Accounting Standards Advisory Forum
Goodwill and Impairment
June 2017

Possible Approach for
Addressing the “TooLittle, Too Late” Issue

Accounting Standards Board of Japan

Objective of this paper
1. The purpose of this paper is to discuss the ASBJ’s proposal1 regarding a possible approach toaddress the concerns identified in the impairment model under current IAS 36 Impairment of
Assets (hereinafter referred to as “IAS 36”), that impairment losses on goodwill are recognised
too late or in amounts that are too small (hereinafter referred to as “the ‘too little, too late’issue”).

Background
2. The International Accounting Standards Board (IASB) added the Goodwill and Impairment
project to its agenda to consider how to address the following three areas of focus identified in
the Post-implementation review (PIR) of IFRS 3 Business Combinations (hereinafter referred toas “IFRS 3”):(a) whether changes should be made to the existing impairment testing requirements in IAS36;(b) subsequent accounting for goodwill (including the relative merits of an impairment-only
approach and an amortisation and impairment approach); and(c) the extent to which other intangible assets should be separated from goodwill.
3. Within these areas of focus, stakeholders around the world have opposing and strongly heldviews regarding the subsequent accounting for goodwill, as follows:(a) the Report and Feedback Statement “Post-implementation Review of IFRS 3 Business
Combinations” issued in June 2015 (hereinafter referred to as “Feedback Statement of
IFRS 3”) indicated that investors held mixed views on the subsequent accounting for
goodwill;(b) in past IASB Board meetings discussing the subsequent accounting for goodwill2, IASB
Board members held mixed views on reintroducing the amortisation of goodwill;(c) in past ASAF meetings discussing the subsequent accounting for goodwill3, national
1

This paper was approved for publication after deliberations by the Board members of the ASBJ. However, someBoard members of the ASBJ did not agree with some of the proposals in this paper.
2 The views of IASB Board members regarding the subsequent accounting for goodwill were stated at the October
2015 and the February 2016 IASB Board meetings, the May 2016 IASB Board meeting in which the ASBJ andEuropean Financial Reporting Advisory Group (EFRAG) secretariat reported the results of its quantitative study on
goodwill and impairment, and at the June 2016 joint Board meeting of the IASB and the U.S. Financial AccountingStandards Board (FASB).
3 The views of the ASAF members regarding subsequent accounting for goodwill were stated at the ASAF meetingin December 2015.

2

accounting standards setters and regional bodies participating in the ASAF held mixed
views;(d) in the agenda paper for discussion at the March 2017 IASB Board meeting4, the staff
observed that, regarding the subsequent accounting for goodwill (especially whether toamortise or not), the feedback during the PIR of IFRS 3 did not provide evidence of
decrease in the diversity of views and that the staff had not heard new conceptualarguments that would support the amortisation of goodwill since the June 2016 joint Board
meeting of the IASB and the FASB; and(e) regarding the views of preparers of financial statements, some participants of the Global
Preparers Forum (GPF) stated that they supported the amortisation model5 or the direct
write-off model during the discussion held in March 2017, even though the discussion of
the subsequent accounting for goodwill was not planned.

Identifying the Concerns
4. The comments made on the Request for Information for the Post-Implementation Review of
IFRS 3 (hereinafter referred to as “the RFI”) and the results of the research conducted by the
ASBJ staff in the past, described in the following paragraphs, imply that the “too little, too late”
issue exists under the current impairment-only model. The ASBJ thinks that the “too little, toolate” issue indicates that it is necessary to reevaluate whether the current impairment test is
sufficiently “rigorous and operational” (paragraph BC131G of IAS 36)6 to justify nonamortisation, and whether the information provided from the subsequent accounting for
goodwill is relevant to users of financial statements.
5. In the Feedback Statement of IFRS 3, the summary of the comments to the RFI indicated that“many participants think that there appears to be a ‘lag’ in the time between the impairment
occurring and the impairment charge being recognised in the financial statements.”

