reducing reliance on forecasting subjectivity.

Summary of messages

43. Moreover, the surveys have shown that respondents were split on whether the impairment
model for goodwill was pro-cyclical. Mixed views were presented on whether amortisationof goodwill would be beneficial or not. For example, some respondents believed thatwhen the economic cycle is neither in recession nor in expansion, the impairment test
is not able to identify any entity-specific negative effects. This would mean that the
impairment losses are recognised only when the economic cycle has changed or whenthe entity is no longer able to restore its specific ability to create value.
44. In January 2013, the ESMA published a report titled “European enforcers review ofimpairment of goodwill and other intangible assets in the IFRS financial statements”.
ESMA’s report indicated that in the financial crisis, market participants expressed
concerns about the reliability of goodwill impairment tests. In addition, IASB Chairman
Hans Hoogervorst at the IAAER conference in June 2012 recognised that goodwill
impairment often came too late during the financial crisis.

CONCLUSION
45. The Research Group considered three different approaches to solving these issues:(a)changing the accounting treatment of goodwill, including the reintroduction of theamortisation;(b)

improving the requirements for the impairment test; and(c)

improving the disclosure requirements currently specified by IAS 36.

46. The Research Group notes that these approaches are not mutually exclusive, and it
is likely that taking measures that consider all of the approaches would contribute tosolving the problems identified.

17
Should Goodwill still not be Amortised?

42. Some respondents found application problems. They believed that the current
requirements are costly and involve much judgment due to the assumptions required
and therefore the information is not relevant for users. Moreover, some respondents
found it difficult to challenge management’s impairment tests. In addition, preparers
have indicated that costs to comply with IAS 36 are significant and that, according
to their experience with the application of IFRSs, they consider the estimation of therecoverable amount of goodwill more challenging and burdensome than the estimationof the pattern of consumption of goodwill (including estimation of the useful life).

Accounting and Disclosure for Goodwill

41. Although responses were not unanimous, the Research Group found that common
themes emerged from the feedback. In particular, the results of the surveys showed ashared view that the informational content of impairment losses only has confirmativevalue (rather than being both confirmative and predictive), and that the impairment-only
approach has conceptual shortcomings as it results in recognising internally generated
goodwill. Further, some respondents believed that the impairment testing did not reflect
timely the negative performance of an entity.

Chapter Two: Changing Accounting Requirements for Goodwill

Accounting and Disclosure for Goodwill

47. In the following paragraphs, the Research Group will explore possible alternative
approaches to the impairment-only approach, taking into account the approaches thathave been considered previously as well as recent discussions relating to the accounting
requirements of goodwill7. Alternative approaches are as follows:

Should Goodwill still not be Amortised?

18

(a)

‘discernible-element’ approach by separating goodwill into different components
and applying different treatments thereto;(b)‘direct write-off’ approach by immediately charging the goodwill to profit or loss on
the acquisition date;(c)‘direct write-off’ approach by immediately charging the goodwill to equity on theacquisition date; and(d)‘amortisation and impairment’ approach.

48. The Research Group thinks that cost-benefit is an important consideration in thedevelopment of accounting standards, but in this case decided to focus primarily on
promoting the relevance of financial information relating to acquired goodwill that arises
from business combinations.

DISCERNIBLE ELEMENT APPROACH
49. Acquired goodwill can be viewed from either of the following two general perspectives8:(a)a ‘top-down perspective’, which views goodwill as being a component or subsetof something larger. Following the perspective, goodwill is perceived as what is left
over; or(b)a ‘bottom-up perspective’, which views goodwill in terms of the components thatmake it up. According to this view, if the price paid by the acquirer exceeds thefair value of the net identifiable assets of the acquiree, presumably some otherresources were acquired that have value to the acquirer. In this context, goodwill
can be interpreted as the ‘purchase premium’, the premium paid by the acquirer
over the book value of the acquiree’s net assets.

50. Theoretically, under the bottom-up perspective, acquired goodwill should arguably
be separated into different components and different accounting treatment should beapplied to each component. For example, the Basis for Conclusions in IFRS 3 states that
arguably goodwill consists of the following components:

7

8

For example, see the Issue Paper, Proposal of Alternatives for Goodwill Accounting, which was presented by Shinhan Financial Groupof Korea for the Emerging Economies Group meeting of May 2013.
Paragraphs 49 to 52 of this paper draw extensively on L. Todd Johnson and Kimberly R. Petrone “Commentary: Is Goodwill an Asset’,
Accounting Horizons, Vol. 12 (3), September 1998.

(b)Component 2—The fair value of other net assets that the acquiree had not previously
recognised (e.g., intangible assets that are not recognised due to measurement
difficulties).

(c)Component 3—The fair value of the going concern element of the acquiree’s
existing business, reflecting on the ability of the acquiree as a standalone businessto earn a higher rate of return on an organised collection of net assets than would
be expected if those net assets had to be acquired separately (often referred to as
the ‘going-concern goodwill’).

(d)Component 4—The fair value of the expected synergies and other benefits fromcombining the acquirer’s and acquiree’s net assets and businesses (often referred
to as the ‘combination goodwill’).

(e)Component 5—Overvaluation of the consideration paid by the acquirer stemmingfrom errors in valuing the consideration tendered.

(f)Component 6—Overpayment or underpayment by the acquirer.

51. Arguably, Components 1 and 2 are conceptually not part of ‘core-goodwill’ (whichstakeholders refer to as ‘excess earning power’). Specifically, Component 1 would not
be an asset itself but it represents gains that were not reflected by the acquiree on its
net assets; thus, it is part of other assets rather than part of core-goodwill. In addition,
Component 2 would conceptually be part of the intangible assets that might have been
separately identified and recognised as individual assets. In the Research Group’s
understanding, Components 1 and 2 may end up being included in goodwill, becausesome intangible assets are not recognised at acquisition date and some assets andliabilities are not measured at their acquisition date fair value.
52. Component 59 would not be an asset but rather a measurement error by the acquirer.
Conceptually, the Research Group thinks that Component 5 should be charged to profit
or loss immediately, because it would not meet the definition of an asset10 under The
Conceptual Framework for Financial Reporting (the Conceptual Framework). However,in practice any overvaluation is unlikely to be detectable or known. Component 6 would
also not conceptually be an asset, but rather it simply represents a loss (in the case of
overpayment) or a gain (in the case of underpayment) to the acquirer. In theory a rationaleacquirer should not overpay on purpose but some argue that overpayment by acquirers
occurs especially in the presence of multiple bidders, and accounting standards should
not neglect such an overpayment.

This might arise from the situation where value placed on the consideration is based on the current market price of the stock and thenumber of shares being traded is relatively small.
10
Paragraph 4.4 of the existing Conceptual Framework states that an asset is a resource controlled by the entity as a result of 		
past events and from which future economic benefits are expected to flow to the entity.
9

Accounting and Disclosure for Goodwill

Component 1—The excess of the fair value over the book value of the acquiree’s
net assets at the date of acquisition.

19
Should Goodwill still not be Amortised?

(a)Accounting and Disclosure for Goodwill

53. On the other hand, Components 3 and 4 would be considered as ‘core-goodwill’.
Component 3 would be considered as the excess earning power that existed in theacquiree before the acquisition, irrespective of the business combination. Component
4 would be considered as the newly generated excess earning power as a result of
the business combination, because it enables the combination of the excess earning
powers of the acquiree and the acquirer.

Should Goodwill still not be Amortised?

20

54. Conceptually, it might be possible to require different accounting treatments for thedifferent components. The portion of goodwill relating to going-concern goodwill andcombination goodwill (that is, Components 3 and 4), for example, could be amortisedover the weighted-average useful life of these components, while Components 5 and 6
should be immediately expensed. However, the question is how complex it would be to
apply the discernible element approach in practice.
55. The Research Group explored if it would be possible to separate goodwill into different
components (including the possible way to identify any portion that represents anoverpayment). For example, it might be possible to identify such a portion by comparing
the valuation of an acquiree (for example, a valuation by an independent expert) to theconsideration paid.
56. However, this approach would involve numerous subjective judgments in identifying
discernible elements. In addition, requiring an entity to compare the amounts assuggested in the previous paragraph may be inconsistent with the principle in IFRS 13
Fair Value Measurement that an entity shall maximise the use of relevant observable
inputs and minimise the use of unobservable inputs to meet the objective of fair value
measurement. Furthermore, the benefit of requiring a third party valuation for this purpose
may not in itself outweigh the cost, while existing accounting requirements are alreadycriticised for being too complex and costly.
57. Therefore, the Research Group concluded that the discernible element approach would
not be sufficiently practical to implement.
58. It should be noted that, with reference to Component 1, goodwill arises partly in relation
to the recognition of deferred tax liabilities. This is because while other assets andliabilities are principally measured at fair value in business combinations, deferred tax
assets and liabilities are required to be measured in accordance with IAS 12 Income
Taxes (for example, without regard to the time value of money) and this component
sometimes is significant. In theory, it would be appropriate to amortise this component
in the same period in which the related deferred tax liabilities reverse.