4

Agenda Paper 18.
In the “Summary of Results of Questionnaire Survey on Goodwill Accounting” issued by the Subcommittee on
Corporate Accounting of the Committee on Finance and Accounting of the Keidanren (Japan Business Federation),
29 out of 31 entities (entities applying Japanese GAAP : all 15 entities, entities applying and planning to apply IFRS :11 out of 13 entities, entities applying U.S. GAAP : all 3 entities) which responded to the questionnaire survey
responded that they supported the amortisation and impairment model.
http://www.keidanren.or.jp/en/policy/2017/014.pdf.
6 In the Basis for Conclusions discussing the basis for abolishing the amortisation of goodwill, paragraph BC131G of
IAS 36 states, “if a rigorous and operational impairment test could be devised, more useful information would be
provided to users of an entity’s financial statements under an approach in which goodwill is not amortised, but instead
tested for impairment annually or more frequently if events or changes in circumstances indicate that the goodwill
might be impaired.”
53

6. Furthermore, the European Securities and Markets Authority (ESMA) included in its comment
to the RFI the reference to ESMA’s report “European enforcers review of impairment of
goodwill and other intangible assets in the IFRS financial statements” issued in January 2013,
which stated its concern as to whether the level of impairment recognised in 2011 appropriatelyreflected the effects of the financial and economic crisis.
7. The ASBJ thinks that the following results of the research conducted in the past by the ASBJ
staff also implies that the “too little, too late” issue exists:(a) In 2016, the ASBJ staff conducted a quantitative study on goodwill and impairment
together with the EFRAG secretariat, and as a result, issued Research Paper No. 2“Quantitative Study on Goodwill and Impairment” in October 20167 (hereinafter referred
to as “ASBJ Research Paper No. 2”). The ASBJ is of the view that the following items
described in Research Paper No. 2 imply that the effects of goodwill impairment risk on an
entity’s financial soundness is growing and that the time until goodwill is fully expensed
under the impairment-only model is exceeding 20 years, which was the rebuttablepresumption regarding the useful life of goodwill in the superseded standard, IAS 22
Business Combinations (hereinafter referred to as “IAS 22”).
 Looking at the individual companies that constituted each stock market index in 2014,
35% of the companies that constituted the stock market index of the United States and
33% of the companies that constituted the stock market index of Europe had goodwillthat exceeded 50% of their net assets. Furthermore, 14% of the companies that
constituted the stock market index of the Unites States and 11% of the companies that
constituted the stock market index of Europe had goodwill that exceeded 100% of their
net assets. A few companies that constituted the stock market indices in the UnitedStates, Europe and Australia had goodwill that exceeded 100% of their market
capitalisation.
 When dividing the goodwill amount at the end of the previous year by goodwill
expensed (that is, either by impairment or amortisation, if applicable) during the period,
the resulting ratio from 2006 to 2014 was 82 years for the stock market index of theUnited States, 37 years for the stock market index of Europe, 9 years for the stock
market index of Japan and 34 years for the stock market index of Australia.
(b) The ASBJ staff conducted in-depth interviews with analysts in Japan with the aim ofunderstanding their current views on goodwill and impairment more thoroughly and issued

7

https://www.asb.or.jp/en/discussions/papers/2016-1003.html.

4Research Paper No. 3 “Analyst Views on Financial Information Regarding Goodwill”(hereinafter referred to as “ASBJ Research Paper No. 3”) 8.

The ASBJ observes that thefollowing observation in ASBJ Research Paper No. 3 indicates analysts’ concerns that
goodwill with impairment risk is included in the entity’s financial statements.
 Many analysts thought that impairment losses on goodwill were recognised later thanwhen they thought the deterioration in the value of goodwill had occurred.

These

analysts said that they incorporated the deterioration in the value of goodwill in theiranalyses before the impairment losses on goodwill were recognised.
8. The Feedback Statement of IFRS 3 also noted the concerns that the impairment test of goodwill
under the current impairment model was complex and involved significant judgements.
Accordingly, the ASBJ thinks that the subsequent accounting for goodwill should not be
excessively complex nor should it impose undue practical burden on entities making
judgements.

Alternatives for the Subsequent Accounting for Goodwill
9. The ASBJ identified the following three alternatives for subsequent accounting for goodwill,
which had potential to address the “too little, too late” issue.

All three alternatives would result

in recognising expenses earlier than the impairment-only model under current IAS 36.
(a) Direct Write-Off of Goodwill
Within the three alternatives discussed in this paper, a direct write-off of goodwill would
expense the initial amount of goodwill recognised in the most expeditious manner.

(As

IFRS 3 does9, this paper assumes that goodwill meets the definition of an asset.
Furthermore, although a direct write-off of goodwill may be achieved by reducing thecarrying amount of goodwill through other comprehensive income (OCI) or by directlyreducing equity, this paper assumes that goodwill will be expensed through profit or loss
when it is initially recognised.)(b) Amortisation and Impairment Model
The amortisation and impairment model would reduce the carrying amount of goodwill byamortising goodwill and recognising expenses and, in addition, would recognise
impairment losses when the value of goodwill deteriorates below the carrying amount (after
8
9

https://www.asb.or.jp/en/discussions/papers/2017-0612.html.
Refer to paragraph BC323 of IFRS 3.

5amortisation).

Because goodwill would be amortised prior to the recognition of

impairment losses under IAS 36, this model would result in recognising expenses earlier
than the impairment-only model under current IAS 36.
(c) PH Approach
The pre-acquisition headroom approach (hereinafter referred to as “PH approach”), which
the IASB is considering as a potential improvement to make the impairment test more
effective, would result in recognising expenses earlier than the impairment-only model
under current IAS 36.

Under the PH approach, for the purpose of testing goodwill for

impairment, the pre-acquisition headroom (PH) measured at the acquisition date would be
added to the carrying amount of the cash generating unit (CGU) to which goodwill was
allocated, and that amount would be compared to the recoverable amount of the CGU towhich goodwill was allocated.
10. The ASBJ assessed whether the three alternatives regarding the subsequent accounting for
goodwill had the potential to lead to an improvement to the impairment-only model undercurrent IAS 36 from the perspective of providing relevant information to users of financial
statements as well as from the perspective of complexity in the accounting and the practicalburden associated with the judgements required.
(a) Direct Write-Off of Goodwill
 A direct write-off of goodwill is easy to apply because it does not require specificjudgement in the accounting.
 On the other hand, a direct write-off of goodwill would produce the same results as notrecognising goodwill as an asset but recognising expenses at the date of acquisition.
This would mean that goodwill, which forms part of the consideration for the businesscombination, would not have any value as of the acquisition date, which is difficult to
explain from the perspective of providing relevant information to users of financial
statements.
 Additionally, when goodwill is directly written off, subsequent goodwill impairment
losses would not be recognised.

When goodwill impairment losses are considered torepresent a signal that there was a failure in the investment (that is, the businesscombination), such signal would not be provided.
(b) Amortisation and Impairment Model By amortising goodwill, profit or loss would be calculated by matching the increases in6

income due to the business combination with the amortisation expense.

This would

allow management to explain the results of the business combinations using profit andloss that deducts amortisation expenses. Under the view that goodwill represents
excess earnings power, the value of goodwill would normally deteriorate due tocompetition. Amortisation of goodwill would appropriately reflect such deterioration
and at the same time would avoid the recognition of what is effectively internallygenerated goodwill.
 On the other hand, under the amortisation and impairment model, goodwill impairment
losses are less likely to be recognised compared to when goodwill is not amortised,because the carrying amount of goodwill would be reduced by amortisation.