Level 1

60. Prior to the issuance of FRS 10, UK Accounting Standards Committee’s Statement ofStandard Accounting Practice (SSAP) No.22 Accounting for Goodwill even permitted
purchased goodwill to be immediately eliminated against reserves, because it wasthought that an immediate write-off was consistent with the requirement to not recogniseinternally generated goodwill, and that goodwill itself is not a right to future economic
benefits controlled by the entity.
61. However, many disagree with the approach because they believe that acquired goodwill
meets the criteria for recognition of an asset under the Conceptual Framework. In thefollowing paragraphs, the Research Group considers whether acquired goodwill actuallyqualifies for recognition as an asset under the existing Conceptual Framework andthe proposed definition in the IASB’s Discussion Paper A Review of the Conceptual
Framework for Financial Reporting (the Conceptual Framework DP)11.
Does acquired goodwill meet the definition of an asset?
Table 1: Relevant Definitions under the Conceptual Framework and the Conceptual
Framework DP
Definitions

Existing definitions

Proposed definitions

Asset (of anentity)A resource controlled by theentity as a result of past eventsand from which future economic
benefits are expected to flow tothe entity.

A present economic resource
controlled by the entity as aresult of past events.

[No existing definition]

A right, or other source ofvalue, that is capable ofproducing economic benefits.

Economic
resource

11

For internally generated goodwill, paragraph 4.26 (e) of the Conceptual Framework DP explained that it should not be recognised
because it does not meet the objective of financial reporting (paragraph OB7 of the Conceptual Framework).

21
Should Goodwill still not be Amortised?

59. Some have argued that goodwill acquired in a business combination should be expensed
at the time of acquisition because it does not meet the definition of an asset under therespective Conceptual Frameworks. In Financial Reporting Standard No.10, Goodwill
and Intangible Assets (FRS 10) published in 1997, the UK Accounting Standards Board
took the position that goodwill is neither an asset nor an immediate loss in value but israther a bridge between the cost of investment shown as an asset in the acquirer’s own
financial statements and the value attributed to the acquired assets and liabilities in the
consolidated financial statements. FRS 10 requires to determine if purchased goodwill
has an indefinite or a limited useful life, and to amortise it when goodwill is deemed tohave a limited useful life.

Accounting and Disclosure for Goodwill

DIRECT WRITE-OFF APPROACH: IMMEDIATELY CHARGING THE
GOODWILL TO PROFIT OR LOSS

Accounting and Disclosure for Goodwill

62. The difficulty of the argument is due to the uncertain nature of goodwill. In fact, somebelieve that acquired goodwill does not meet the definition of an asset because they
focus on components other than the ‘core-goodwill’. For example, some are of the viewthat consideration amounts are often overpaid in business combinations, especially when
consideration is paid in the acquiring entity’s own equity instruments. In addition, someinterpret the definition of an asset narrowly (for example, some believe that goodwill is
not an asset because it cannot be sold separately).
63. However, the Research Group believes that it is reasonable to assume that the primary
component of goodwill is ‘core-goodwill’, because IFRSs try to avoid the inclusion ofComponents 1, 2 and 5 in the initial measurement of goodwill by requiring an entity tomake every effort:(a)to recognise the identifiable net assets acquired at their fair values rather than theircarrying amounts, thereby eliminating or reducing Component 1;(b)

to recognise all acquired intangible assets meeting the criteria in IFRS 3 so thatthey are not subsumed into the amount initially recognised as goodwill, thereby
reducing Component 2; and(c)to measure the consideration accurately, thereby eliminating or reducing
Component 5.

Should Goodwill still not be Amortised?

22

64. In addition, exchangeability is not a criterion identified in the definition of an asset in
the Conceptual Framework. Furthermore, consistent with paragraph 58 of IFRS 13,
the Research Group believes that the transaction price should be deemed to equal
fair value. IFRS 13 describes the situations in which the transaction price might not
represent the fair value of an asset or a liability at initial recognition12, but the ResearchGroup believes that business combinations discussed in this paper do not meet any of
the situations identified in the Standard. Above all, the Research Group considers thatthe transaction price should normally be deemed to be fair value (because businesscombinations are conducted at arm’s length) and the presumption can only be rebuttedin limited circumstances based on careful consideration of individual transactions.
65. Having presumed that acquired goodwill primarily consists of ‘core-goodwill’, theResearch Group thinks that it meets the definition of an asset under the relevant
definitions (see Table 1) in the existing Conceptual Framework, because:(a)12

it is a resource controlled by the entity. The control is provided by means of theacquirer’s ownership of a controlling interest in the acquired entity;

Paragraph B4 of IFRS 13 describes the following situations:(a) The transaction is between related parties.
(b) The transaction takes place under duress or the seller is forced to accept the price in the transaction.
(c) The unit of account represented by the transaction price is different from the unit of account for the asset or liability measured at fair value.
(d) The market in which the transaction takes place is different from the principal market.

(b)it results from a past event, that is the business combination; and(c)although future economic benefits are not expected to flow to the entity from thecore-goodwill itself, future economic benefits are expected to flow to the entity
in combination with other assets and they will contribute indirectly to future cash
flows. The Conceptual Framework explicitly supports this view.

it is a present source of value, which is capable of producing economic benefit.
This is because it is expected to produce economic benefits in combination withother assets;(b)

it is controlled by the entity. The control is provided by means of the acquirer’sownership of a controlling financial interest in the acquired entity’s equity; and(c)it results from a past event, which is the business combination.

Does acquired goodwill meet the recognition criteria?
Table 2: Recognition criteria of an asset under the Conceptual Framework
Criteria

Recognition of an asset

Existing
criteria

An entity recognises an item that meets the definition of an element if:(a) It is probable that any future economic benefit associated with
the item will flow to the entity; and(b) The item has a cost or value that can be measured withreliability.

Proposedcriteria

An entity should recognise all its assets. However, the IASB might
decide in developing or revising particular standards that an entity
need not, or should not recognise an asset:(a) If recognising the asset would provide users of financial
statements with information that is not relevant, or not
sufficiently relevant to justify the cost; or(b) If no measure of the asset (or the liability) would result in afaithful representation of the asset and of changes in theasset, even if all necessary descriptions and explanations aredisclosed.

23
Should Goodwill still not be Amortised?

(a)

Accounting and Disclosure for Goodwill

66. The Research Group also thinks that the ‘core-goodwill’ meets the proposed definitionof an asset in the Conceptual Framework DP (see Table 1), because:Accounting and Disclosure for Goodwill

67. With the presumption that acquired goodwill meets the definition of an asset, theResearch Group thinks that it would also meet the recognition criteria under the existing
Conceptual Framework (see Table 2), because:

Should Goodwill still not be Amortised?

24

(a)

with the synergies embodied in the ‘core-goodwill’, it is presumed that future
economic benefits associated with goodwill will flow to the entity; and(b)acquired goodwill can be measured at cost (or residual) with sufficient reliability.

68. In addition, the Research Group thinks that the ‘core-goodwill’ would meet the
proposed recognition threshold stated in the Conceptual Framework DP (see Table 2).
This is because while internally generated goodwill is used as an example of an itemthat should not be recognised, none of the examples given in paragraph 4.26 of theConceptual Framework DP (that explained limited situations where an asset should not
be recognised, although it meets the definition of an asset) refers to the core-goodwill
acquired in a business combination. Accordingly, the Research Group believes thatthe recognition filters with reference to relevance and faithful representation would notprevent an entity recognising ‘core-goodwill’.

DIRECT WRITE-OFF APPROACH: IMMEDIATELY CHARGING THE
GOODWILL TO EQUITY
69. Charging the goodwill immediately to equity on the acquisition date was one of theaccounting treatments permitted under IAS 22. Under this approach, goodwill acquired
in a business combination is immediately charged to equity13, without charging the effectthrough the statement of profit or loss and other comprehensive income (OCI).
70. In the previous section, the Research Group concluded that acquired goodwill should berecognised as an asset. Therefore, the Research Group is of the view that charging the
goodwill to equity is inappropriate.
71. In addition, the Research Group thinks that this approach is inappropriate because
this may cause confusion regarding the nature of the business combination (that is atransaction with a third party), and result in inconsistencies with definitions of ‘income’ and’expenses’ in the Conceptual Framework. This is because this approach would requireacquired goodwill (that is, the increase in economic benefit during the accounting period)
to be accounted for directly as the decrease in equity; however, business combinations
do not give rise to contributions from (or distributions to) equity participants. In addition,such a decrease cannot be explained as a capital maintenance adjustment.
72. Furthermore, if acquired goodwill were accounted for as a decrease in equity withoutcharging an expense to profit or loss, the result of the business combination would not
be faithfully represented in the statement of profit or loss and OCI, thereby impeding theproper reflection of financial performance.
13

Paragraph 23 of IAS 22(1983) states that goodwill is not an independently realisable asset, that it has an indeterminate life for which
any amortisation programme is arbitrary, and that, as self-generated goodwill is not recognised, it is inappropriate to recognise
goodwill arising on acquisition.

Other considerations

if goodwill initially had value, virtually no event other than a catastrophe could
subsequently occur in which it instantaneously became worthless;(b)although there are uncertainties associated with goodwill subsequent to initialrecognition, such uncertainties are not unique to goodwill;(c)an acquirer’s profit would be inflated in subsequent periods (including when all orpart of the acquired business is impaired or disposed of), and users of financial
statements may be misled without relevant disclosures. Many feel that this will
reduce the usefulness of financial information especially in light of the stewardship
perspective, because users have to adjust the financial figures when assessing
how efficiently and effectively an entity’s management and governing board havedischarged their responsibilities to use the entity’s resources. The immediate writeoff of goodwill in all instances would imply that there is no difference between
paying for the ‘core-goodwill’ or making overpayments in acquisitions;(d)an acquirer’s financial performance would always be negatively impacted in the
period when an entity acquires a business with premiums on it. Many feel this ascounter-intuitive;(e)an entity’s ability to pay dividends may be affected adversely, and its capitalstrength may be presented inappropriately;(f)the direct write-off approach creates an accounting arbitrage around identificationand measurement of other intangible assets. This would risk moving the issue fromthe impairment of goodwill to the impairment of the identified intangible assets; and(g)

if an entity writes off the goodwill immediately in its consolidated financial
statements, it would be difficult to determine the treatment for the separate financial
statements. It might be possible to require an entity to write off a portion of its
investment immediately, but it does not seem to comply with the general principles
in IFRS 9 Financial Instruments or IAS 39 Financial Instruments: Recognition
and Measurement. If an entity were required to immediately write off part of theinvestment on acquisition, an entity that acquires a subsidiary would face risks
of not meeting a minimum amount of shareholders’ equity as required by somelegislation or debt covenants, where the situation is essentially unchanged upon
the acquisition. At the same time, the inconsistency that would arise if an entity
were to immediately expense goodwill in its consolidated financial statements andtreat it as part of an asset in its separate financial statements would be difficult tojustify on a conceptual or practical level.

25
Should Goodwill still not be Amortised?

(a)

Accounting and Disclosure for Goodwill

73. The Research Group also thinks that the direct write-off approach has the following
disadvantages:

AMORTISATION AND IMPAIRMENT APPROACH
Background

Accounting and Disclosure for Goodwill

74. As stated in paragraph 13 of this paper, many stakeholders acknowledged that theamortisation and impairment approach would be conceptually the most appropriate
approach during the IASB’s consultation leading up to the publication of IFRS 3 in 2004.
This is because, in many cases, the excess earning power (which is essentially the ‘coregoodwill’) is presumed to decrease over time through competition with others. However,the IASB decided not to adopt this approach.
75. Some support the amortisation and impairment approach, primarily for the following
reasons:(a)acquired goodwill is an asset that is consumed and replaced with internally generated
goodwill over time. Unless acquired goodwill is amortised over subsequent
periods, it would not be possible to reflect the economics related to the acquisitiontransaction in the financial statements, because financial statements would failto reflect the matching relationship between costs and incomes in subsequent
periods;(b)even if the useful life of acquired goodwill or the pattern in which goodwill diminishes
cannot be predicted with accuracy, the same argument would apply to property,
plant and equipment, for which depreciation is required; and(c)although the amortisation charge may only be an approximate estimate of theactual decrease in acquired goodwill during the period, users can be expected tounderstand the limitations of the amount if it is presented separately in the income
statement.

Should Goodwill still not be Amortised?

26

76. On the other hand, others argue against the amortisation and impairment approach forthe following reasons:(a)the useful life of acquired goodwill and the pattern in which it diminishes generally
are not possible to predict, and the amortisation charge over any given period is only
an arbitrary estimate of the consumption of acquired goodwill during that period;(b)many analysts stated that they ignored goodwill amortisation expense in theiranalysis, and many entities ignored goodwill amortisation expense in measuring
operating performance; and(c)the increases in reported earnings in periods after amortisation of goodwill iscompleted may not be considered to be representationally faithful, because suchincreases in earnings arise from the cessation of prior ‘doubling-up’ of expenses
related to goodwill.

Level 1(a)developing conceptual and operational criteria to identify these conditions would
be highly complex and difficult; and(b)allowing an option to amortise would impair comparability of financial information.

Review of academic literature
79. The Research Group believes that one of the major challenges for the amortisationand impairment approach is how to determine the appropriate period of time overwhich goodwill should be amortised14. In addition, some stakeholders have stated that
excess earning power quickly becomes obsolete, particularly considering the speed oftechnological advancements. Therefore, the Research Group carried out a limited review
of academic literature to identify any findings to the following questions:

14

(a)

Is there any evidence that suggests that excess earning power diminishes (or does
not diminish) over time?

(b)

If excess earning power diminishes over time, is there any academic literature that
identifies a specific period over which it would diminish?

It is considered that if the pattern in which goodwill’s future economic benefits are expected to be consumed by the entity cannot
be determined reliably, the straight-line method may be used by analogy with an intangible asset having a finite useful life (paragraph
97 of IAS 38).

27
Should Goodwill still not be Amortised?

78. There might be a variation to the amortisation and impairment approach, which is torequire (or permit) amortisation only in certain conditions. However, this approach has
the following disadvantages:

Accounting and Disclosure for Goodwill

77. In addition, others may argue that even if the amortisation and impairment approachwere to be reinstated, the assessment of an appropriate amortisation period may differ
depending on the emphasis on the ‘stewardship’ objective. Specifically, there is a viewthat a shorter period would be appropriate from the stewardship perspective. However,the Research Group is inclined to think that the decision of appropriate amortisation
period would not differ based on which objective should be emphasised especially wherean entity is required to review the amortisation period at least each financial year-end.
The recent discussion of the Conceptual Framework indicates that accounting judgment
would rarely differ depending on which objective is emphasised.

Accounting and Disclosure for Goodwill

80. Although the findings were not uniform, the Research Group noted that several studies
found that excess earning power diminished over time with the period varying from 3
to 10 years. Among others, the Research Group found the following papers particularly
relevan15.
(a)Jennings et al. (2001): This article discussed a study which surveyed data of
the U.S. publicly traded companies that reported goodwill assets in the periodof 1993 to 1998. The study reported that earnings before goodwill amortisation
can explain the observed distribution of share prices better than earnings after
goodwill amortisation. The study also found that goodwill amortisation adds noise
to the analysis of share valuations based on earnings alone. The study stated thatthese results suggest that abolishing goodwill amortisation would not reduce theusefulness of earnings;(b)

Fama and French (2000): This article discussed a study that tested data in the
period of 1964 to 1995. The study found evidence that profitability is mean reverting(in a simple partial adjustment model, the estimated rate of mean reversion isabout 38% per year). The study also concluded that the rate of mean reversion isfaster when profitability is below its mean and when it is far from its mean in either
direction. The study also found that there is also a predictable variation in earnings;
in particular, the study reported that negative changes in earnings and extremechanges tend to reverse faster;(c)

Bugeja and Gallery (2006): This article discussed a study that surveyed 475
Australian companies in the periods of 1995 to 199916. The study classified
goodwill into those acquired in the previous two years, and those acquired threeor more years ago. The study reported that the analysis showed that goodwill
acquired in the observation period and each of the prior two years were positively
associated with entities’ values, but there was no meaningful level of association
between goodwill acquired more than two years ago and the entities’ values. The
study concluded that the absence of a meaningful relationship may suggest that
goodwill recognised more than two years ago was not considered as an asset byinvestors;(d)Ojala (2007): This article discussed a study that conducted analysis on 114 Finnish
companies17. The study concluded that the evidence showed that the value of
information about the goodwill balance, the amortisation expense and related
impairment losses were more relevant if an entity applied an amortisation period
less than 5 years than using a longer period as an amortisation period. The study
concluded that the practice of goodwill amortisation provided relevant information
to investors, when amortisation periods were kept sufficiently short in order tobetter reflect the economic life of the underlying assets;

Should Goodwill still not be Amortised?