When

goodwill impairment losses are considered to represent a signal that there was a failurein the investment (that is, the business combination), it is less likely that such signal
would be provided.
 When goodwill is to be amortised, the amortisation period would become an issue.
The ASBJ thinks that estimating the amortisation period based on the management’s
estimate of the period for which the future net cash inflows would increase due to thebusiness combination would provide users of financial statements with relevant
information (See paragraph 43 in this paper).
(c) PH Approach
 It is considered that the PH approach would partly address the issue that the unrealised
gains on the net assets and internally generated goodwill that are included in theexisting CGU to which goodwill is allocated would shield the impairment of goodwill.
 Under the PH approach, goodwill impairment losses are recognised when the carrying
amount of the CGU to which goodwill was allocated plus the PH (which is measured at
the acquisition date and is “frozen”) exceeds the recoverable amount of that CGU.
However, it is difficult to explain what the carrying amount of goodwill after
impairment losses recognised purports to represent from the perspective of providing
relevant information to users of financial statements.
 Furthermore, the PH approach involves a complex measurement process, which islikely to lead to increased practical burden by requiring judgements related to themeasurement of the PH as of the acquisition date (in particular, in the determination of
the recoverable amount of the existing CGU before the business combination).
11. Based on the discussions above, the ASBJ thinks that, from the perspective of providing relevant
7information to users of financial statements, it would be difficult to conclude that neither the
direct write-off of goodwill nor the PH approach would result in an improvement to theimpairment-only model under current IAS 36.
12. Although it is not discussed in depth in this paper, the ASBJ is aware that, when discussing thesubsequent accounting for goodwill, it is necessary to consider the identification of and thesubsequent accounting for intangible assets other than goodwill.

If a direct write-off of

goodwill were to be required, this may provide an entity with an incentive to identify moreintangible assets other than goodwill, so as to reduce the amount of goodwill that is immediately
expensed (especially when the non-amortisation of intangible assets other than goodwill
continued to be available). On the other hand, if all intangible assets, including those otherthan goodwill were to be amortised, it is less likely that the distinction between goodwill andintangible assets other than goodwill would become a significant issue.

Option to adopt the amortisation and impairment model
13. The ASBJ has been consistently supporting the amortisation and impairment model because it
provides useful information to users of financial statements regarding the entity’s financial
performance after the business combination by reflecting the deterioration in the value of
goodwill in profit or loss for each period through amortisation.

From the analyses provided up

to the preceding paragraph, the ASBJ thinks the amortisation and impairment model is aneffective approach that would also address the “too little, too late” issue that is implied under the
impairment-only model under current IAS 36.

Regarding the subsequent accounting for

goodwill, the ASBJ reaffirmed its position that the IASB should replace the impairment-onlymodel under current IAS 36 with the amortisation and impairment model.
14. Notwithstanding the ASBJ’s position in the preceding paragraph, as mentioned in paragraph 3 inthis paper, the ASBJ acknowledges that stakeholders have opposing and strongly held views on
the subsequent accounting for goodwill, and that there are concerns regarding the significant
burden that would be imposed on entities change from the current impairment-only model to theamortisation and impairment model.
15. Considering the current situation regarding the appropriate subsequent accounting for goodwill,
the ASBJ proposes considering an optional approach. Under this approach, an entity would be
required to choose from either of the following two models based on what the entity thinks isuseful to discharge its accountability responsibilities as an accounting policy:(a) the impairment-only model under current IAS 36; or
8(b) the amortisation and impairment model.
16. The advantages of this optional approach are discussed in detail from paragraph 19 of this paper
and the concerns related to this optional approach are discussed in detail from paragraph 25 ofthis paper.
17. When both the impairment-only model under current IAS 36 and the amortisation andimpairment model are used for the subsequent accounting for goodwill, instead of requiring
entities to adopt either approach as an accounting policy, it may be possible, for example, toestablish criteria to determine which model to use for each business combination (that is, foreach goodwill recognised) and require entities to apply those criteria to determine which model
to use.

However, the ASBJ proposes to require entities to adopt either as an accounting policy

and apply the same model to all of the reporting entity’s business combinations consistently forthe following reasons:(a) Considering the current situation that there are diverse views regarding the essential
characteristics of goodwill (whether it deteriorates in value and whether it can be
consumed) and the appropriate subsequent accounting for goodwill, it would be difficult toreach a consensus on the criteria to determine which model to use.

Furthermore,

depending on the criteria that would be developed, entities may be required to exercise
significant judgement to determine which model to use and thus may increase the burden
on entities.

In addition, depending on the criteria that would be developed, the selectionof the model may become arbitrary.
(b) If the same model were not applied to all of the reporting entity’s business combinations
consistently, the carrying amount of goodwill would include goodwill that is amortised andgoodwill that is not amortised.