28

The Research Group notes that the summary of the articles in this paper is not intended to describe the whole story in the articles.
Rather, it is the summary of the Research Group’s understanding based on its reading.
16
Prior to the adoption of IFRS in January 2005, under Australian accounting standards, acquired goodwill was subject to amortisation
over a period not exceeding 20 years on a straight-line basis, and the balance of goodwill was required to be reviewed annually andwritten down to the extent that future economic benefits were no longer probable.
17
The previous other literature often surveyed companies that were subject to US GAAP, which requires amortisation over period up
to 40 years. To the contrary, Finish accounting standards required amortisation period up to 20 years.
15

(e)

Obinata (2013): This article reported the outcome of his study which showed thatthe value of goodwill generally corresponds to the size of excess earning powerover its mean in the industry. The study therefore concluded that goodwill should
be amortised systematically, if the profitability is mean reverting and the excess
earning power diminishes in a consistent manner. As a result of analysis on sample
data of Japanese companies, this study further concluded that a positive goodwill
balance should be amortised periodically over five to ten years, so as to reflect theunderlying economic substance.

(a)

it is difficult to estimate the period with perfect accuracy, but it would be possible
to reasonably estimate the period. This is because an entity usually goes throughin-depth discussion and analysis about the period over which the investment will
be recovered (or a pay-back period) and this would provide a good starting point
to estimate the period over which the excess earning power will diminish;(b)

the 40-years period stipulated in APB Opinion No.17 would be too long, consideringthat the nature of business has changed significantly since then. A 20-years period
may still be too long in many cases, considering the rapid changes in businessenvironments (especially in the IT business industry), although there are cases
where this presumption could be justified; and(c)considering the uniqueness of each business combination, it would be arbitrary
to stipulate a specific number of years over which acquired goodwill should beamortised. It may however be reasonable to include a maximum duration, while
requiring an entity to estimate the period based on relevant facts and circumstances.
Establishing a rebuttable presumption could also be explored.

29
Should Goodwill still not be Amortised?

81. The Research Group reached out to stakeholders to seek their views on whether thereasonable period over which excess earning power will diminish can be estimated.
During the discussion, the Research Group heard the following comments:

Accounting and Disclosure for Goodwill

Discussion with stakeholders

CONCLUSION

Accounting and Disclosure for Goodwill

82. As explained in paragraphs 49 to 78 of this paper, the Research Group investigatedwhether there are approaches that remedy shortcomings of the current impairment-only
approach as identified in the responses to its survey. Based on its analysis, the ResearchGroup concluded that:(a)the discernible-element approach would be impracticable to implement, although
it has conceptual merits;(b)the direct write-off approach (immediate charge of the goodwill to profit or loss)
implies that acquired goodwill is not an asset. Whilst it can be debated whether
goodwill is or is not an asset, the Research Group concluded that it would meetthe recognition criteria both under the existing Conceptual Framework as well as
the proposal in the Conceptual Framework DP; and(c)the Research Group reached a similar conclusion in relation to the direct write-off
to equity. Moreover, the Research Group identified additional conceptual problems
with regard to the definition of incomes and expenses.

Should Goodwill still not be Amortised?

30

83. The Research Group therefore concluded in favour of an amortisation and impairment
approach. Some may disagree with the re-introduction of amortisation for the reasonsstated in paragraph 76 of this paper. However, in relation to these arguments, theResearch Group believes that:(a)as explained in paragraph 81 of this paper, stakeholders has indicated that although
it is difficult to estimate the period over which excess earning power will diminish
with perfect accuracy, it would be possible to reasonably estimate the period;(b)in relation to the information content of the amortisation of goodwill, the input
collected from analysts indicates that even if amortisation may have no information
content, neither the recognition of impairment losses would have predictive value;
and

(c)

although some may feel that amortisation expense and costs to maintain the excess
earning power are doubled up, this is also the case for other assets, including
intangible assets separately recognised in a business combination (e.g., thoserelating to customer relationship).

establishing an overall principle that the goodwill should be amortised over theperiod in which the goodwill recognised from a business combination is expected
to give rise to its effect;(b)

requiring that the entity base its assessment on relevant information that is available
including information about current conditions and reasonable and supportable
forecasts, but give greater weight to objective evidence of conditions that affect theperiod in which the goodwill recognised from a business combination is expected
to give rise to its effect;(c)

providing guidance that an entity would normally consider the following factors indetermining the amortisation period:
(i)

(d)

the expected period in which the acquirer expects the acquired business toearn a higher rate of return as a standalone business. In addition, dependingon the situations, the period over which synergies and other benefits fromcombining the acquirer’s and acquiree’s net assets and businesses will be
realised may also be considered. Consideration of this factor does not meanthat an entity should presume an indefinite amortisation period, if it uses
terminal value in calculating the present value of an acquirer’s ability to earna higher rate of return;(ii)

the expected payback period of the investment on a business combination,
which is normally estimated at the time when the business combination takes
place. However, the payback period itself would not meet the definition ofan amortisation period, and an entity would need to make the appropriate
adjustments in determining the amortisation period; and(iii)

the useful life of the primary asset (or the weighted-average useful life ofgroup of assets) which is the primary identifiable long-lived asset, including
intangibles, from the use of which the entity is expected to derive its
future cash flows. This may be especially valid when an entity’s operation
significantly relies on a particular asset (or a group of assets) and there is areasonable correlation between the period over which the excess earning
power diminishes and the useful life of the particular asset (or a group ofassets); andrequiring that the entity reviews the amortisation period when necessary byconsidering whether there have been significant changes in technology, commercial
innovation, or market demand for products or services (both already occurred orreasonably expected in the future) since the business combination.

31
Should Goodwill still not be Amortised?

(a)

Accounting and Disclosure for Goodwill

84. Based on the articles above and the results of the discussion with stakeholders, theResearch Group thinks that the following requirements would enable entities to estimate
the amortisation period of acquired goodwill in a reasonable way:

Accounting and Disclosure for Goodwill

85. The Research Group also favours establishing a rebuttable presumption that theamortisation period should not exceed a maximum amount of years (for example, ten
or twenty years). Some may argue that setting ten or twenty years seems too long,
given the results of academic literature on the consumption of the excess earning power.
However, in the Research Group’s view, the presumption should capture a maximum
period, while the academic literature focused on an average period of consumption of
the excess earning power.

87. Nevertheless, reintroduction of amortisation does not replace the need for a robust
impairment model, its rigorous application and appropriate disclosure requirements18.
These will be explored more in detail in the following chapters.

Should Goodwill still not be Amortised?

32

86. Based on the discussion above, the Research Group believes that the reintroductionof goodwill amortisation would be appropriate, because it reasonably reflects theconsumption of the economic resource acquired in the business combination over time,and can be applied in a way that achieves an adequate level of verifiability and reliability.
The Research Group acknowledges the argument that the actual pattern of consumptionof the benefits of the acquisition is difficult to predict and may not be constant over time.
However, the Research Group thinks that overall systematic amortisation on a straightline basis would meet an appropriate balance between faithful representation and cost.

18

For example, disclosure requirements that assist users to assess the quality of goodwill as of the period end.

Chapter Three: Improvements in the existing impairment test

BACKGROUND

90. Paragraphs 104 and 105 of IAS 36 require allocating any impairment loss first to the
goodwill of the CGU (group of units) before it is allocated to other assets within theunit (or group of units) on a pro-rata basis, as long as it does not reduce any asset
below the highest of its recoverable amount and zero. The impairment loss is recognised
immediately in profit or loss. Paragraph 124 of IAS 36 does not allow reversing impairment
losses for goodwill in subsequent periods.
91. The requirement in paragraph 107 of IAS 38 not to amortise intangible assets withindefinite useful lives was a radical change from the prior requirements. Previously, IFRS
required amortisation of goodwill over its useful life. The reasons for discontinuing theamortisation of goodwill are described in paragraphs 11 and 14 of this DP.

RECENT DISCUSSIONS ABOUT THE CURRENT IMPAIRMENT TEST
92. Although IAS 36 requires an annual goodwill impairment test and a one-step impairment
test, it still allows discretion in making a number of choices in relation to impairment.
This view is supported by studies showing how principle-based standards could beapplied in different ways and at different times. This is due to differences both in terms ofaccounting practices, i.e. the difference between de jure harmonization (harmonization
rules) and de facto harmonization (harmonization practices), and in terms of countryspecific factors such as legal, fiscal, cultural and political values (Ashiq and Lee-Seok
2000, Laghi 2006, Swanson, Singer and Downs, 2007; Glaum et al. 2013).

33
Should Goodwill still not be Amortised?

89. At the date of acquisition, paragraph 80 of IAS 36 requires allocating goodwill to eachof the acquirer’s CGU, or groups of CGUs expected to benefit from the synergies ofthe business combination. Each CGU or group of CGUs to which goodwill is allocatedshould represent the lowest level within the entity at which goodwill is monitored forinternal management purposes.

Accounting and Disclosure for Goodwill

88. As mentioned above, under IFRS 3 goodwill is not amortised and is subject toimpairment testing at least annually, or whenever there is an indication that it is impaired.
The impairment test requires comparing the carrying amount to the recoverable value.
Paragraph 18 of IAS 36 defines the recoverable amount as the higher of an asset’s or
CGU’s fair value less costs to sell (FVLCTS) and its value in use (VIU).

Accounting and Disclosure for Goodwill

93. As mentioned above, the surveys conducted by OIC-EFRAG, the ASBJ’s survey andthe discussions on this project held at the recent IFASS meetings have highlighted thefollowing issues related to the existing accounting treatment:

Should Goodwill still not be Amortised?

34

(a)

the impairment-only approach leaves significant room for managerial discretion,interpretation, judgment and bias and in fact it may result in the entity failing torecognise an incurred impairment loss; and(b)

the financial crisis has shown that an improvement of the current standard may benecessary. Specifically, many respondents stated that the IASB should investigate
whether the impairment test could be improved to ensure that entities use robust
and reliable assumptions so that impairment losses are recognised on a timely
basis.

94. In addition, other studies suggest how impairment losses may be recognised too little
and too late. In particular, Laghi et al. (2013) considered a sample of 3,112 companies
listed in the UK during the period 2008-2012, and showed that only 133 companies(4.2%) recognised an impairment loss higher than 5% of goodwill.
95. The same study considered a sample of 835 companies listed in the European Union thatrecognised an impairment loss in the period, and showed that only 53% recognised an
impairment loss higher than 5% of goodwill, although financial markets were depressed
during this period. Moreover, the impairment losses were recognised mainly in the period
2009-2011 later than the start of the financial crisis.
96. Finally, the results of this study show that the different European stock markets react
differently to impairment losses. In particular, the authors pointed out that the correlation
between impairment losses and stock price increases significantly during periodsof negative stress in financial markets. Moreover, the authors evidence the fact thatcountry-specific factors have a significant influence on the investment decisions ofmarket operators.
97. Based on these considerations, the Research Group investigated possible solutions toensure a more timely recognition of impairment losses and reduce the subjectivity andcost of the impairment test. This could be achieved in one of the following approaches,or with a combination of both:(a)excluding from the assessment of the recoverable amount the effects of goodwill
generated internally after the acquisition; or(b)reducing the use of judgment in the current IAS 36 requirements.

98. As mentioned above, it is argued that an impairment-only approach allows entities torecognise internally generated goodwill, in conflict with the requirements in paragraph
48 of IAS 38. Such an issue arises because while the recognised amount of goodwill
is determined based on the conditions at the date of the business combination, theimpairment test refers to the value of the business at a subsequent date. Such a difference
implies that, if no impairment loss is recognised, part of the newly internally generated
goodwill replaces the economic consumption of the acquired goodwill. This would
also give rise to comparability issues between entities that have undertaken businesscombinations, and as a consequence can recognise internally generated goodwill, andthose that cannot do it.
99. To avoid this, IAS 36 could be amended to require reassessing the recoverable amountbased on the conditions existing at the acquisition date, without considering thesubsequent changes in the business acquired. However, this approach would effectively
require a calculation of pro-forma future cash flows of a theoretical CGU.

Accounting and Disclosure for Goodwill

DEVELOPING AN IMPAIRMENT TESTING MODEL THATCONSIDERS ONLY ACQUIRED GOODWILL

100. Such an approach, if pursuable, would impose significant additional costs on the
preparers because the pro-forma numbers would only be used for the impairment test,
and could not be drawn from internal budgets and forecasts used for management
purposes. Therefore, the Research Group believes that such a solution is impracticable.
The Research Group is of the view that improving the impairment test model without
introducing amortisation cannot in any case solve the issue related to the recognition ofinternally generated goodwill.

REDUCING THE USE OF JUDGMENT IN THE CURRENTREQUIREMENTS
101. Respondents to the surveys have noted that the current IAS 36 in some cases provides
little or no specific guidance. Academic research (e.g. Glaum et al., 2013; Peterson etal., 2010) confirms that there is uncertainty as to how IAS 36’s requirements are appliedin practice.
102. In particular, respondents have identified the following areas of judgment:(a)the choice of CGUs to which goodwill is allocated; and(b)

Inputs and methods to determine the recoverable amount of CGUs.

Should Goodwill still not be Amortised?

35

Identification of CGUs to which goodwill is allocatedAccounting and Disclosure for Goodwill

103. In relation to the identification of CGUs, IAS 36 paragraph 68 says that: “an asset’s cashgenerating unit is the smallest group of assets that includes the asset and generates
cash inflows that are largely independent of the cash inflows from other assets orgroups of assets. Identification of an asset’s cash-generating unit involves judgment. If
recoverable amounts cannot be determined for an individual asset, an entity identifies
the lowest aggregation of assets that generate largely independent cash inflows.”

Should Goodwill still not be Amortised?

36

104. Size and composition of CGUs impacts the recognition and measurement of impairment
losses, but IAS 36 offers limited guidance in identifying them. If a CGU is too broad, it
may result in non-recognition of impairment because the gains of some units may offset
the losses of another unit within the same CGU. Paragraph 80b of IAS 36 requires thata CGU should not be larger than an operating segment determined in accordance withIFRS 8 Segment Reporting, but some studies cast doubts on whether there are entities
that do not comply with this requirement.
105. Based on empirical research, Ernst & Young (2006, 35) concludes that frequently
entities identify only one CGU for each of their segments, even if they do not specificallydisclose this fact. Contrary to that, Petersen and Plenborg (2010) on the basis of asurvey conducted across all Danish listed companies, find that only 25% of the entities
surveyed identify CGUs at the segment level. This may indicate that in some jurisdictions
preparers are more rigorous in applying the requirements.
106. In relation to the allocation of goodwill to the CGUs, it should be noted that a different
approach exists between IFRSs and US GAAP. Under US GAAP, goodwill is allocatedto the reporting unit level whilst under IFRS it is allocated to the CGUs. Reporting unit isdefined in US GAAP as an operating segment or one level below an operating segment(component).
107. The Research Group believes that to favour a consistent application of the standard a stricter
guidance could be introduced to facilitate the allocation of goodwill to the smallest CGU.
Inputs and methods for estimating the recoverable amount of CGUs
108. In relation to the inputs and methods for estimating the recoverable amount, the ResearchGroup believes that the areas in need of improvement are:(a)the valuation approach;(b)the calculation of the VIU;(c)the discount rates and cash flows; and(d)the forecast period and determining terminal value (TV).

109. As mentioned above, paragraph 18 of IAS 36 states that the recoverable amount is thehigher of its FVLCTS and its VIU. On this point, the OIC-EFRAG survey shows that entities
mostly use VIU in determining the recoverable amount. In all likelihood, the infrequent use
of FVLCTS is due to the fact that it requires information on the market value of the unit.