Moreover, goodwill impairment losses would include

those arising from goodwill that is amortised and goodwill that is not amortised.

It would

be difficult to justify these amounts from the perspective of providing relevant information
to users of financial statements.
(c) By applying either model for all of the reporting entity’s business combinations
consistently as an accounting policy, management would be able to align the subsequentaccounting for goodwill with its views on how to discharge its accountability
responsibilities regarding the results of the business combinations.
18. The ASBJ acknowledges that the IASB is currently undertaking a project to simplify andimprove the effectiveness of the impairment test under IAS 36.

If the IASB changes therequirements in IAS 36, the ASBJ thinks the improvements can be applied to both the9impairment-only model and the amortisation and impairment model.

Advantages of the Optional Approach
19. The optional approach described in paragraph 15 of this paper has the following advantages:(a) management can choose the accounting model it thinks is useful to discharge its
accountability responsibilities; and(b) preparers and investors can communicate more effectively.

Management can choose the accounting model it thinks is useful to discharge its
accountability responsibilities
20. The ASBJ observes that diversity exists regarding how management views its accountability
responsibilities related to the results of the business combinations, which can be summarised asfollows:(a) The amortisation and impairment model is useful from the perspective of discharging
accountability responsibilities related to the results of the business combinations.
 The management can explain the results of the reporting entity’s business combinations
using profit or loss which would be calculated by matching the increases in income dueto the business combination with the costs of goodwill (amortisation expenses), wheresuch costs would be allocated over the period management estimates that future cash
flows would increase.
 It would be recognised and explained as a failure in the investment (that is, the businesscombination) when the value of goodwill deteriorates below the carrying amount of
goodwill after amortisation.
 By amortising goodwill, management can explain that they manage their acquirees in anorderly manner considering both the recoupment of the investment amount and the riskof impairment, thereby providing discipline in managing the entity.
(b) The impairment-only model is useful from the perspective of discharging accountability
responsibilities related to the results of the business combinations.
 It would be recognised and explained as a failure in the investment (that is, the business10

combination) when the carrying amount of goodwill without amortisation becomes
unrecoverable with the future cash flows arising from the CGU to which goodwill was
allocated.
 Management can provide a signal that there was a failure in the investment (that is, thebusiness combination) when the value of goodwill deteriorated from the amountinitially recognised.
 Management can explain the growth of the reporting entity’s income and profit as aresult of the business combinations, regardless of the amount of the initial investment or
the amount of the expenses allocated.
21. Given the diverse views of management of the reporting entities, allowing an option to select thesubsequent accounting for goodwill would provide management with different views to adopt
the accounting they believe is useful to discharge their accountability responsibilities related to
the results of their business combinations.

Preparers and investors can communicate more effectively
22. ASBJ Research Paper No. 3 states that the needs of analysts for the financial information
regarding business combinations varied, and the way analysts used the financial information
provided depended on the objectives of their analysis. It also stated that some analysts thoughtthat information regarding the management’s estimate of the period that future cash flows would
increase due to the business combination was useful.
23. Because IFRS currently requires the impairment-only model under IAS 36, information
regarding the management’s estimate of the period that future cash flows would increase, as
described in the preceding paragraph, is not necessarily provided to users of financial
statements. Accordingly, by allowing management to choose from either the impairment-onlymodel under current IAS 36 or the amortisation and impairment model as the reporting entity’s
subsequent accounting for goodwill, preparers can provide investors with financial informationthat is consistent with their views on how to evaluate the results of their business combinations.
24. By introducing the optional approach, it is expected that the approach would provide an
opportunity for preparers and investors to communicate how preparers evaluate and explain the
results of the business combinations, and this would make the communication between preparers
and investors regarding the financial information prepared based on the selected accounting
policy more effective. As a result, it is expected that investors would be provided with11

information that would allow investors to better understand management behaviour as well as toenable investors’ analyses and future forecasts related to the business combinations in a moresophisticated manner - more effectively and efficiently.