112. IFRS 13 has clarified methods for the calculation of fair value in the absence of a
primary market for the asset being valued. It has also explained that fair value of a nonfinancial asset should represent its highest and best use. Some question that in very few
circumstances an entity could conclude that value in use may be higher than a fair value
if the latter represents its highest and best use. Such an aspect may be considered by
the IASB in revisiting the requirement of IAS 36.
Assessing the discount rate
113. A significant area of judgement in the calculation of the VIU is the determination of the
discount rate. Paragraph 55 of IAS 36 requires that an entity must use a pre-tax discountrate to discount pre-tax cash flows so there is consistency between the discount rate
and the cash flows. Paragraph 94 of the Basis for Conclusions of IAS 36 states that,conceptually discounting post-tax cash flows at a post-tax discount rate or discounting
pre-tax cash flows at a pre-tax discount rate should give the same results. This could
be understood as an indirect equivalence between pre-tax and post-tax discount rates.
However, if the expected future cash flows are not evenly distributed over the period, theequivalence may not occur.
114. In addition, most academic books (e.g. Koller et al., 2005) estimate value in use on thebasis of post-tax cash flows, discounted with a post-tax discount rate.
115. IAS 36 is not explicit as to how to estimate a pre-tax discount rate, and implicitly
suggests using an iterative process in certain cases (see paragraphs 56, 57 and BCZ85).
It would seem that VIU could be estimated starting from a post-tax calculation to arriveat an equivalent result through an iterative process. However, as said above, the iterative
process depends upon the time distribution of the cash flows. Moreover, entities can beconsistent with the concept stated in paragraph 94 of the Basis for Conclusions in IAS 36
only if the cash flows are uniformly distributed along the time period. More particularly,
if the cash flows are variable and/or uneven, the discount factor will influence the results
according to how the flows are distributed.

37
Should Goodwill still not be Amortised?

111. To estimate VIU, paragraph 30 of IAS 36 requires applying the discounted cash flow
model (DCF), including its variants such as the dividend discount model (DDM). However,there are studies that show that some entities apply other methods such as EVA-model(economic value added model) and multiples (Peterson et al. 2010).

Accounting and Disclosure for Goodwill

110. Some have argued that the method applied to determine the recoverable amount shouldreflect the expected manner of recovery, and if the entity intends to recover the value by
operating the unit, the recoverable amount should only be based on VIU.

Accounting and Disclosure for Goodwill

116. The examples and explanations in IAS 36 do not clearly explain how the iterative process
should be applied when the cash flows are uneven and the entity is unable to reconcile
between the post and pre-tax rate and flow. The reconciliation is possible when theflows and the growth rate are even, without the need for an iterative process but simply
by grossing-up the post-tax rate and flow. The IASB should then clarify that using theformula [post-tax rate/(1 – corporate tax rate] to determine the pre-tax rate works only
when no growth is assumed in the future periods. If the growth rate is positive, and theflows are assumed to be steady over the period, it is still possible to determine the pretax rate by grossing up both the post-tax rate and the growth rate.

Should Goodwill still not be Amortised?

38

117. The issue related to the calculation of the discount rate is not limited to the tax effect but
also whether there is a consistency among entities using IFRSs in relation to the input
used in determining the discount rate. To this end the Research Group looks favourably
to the research work initiated by the IASB staff on the use of discount rates and is keen
to be involved in the project.
118. Paragraph 33b of IAS 36 requires that projections based on budgets and forecasts
shall cover a maximum period of five years, unless a longer period can be justified. The
IASB intended limiting the explicit forecast period because the entity’s ability to forecast
beyond 5 years is presumed to be low. Yet IAS 36 does not provide any guidance on
the methods to estimate the terminal value (e.g. Gordon’s growth model, a value driverformula, or others). Studies show that some entities use multiples to estimate terminal
value: Petersen and Plenborg examined a sample of Danish companies and foundthat some use methods other than a DCF model such as EVA (Evaluation Value Addedmodel), multiples and other methods.
119. More specifically, these studies concluded that some preparers use a DCF model only
for the explicit period and then add a terminal value calculated under a different method.
Although IAS 36 does not prohibit this, it might be inconsistent with a DCF model. In
all likelihood, it can be assumed that considering an infinite lifetime the majority of therecoverable amount can be attributed to the terminal value, and in such circumstancesmost of the value estimated is captured by the multiple.

CONCLUSION

developing more prescriptive requirements and guidance to reduce the recognitionof internally generated goodwill is impracticable. Such an issue can be addressedin part by improving the impairment test model but only if the improvement iscombined with the re-introduction of the amortisation of goodwill. In any case,the impairment test needs to be retained even if amortisation of goodwill isreintroduced;(b)

there are a number of areas for possible improvements of IAS 36 in order to reduce
the operational challenges. This applies to calculation of VIU and its relationshipwith fair value as well as the determination of the discount rate; and(c)in relation to the concept and usage of discount rate, the Research Group isinterested in the research work conducted by the IASB staff and is keen to be
involved in the project.

39
Should Goodwill still not be Amortised?

(a)

Accounting and Disclosure for Goodwill

120. The Research Group thinks that the following conclusion can be drawn from the above
analysis:

Chapter Four: Improvements to disclosures in IAS 36

CURRENT STATUS OF GOODWILL IMPAIRMENT DISCLOSURES
121. This part of the paper focuses on possible improvements in the disclosure around goodwill
impairment, and not on how to enhance the application of existing requirements.

Accounting and Disclosure for Goodwill

122. IAS 36 includes a number of disclosure requirements around impairment in general, andgoodwill in particular. It requires an entity to disclose the following types of information:(a)for each class of asset, the amount of impairment losses and reversals in the
period;(b)for each CGU that incurred a material impairment loss:

Should Goodwill still not be Amortised?

40

(c)

(i)

events and circumstances that led to the impairment loss or reversal;(ii)

a description of the CGU to which the impaired goodwill is allocated (and anychange in the composition of the CGU in the period); and(iii)

the method used to calculate the recoverable amount of the CGU.

for each CGU that includes an amount of goodwill significant to the total goodwill:(i)the carrying amount of the goodwill allocated to the CGU;(ii)

the method used to calculate the recoverable amount of the CGU;(iii)

key assumptions in the calculation of the recoverable amount; and(iv)

an analysis of the sensitivity of the recoverable amount to key assumptions(if a reasonably possible change would determine the recoverable amount tobe higher than the carrying amount).

123. While recent Standards explain the objective of the disclosures required, IAS 36 does
not indicate it explicitly. Paragraph 194 of the Basis for Conclusions states that nonamortisation of goodwill increases the reliance that must be placed on impairment tests.
However, the nature of impairment tests means that the carrying amount of such assets
and the related assertion that those carrying amounts are recoverable will normally be
supported only by management’s projections. Paragraph 198 of the Basis for Conclusions
explains that the disclosure requirements are designed to improve the reliability of theimpairment test.

Level 1

Criticism of existing disclosures126. It may seem that IAS 36 and IFRS 3 already prescribe extensive disclosure requirements.
There are however claims that compliance is lacking or merely formal.
127. In January 2013, the European securities market regulator (ESMA)19 concluded that
“Although the major disclosures related to goodwill impairment testing were generally
included, in many cases these were of a boilerplate nature and not entity-specific. This
stems from a combination of a failure to comply with the requirements of the standard
by issuers, as well as, arguably, a lack of specificity in the standard, especially in thearea of sensitivity analysis. This also means that, in many cases, the user of the financial
statements is not able to evaluate the reliability of the assumptions used from thedisclosures given, which is the primary purpose of those disclosure”.
128. Amiraslani, Iatridis and Pope (2013)20 looked at entities across Europe and foundthat companies in different countries show different levels of compliance with IFRS
requirements. While they recommend caution in generalising the results of the survey
because of the small sample size, the impairment intensity seemed affected by certain
country characteristics such as the strength of enforcement mechanisms.
129. Other studies have looked at the effectiveness of disclosures in existing Standards.
Hayn and Hughes (2005)21 conclude that “the results suggest that the ability to predict
goodwill impairment based on information provided in the financial statements islimited”. They attribute this to the paucity of information around the performance of theacquired business particularly when the goodwill is allocated to a CGU that differs fromthe entity’s reported operating segments.

European enforcers review of impairment of goodwill and other intangible assets in the IFRS financial statements.
Amiraslani H., Iatridis G. and Pope, P. (2013). Accounting for asset impairment: a test for IFRS compliance across Europe (CassBusiness School).
21
Hayn C. and Hughes P. (2005). Leading Indicators of Goodwill Impairment.
19
20

41
Should Goodwill still not be Amortised?

125. Although impairment does not affect the amount or timing of cash flows, being able
to predict it is an important input to users’ assessment of the amount, timing anduncertainty of (the prospect for) future net cash inflows to the entity. It is an indicationthat the performance of the acquired business is deteriorating and that entities havelowered their previous forecast of future cash flows and returns.

Accounting and Disclosure for Goodwill

124. Beyond the overall criticism that impairment of goodwill is untimely, there is a perceptionthat users are not able to anticipate when impairment will occur or understand why
it has not occurred based on the information provided in accordance with disclosure
requirements of IAS 36.

Accounting and Disclosure for Goodwill

130. Some preliminary remarks are listed below:

Should Goodwill still not be Amortised?

42

(a)

the Research Group believes that explicit disclosure objectives in the Standard
would be useful. This would assist preparers in the appropriate application of therequirements;(b)

entities need to consider the level of detail necessary so that the information isuseful and that excessive detail does not obscure the usefulness of the information;(c)some information could be disclosed not in the notes, but elsewhere in thefinancial reports, as far as the boundary of information disclosed other than in thenotes is clearly identified. This may be the case for instance for explanations of
the variances between budget/forecast and actual amounts. This paper does notdiscuss placement criteria further;(d)during the development of IAS 36, the IASB conducted field-tests of the initial
disclosure proposals. Participants in the field test expressed concern about
disclosing the values assigned to, and the sensitivity of, each key assumption andargued that these requirements could cause significant commercial harm to theentity. It was noted that users might use the quantitative disclosures as a basis
to initiate litigation against the entity or its directors in the likely event that thoseassumptions prove less than accurate. This factor will need to be considered
before changes are introduced.

131. As mentioned above, disclosure requirements in IAS 36 and IFRS 3 already appear to beextensive. If new requirements were to be added, it could be appropriate to assess if all
the existing requirements were still relevant or justified from a cost-benefit perspective.
This paper does not discuss this, however the Research Group notes that, during theoutreach, some constituents have expressed concern with the requirement to disclose
the revenue and profit or loss of the combined entity as though the acquisition date had
been at the beginning of the reporting period.

ENHANCED DISCLOSURE REQUIREMENTS(a)the assets, liabilities, equity, income, expenses, changes in equity and cash flowsof the entity; and(b)

how efficiently and effectively the entity’s management and governing board havedischarged their responsibilities to use the entity’s resources23.

134. To serve these objectives, the Research Group think that disclosures on impairment
could, in theory, provide information that:(a)enables users to understand the financial effects of impairment losses recognisedin the period;(b)assists users in understanding the robustness of the modelling and the entity’s
assumptions;(c)provides confirmation of the ‘reasonableness’ of the entity’s past assumptions;(d)assists users in predicting future impairment; and(e)allows users to perform their own impairment calculation, or re-perform the entity’s
calculation.

135. In the Research Group’s view, the existing disclosure requirements in IAS 3624 allow
users to understand the financial effect of impairment losses. Also, the Research Group
does not support the objective that disclosures should allow users to second-guessmanagement’s impairment test (see (e) of the previous paragraph).
136. In the following paragraphs, the Research Group explores whether the other objectives
are adequately met in the existing requirements, as well as how they could be enhanced.

Paragraphs OB3 and OB4, Conceptual Framework.
Paragraph 7.33, Conceptual Framework DP.
24
Paragraphs 126 to 131, IAS 36.
22
23

43
Should Goodwill still not be Amortised?

133. Following the objectives stated in the previous paragraph, the IASB’s Conceptual
Framework DP states that the objective of the notes to the financial statements is tosupplement the primary financial statements by providing additional useful information
about:

Accounting and Disclosure for Goodwill

132. The IASB’s Conceptual Framework states that existing and potential investors, lenders
and other creditors need information to help them assess the prospects for future net
cash inflows to an entity, and how efficiently and effectively the entity’s management andgoverning board have discharged their responsibilities to use the entity’s resources22.

Disclosures to assist users in understanding the robustness of the modelling and the entity’s
assumptions

Accounting and Disclosure for Goodwill

Timing profile of VIU
137. According to paragraph QC16 of the Conceptual Framework, faithful representation
does not necessarily result in useful information. For example, an estimate of impairment
can be a faithful representation if the reporting entity has properly applied an appropriate
process, described the estimate and explained any uncertainty that significantly affects
the estimate. Other things being equal, a longer time horizon is likely to increase theuncertainty embodied in the measurement.

Should Goodwill still not be Amortised?

44

138. Therefore it may be relevant for the reader to know how much the VIU is supported bycash flows expected in the short term or by cash flows expected in the longer term.
Paragraph 134(d) of IAS 36 requires disclosure of the period over which management has
projected cash flows based on financial budgets/forecasts approved by management.
139. A simple solution is to disclose the portion of the recoverable amount covered byestimates and the terminal value. If full disclosure is deemed prejudicial to the entity,
the information could be limited to a simple breakdown in percentage terms with noindication of the total amount.
Inputs to the discount rate
140. One area where the quality of information could be enhanced is discount rates. The
appropriateness of discount rates is often identified as an issue and it would be usefulfor users to understand better how the rates were determined. In a recent survey on the
impairment of financial assets25, users rated as highest importance the disclosures ofassumptions and techniques used in estimating the allowance for credit losses, and thesame argument may apply to impairment of non-financial assets.
141. Currently, IAS 3626 requires an entity to disclose each key assumption on which
management has based its cash flow projections for the period covered by the mostrecent budgets/forecasts. However, the choice of a proper discount rate and terminal
growth rate has a significant impact on the VIU calculation, and some argue that therequirement should be more prescriptive. In fact, paragraph 55(b) of IAS 36 explicitly
requires that the discount rate reflect current market assessments of the risks specificto the asset (or the CGU), while studies have found evidence that entities may use thesame discount rate for different CGU.
142. Full disclosure and justification of the calculation would provide the maximum amount of
information. On the other hand, especially if the entity has multiple CGUs, the disclosure
could be voluminous – although preparing it would not involve significant additional
work because the entity already has all the relevant data.

25
26

CFA Institute (2013). Credit loss and impairment survey.
Paragraph 132, IAS 36.

Disclosures to provide confirmation of the reasonableness of the entity’s past assumptions
145. The Research Group believes that it is appropriate to use the term ‘reasonableness’
rather than ‘accuracy’ when referring to assumptions, because the calculation of VIU
involves the use of forward-looking information. Management should use its best
judgment and exercise a degree of caution in forming its estimates, but full precision
cannot be reached and should not be expected by users of the financial statements.
Analysis of variances146. In order to assess the prospects for future net cash inflows to an entity, users must be ina position to assess the entity’s precision in forecasting. Therefore, information that has
a confirmative value is relevant.
147. Users could benefit from the disclosure of variances between forecasts and actual
results, and related explanations. It is not infrequent that cash flows are expected to
be low, or even negative, in the first year of business operations and increase over time(the so-called ‘hockey stick’ forecast). When this continues for a number of years, it
becomes an indication that original expectations failed to eventuate and that impairment
may be needed.
148. The analysis may address only the variance in the current period or may be on a cumulativebasis since the date of the acquisition. Analysis limited to the current period may beinsufficiently informative, especially if the variance has a low impact or if it is caused bya specific event unusual in size and/or non-recurring in nature. A cumulative variancebecomes burdensome to update after a certain number of years from the businesscombination. Also, variances that occurred in prior years may reflect conditions that nolonger exist. An intermediate solution could be to disclose the variance over a limited
period (such as the last 3 to 5 years).
149. The analysis could also be performed in relation to the initial forecast and provided only
during the period covered by it, or on a rolling basis.

45
Should Goodwill still not be Amortised?

144. In addition, IAS 36 requires entities to re-assess the discount rate and the terminal growthrate at each reporting date and these are expected to change in response to changes
in the market and risk profile of the CGU. Nevertheless, users may perceive a decreasein the discount rate as an attempt to compensate for a decrease in expected cash
flows. Users would have a more nuanced understanding of the model if entities wererequired to disclose the time series of rates over a period of time and an explanation of
circumstances that led to adjustments.

Accounting and Disclosure for Goodwill

143. Alternatively, entities could be explicitly required to provide qualitative information on
the calculation inputs – for instance, an entity would be asked to disclose if it has used
separate rates for different periods or incorporated any liquidity premium in relation tocountry or size risk.

Disclosures to assist users in predicting future impairment

Accounting and Disclosure for Goodwill

Information on performance of the acquired business150. In theory, there would be a clear correlation between the performance of the acquired
business and the timing of the impairment, so disclosure of a measure of profit or loss
would have significant predictive value. Therefore, some argue that there should be amore prescriptive requirement to disclose the performance of the acquired business.
However, there are a number of circumstances when the information will be either
unavailable or irrelevant.

Should Goodwill still not be Amortised?