Concerns on the optional approach
25. The ASBJ acknowledges that, generally speaking, permitting alternatives in accounting
standards is undesirable and that the IASB, after it was reorganised from the International
Accounting Standards Committee (IASC), has completed its works on the Improvements projectin 2003 to eliminate the alternatives that had existed in IASs.
Nevertheless, the ASBJ thinks that, considering the balance between comparability andflexibility, there are circumstances where providing alternatives is warranted.

In fact, under

IFRS, the option to use either the cost model or the revaluation model is provided as the basis
for the subsequent measurement of assets in IAS 16 Property, Plant and Equipment and IAS 38
Intangible Assets.
26. According to ASBJ Research Paper No. 3, some equity analysts noted that “from the perspectiveof conducting analyses based on cash flow information, they were indifferent between
amortisation and non-amortisation because neither affected cash flows.”

For those analysts,

providing an option for the subsequent accounting for goodwill is likely to have a limited effecton their analyses of financial statements.
27. In introducing the optional approach, some may be concerned that additional burden would be
imposed on users of financial statements because of the reduction in the comparability between
entities.

However, the ASBJ thinks the advantages of the optional approach, as discussed

earlier, would outweigh this additional burden.

In addition, the concerns may be alleviated to acertain extent by adding disclosure requirements to supplement information that is necessary to
make comparisons among entities.

Discussion PointRegarding the subsequent accounting for goodwill, what are your views on the
proposal to permit an entity to choose either the impairment-only model under current
IAS 36 or the amortisation and impairment model as an accounting policy?

12

Amortisation Period
Background
28. When the subsequent accounting for goodwill has been discussed, including when theamortisation of goodwill was abolished and in recent discussions, one of the main arguments
raised against the amortisation of goodwill is that estimating the amortisation period is difficultand is arbitrary.
29. If the amortisation of goodwill were to be reintroduced, the ASBJ thinks that one of the main
issues that need to be resolved is how to determine the amortisation period and, accordingly, thefollowing paragraphs discuss this issue.

The ASBJ acknowledges that other issues, such as theamortisation method, also need to be resolved if the amortisation of goodwill were to bereintroduced, but are not discussed in this paper.

Discussions to date
30. In 2004, the IASB superseded IAS 22 and rejected the amortisation and impairment model,
primarily because the amount amortised in any given period can be described as at best anarbitrary estimate of the consumption of acquired goodwill during that period (paragraph
BC131E of IAS 36).
31. In recent discussions regarding the subsequent accounting for goodwill, the IASB staff statedthat “the useful life of acquired goodwill and the pattern in which it diminishes generally are notpossible to predict with a satisfactory level of reliability” is a key argument10 and that the
majority of users of financial statements stated that “amortisation of goodwill over an arbitrary
period does not provide decision useful information11”.
32. Under U.S. GAAP, the FASB issued the Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets (hereinafter referred to as “Statement No. 142”) in 2001,
which abolished the amortisation of goodwill.

The reasons for reaching such conclusion werethat the useful life of goodwill and its pattern of consumption cannot be predicted with sufficientreliability (paragraph B74 of Statement No. 142), as well as that the FASB Board agreed withrespondents who stated that the amortisation of goodwill based on an arbitrary period does notreflect economic substance and thus does not provide useful information (paragraph B79 ofStatement No. 142).

1011

In recent discussions, the FASB has indicated that estimating theParagraph 14 of Agenda Paper 18A for discussion at the October 2015 IASB Board Meeting.
Paragraph 7(a) of Agenda Paper 18B for discussion at the November 2015 IASB Board Meeting.

13

amortisation period is difficult and highly subjective12 as views against the amortisation of
goodwill.

How Accounting Standard Setters Have Prescribed the Amortisation Period
33. In the past, accounting standard setters have prescribed the determination of the amortisation
period as follows:Standard

Principle for

Maximum

Rationale of Prescribing

Determination

Periodthe Amortisation Period

Superseded Standards
・The estimated life of goodwill is neither infinite
nor specifically limited, but is indeterminate
U.S. GAAP

The period(APB Opinion

estimated to be

No. 17,benefitedissued in(paragraph 27)(paragraph 22).
40 years・Since the date at which the value becomes zero isindeterminate, the end of the useful life mustnecessarily be set arbitrarily at some point or1970)

within some range of time for accounting purposes(paragraph 23).
・Because it is frequently difficult to estimate theuseful life, for accounting purposes, the Standard
specifies an arbitrary limit on the amortisation
period (paragraph 45).
・The presumption in this Standard is that goodwill

IFRS

5 years

does not normally have a useful life in excess offive years (paragraph 45).

(IAS 22,

Useful life

(rebuttablerevised in(paragraph 42)

but should

・There may be circumstances when the goodwill is

not exceed

so clearly related to an identifiable asset that it can

20 years)reasonably be expected to benefit the acquirer over1993)

the useful life of the identifiable asset.
Nevertheless, since an enterprise’s planninghorizon with respect to its operations as a whole isunlikely to exceed twenty years, projections as tothe life of goodwill beyond this period are not

12

Appendix B of Agenda Paper 18D for discussion at the June 2016 IASB–FASB Joint Board Meeting.

14

Standard

Principle for

Maximum

Rationale of Prescribing

Determination

Periodthe Amortisation Period
sufficiently reliable to permit an amortisation
period of longer than twenty years (paragraph 45).
・The future economic benefits embodied in

The best

goodwill are always consumed. Although there

estimate of the

may be no physical limit to the useful life of

period during

goodwill, infinite lives do not exist (paragraph

IFRS

which future(IAS 22,

economic

20 years

revised inbenefits are(rebuttable)

1998)

expected to46(a)).
・As an enterprise’s planning horizon for its
operations as a whole is unlikely to exceed 20
years, projections of the life of goodwill beyond

flow to thethis period are not sufficiently reliable to permit anenterpriseamortisation period of longer than 20 years(paragraph 44)(paragraph 47(a)).

Currently Effective Standards
・By amortising goodwill over the period for which
Japanesegoodwill is expected to have an effect,

GAAP

The period foramortisation expenses can be matched against(Accounting

which

income as a result of the business combination.

Standard for

goodwill isBusiness

expected tocompany represents the amount recovered in

Combinations,have an effectexcess of the cost of the investment.

20 yearsissued in・Consistent with the concept that the profit of the・The maximum period was carried over from2003)

predecessor guidance.
・For cost-benefit reasons, rather than conceptual

IFRS forUseful life

reasons, goodwill should be considered to haveSMEs(paragraphs

finite lives and, therefore, goodwill should be(issued in

19.23 and2009)

18.21)

10 yearsamortised over their estimated useful lives, with amaximum amortisation period of ten years(paragraph BC112).

U.S. GAAP

・The useful life should be limited to 10 years on the

Useful life

(Accounting(paragraphStandards

350-20-15-4 of

10 yearsbasis that, generally, a significant portion of theassets and liabilities acquired in a business15

Standard

Principle for

Maximum

Rationale of Prescribing

Determination

Periodthe Amortisation Period

Update No.

thecombination involving private companies would be

2014-02,

Codification)

fully used up or satisfied by the 10th year

optional for(paragraph BC17).
・Some stakeholders supported a 15-year period toprivatecompanies,align with amortisation of goodwill for U.S.

issued infederal tax purposes, but it was concluded that a

2014)

period of 15 years was no less arbitrary than aperiod of 10 years and that a longer amortisation
period would increase the risk of impairment(paragraph BC19).

34. In addition, in its Exposure Draft issued in 1999, the FASB proposed amortising over a uniform
fixed period because the FASB concluded that that was the only practical solution to theintractable problem (paragraph B74 of Statement No. 142).
35. Regarding how accounting standard setters have prescribed the determination of theamortisation period in the past, the ASBJ observes the following:(a) as the principle for determining the amortisation period, some accounting standard settershave prescribed the principle more specifically, such as “the period estimated to bebenefited” or “the period for which goodwill is expected to have an effect”, instead ofsimply prescribing the amortisation period to be the “useful life”;(b) all standards, including those that have prescribed a principle for determining theamortisation period, prescribe a maximum period; and(c) none of the standards contain a clear rationale regarding the specific number of years forthe maximum period, but recently issued standards tend to have a shorter maximum period.