46

151. Firstly, the acquired business may be integrated immediately or over time into the acquiring
entity’s operations so that the CGU encompasses more than the acquired business. In
that case, the results of the CGU are not solely attributable to the performance of theacquired business and it is likely that separate information for the acquired business will
not be available.
152. Secondly, the goodwill may be allocated to multiple CGUs. In that case, the performanceof the acquired business is not the only factor affecting the occurrence of impairment.
Expected timing of impairment
153. Accounting literature suggests a wide variety of explanations for the existence of
goodwill. One theory postulates that goodwill arises because of the existence of a range
of factors that, while favourable to an entity’s performance, are not capable of being
recognised and measured.
154. Within the discussion on the ‘discernible element’ approach, it was noted that according
to paragraph 313 of the BC of IFRS 3 the ‘core’ goodwill should include the following:(a)the fair value of the going concern element of the acquiree’s business before theacquisition; and(b)

the fair value of the expected synergies and other benefits from combining theacquirer’s and acquiree’s businesses.

155. If available techniques allowed for a reliable measurement of the above, entities would
not need to recognise goodwill in their statement of financial position, and possibly
could amortise the amounts (although this is not certain, because goodwill is not the
only asset that is deemed to have an indefinite economic life). Ideally, the residual value
would be amortised over a specific period.
156. Paragraph B64(e) of IFRS 3 requires a qualitative description of the factors that makeup the goodwill recognised, but does not ask entities to disclose the time period overwhich they projected the synergies to have an impact, or the value of the unrecognised
intangibles to be consumed.

Acquisition characteristics that point to future impairment
159. In cases where the acquirer overpays for the acquiree, the overpayment may end up in
the initial measurement of goodwill, although IFRS 3 tries to avoid this by requiring thatthe entity provides a qualitative description of the factors that make up the goodwill(paragraph B64 (e))
160. When the goodwill includes an overpayment, impairment is more likely to occur.
Some characteristics of the original acquisition may provide an indication of possible
overpayment such as:(a)goodwill is significant compared to the net identifiable assets of the acquiree;(b)a significant portion of the consideration was represented by the acquirer’s equity
interests;(c)the acquirer was bidding against other potential buyers; and(d)the acquirer paid a significant premium over the acquiree’s market price.

161. Beyond the amount of recognised goodwill, IFRS 3 requires an entity to provide
information on the acquisition-date fair value of each major class of consideration,
including equity interests of the acquirer (paragraph B64 (f)). No information is requiredon the characteristics listed at (c) an (d) in the paragraph above. While information oncompetitive bids would be difficult to provide, unless there was a public auction process,the acquirer could be required to indicate the amount of the premium paid over themarket price.

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Should Goodwill still not be Amortised?

158. The Research Group expects that normally the acquirer would estimate an expected
payback period (that is, the period in which it expects to recover the investment). In
most cases, this payback period could be deemed to be the period in which it expects
to consume the excess earning power existing at the acquisition date or could be used
to estimate it.

Accounting and Disclosure for Goodwill

157. If an entity was required to disclose the time period over which it expects to consume theexcess earning power from the synergies existing at the acquisition date, it may reducethe incentive to defer the recognition of losses because it would not be unexpected ‘badnews’. The potential downside is that it could result in opportunistic timing of impairment
as management could try to match the recognition with the initial assessment.

Accounting and Disclosure for Goodwill

Reconciliation of total goodwill
162. As mentioned above, IAS 36 requires disclosure of CGUs with a significant amount ofassociated goodwill. Entities are however not required to provide a full reconciliationof the total goodwill allocation to the CGUs. Providing a reconciliation of these figures
would confirm the entity’s compliance and make it easier for users to track the changes
over time. This could prove useful in the case of frequent sales or disposals of businesses
or modifications in the CGUs. The reconciliation would also clearly indicate the degree of
detail applied by the entity in identifying its CGUs.

Should Goodwill still not be Amortised?

48

CONCLUSION
163. The Research Group believes that there is room for improvement in the disclosure
requirements for the impairment test. This does not necessarily imply that eachrequirement discussed in paragraphs 137 to 162 above needs to be added to thedisclosure requirements in IAS 36. Rather, it is a matter to reconsider what the informationneeds of users are in relation to the impairment test, and reach the appropriate balanceamong them.

Chapter Five: Additional Considerations

BACKGROUND

166. In addition, IAS 38 requires that an intangible asset with a finite useful life should
be amortised on a systematic basis over its useful life, while it should be tested for
impairment only when there is any indication that an asset may be impaired. On theother hand, IAS 38 requires that an intangible asset with an indefinite useful life shouldbe tested for impairment annually and whenever there is an indication that the intangible
asset may be impaired, however it does not require or permit amortisation of such an
asset.
167. Some argue that if amortisation of acquired goodwill were to be reintroduced, theexisting accounting requirements relating to intangible assets acquired in a businesscombination should also be reconsidered in the following aspects:(a)whether some intangible assets that are separately identified under existing IFRSs
should be subsumed into goodwill; and(b)whether the standard should continue to assume that some intangible assets haveno foreseeable limit to the period over which the asset is expected to generate
net cash inflows for the entity, and that amortisation should not be permitted or
required for such assets.

SUBSUMING INTANGIBLE ASSETS INTO GOODWILL
168. During the outreach, some stakeholders suggested that the existing requirements of IAS
38 to separate intangible assets from acquired goodwill should be modified, because
an entity should not have to recognise intangible assets that it did not intend to acquire
in a business combination. In addition, these stakeholders advised that values of suchintangible assets are not always measured with sufficient reliability, because the decisionof whether to separate is often arbitrary and there is often no market for these assets.
Therefore, they do not believe that such requirement provides relevant information tousers.

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Should Goodwill still not be Amortised?

165. Under IFRSs, intangible assets shall be recognised separately from goodwill in a businesscombination, if intangible assets acquired in a business combination are identifiable (or, if
they meet either the separability criterion or the contractual-legal criterion). Considerationof the probability recognition criterion and the reliable measurement criterion is not
required under IFRSs, because the IASB believes that these criteria are always satisfied
in a business combination.

Accounting and Disclosure for Goodwill

164. In the March 2014 IFASS meeting, it was suggested that a decision regarding whether
acquired goodwill should be amortised could have an effect on how intangible assets
should be accounted for, and that these issues should be considered in parallel.

169. In addition, for intangible assets such as customer-related intangible assets, it was notedthat the costs of measuring them separately often outweighs the benefits of doing so,
especially in a strict audit environment. This is because an auditor often requests that anentity supports its valuation with a valuation report from an independent expert, and anauditor also obtains an additional report. Further costs arise if the estimates provided bysuch valuation experts happen to diverge.

Accounting and Disclosure for Goodwill

170. If goodwill was amortised, the impact of separating these intangible assets would be
limited to a different amortisation period, and only if the entity assessed that they have auseful life different from goodwill.
171. In relation to this, the UK Financial Reporting Council published its staff research report:
Investor Views on Intangible Assets and their Amortisation in March 2014. Among otherfindings, the report noted that the majority of the respondents expressed a preference foraccounting treatments in the statement of financial position and in the income statementthat were different from those currently required by IAS 38. They also considered that‘wasting’ intangible assets (for example, the right to use wireless network services)
should be separately identified and capitalised, while ‘organically replaced’ intangible
assets (for example, customer lists and brands) should be subsumed into goodwill.

Should Goodwill still not be Amortised?

50

INTANGIBLE ASSETS WITH INDEFINITE USEFUL LIFE
172. Some stakeholders suggested that if acquired goodwill was amortised, the same
treatment should be applied to all intangible assets. This is because the arguments
used to support non-amortisation of intangibles with indefinite useful lives are generally
consistent with those used for non-amortisation of acquired goodwill, but some believethat useful lives of intangible assets can always be estimated. Therefore, stakeholders
suggested that if acquired goodwill were to be amortised, the IASB should also require
an entity to estimate the periods over which future economic benefit are expected toconsumed and allocate the amounts of intangible assets on a systematic basis over theuseful lives.
173. At the same time others believe that reintroducing amortisation of acquired goodwill
should not affect the accounting for intangible assets, because impairment testing ofintangible assets would be more effective due to the clearer linkage between the cash
flow projection and their carrying amounts, and that these intangible assets are directly
measured, while goodwill is measured as a residual.

CONCLUSION
174. Although the Research Group has not formulated a view as to whether, and if so, howaccounting requirements for intangible assets should be changed, it believes that theyshould, at least be investigated. The Research Group would be pleased to learn theviews of constituents, so as to progress its research on this area.

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CFA Institute (2013). Credit Loss and Impairment Survey.
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