Needs of Users of Financial Statements
36. In past discussions, the IASB acknowledged that some users of financial statements think that
information based on management’s assessment of the useful life of goodwill may be useful13.
Furthermore, the IASB indicated the importance of considering what information users offinancial statements are asking for, focusing on the benefits for users of financial statements of
13

Paragraph 7(b) of Agenda Paper 18B for discussion at the November 2015 IASB Board Meeting.

16

the current information versus the costs to preparers of applying the requirements14 as ASAF
members comments at the December 2015 ASAF meeting.
37. As described in ASBJ Research Paper No. 3, analysts have stated that information regarding themanagement’s estimate of the amortisation period was useful. Analysts stated the following
views:(a) Information regarding the management’s estimate of the period for which future cash flows
would increase due to the business combination was useful.

These users also mentioned

that, by amortising goodwill based on such period, profit or loss would be calculated bymatching the increases in income due to the business combination with the amortisation
expense determined based on the management’s estimates and thus provides useful
information.
(b) The amortisation period should be determined based on the management’s estimate of theperiod for which synergies would be realised and maintained.

Goodwill may be amortisedover a relatively long period when the synergies were expected to be realised over a long
period of time.
(c) The primary purpose of amortising goodwill is to ultimately reduce the carrying amount of
goodwill to zero.

The amortisation period should be based on the management’s estimateof the period for which the amount of goodwill would be recouped by the increase in
expected future cash flows due to the business combination.

Our Preliminary Views on the Amortisation period
Principle for the determination of the amortisation period
38. As mentioned earlier in this paper, one of the main reasons the IASB decided to abolish theamortisation of goodwill was that the amortisation period was determined arbitrarily.

If theamortisation of goodwill were to be reintroduced, the ASBJ acknowledges that this would
continue to be a concern.
39. If the amortisation of goodwill were to be reintroduced, the ASBJ thinks that it is important toclarify the principle for the determination of the amortisation period.

In developing thisprinciple, the ASBJ thinks the analysts’ views regarding the amortisation period and theinformation provided by the amortisation of goodwill should be emphasised, in order to provide

14

Appendix C paragraph C2(c) of Agenda Paper 18 for discussion at the February 2016 IASB Board Meeting.

17relevant information through the amortisation of goodwill.
40. In this respect, the ASBJ thinks that it would be inappropriate for an accounting standard setterto prescribe a uniform fixed period.

Information based on a uniform fixed period prescribed byan accounting standard setter will not be useful to users of financial statements who think
information based on the management’s estimates are useful.

In addition, assuming that all

goodwill acquired by the reporting entities have the same useful life does not necessarily resultin faithful representation.
41. There are mixed views regarding the principle for the determination of the amortisation period.
For example, a feedback statement of the joint research by the EFRAG, the Organismo Italiano
di Contabilità (OIC) and the ASBJ15 stated there were factors that could help determining thelength of the amortisation period, including:(a) the period over which the acquirer expects to earn excess return over the theoretical case ofa standalone business;(b) the expected payback period; and(c) economic assumptions that were used to price the transaction.
42. Furthermore, as mentioned earlier in this paper, users of financial statements interviewed by the
ASBJ supported estimating the amortisation period based on the period for which expected
future cash flows would increase due to the business combination.
43. Regarding the preceding two paragraphs, the ASBJ observes that, although the views wereexpressed differently (especially for the concept of “the expected payback period”), there weremany points in common.

The ASBJ thinks the principle that most appropriately describes theessence of the common nature would be “estimating the amortisation period based on the
management’s estimate of the period for which the future net cash inflows would increase due tothe business combination”.
44. The ASBJ acknowledges that there may be concerns about the arbitrariness involved because theamortisation period would be determined based on management’s estimates.

However, the

ASBJ is of the view that this is requiring judgment of the management in order to provide
relevant information to users of financial statements and, accordingly, its advantages would
outweigh the concerns about the arbitrariness.

15

https://www.asb.or.jp/en/discussions/papers/2014-0722/feedback.html.

18

Whether to prescribe a maximum period for the amortisation period
45. As stated in paragraph 33 of this paper, all standards, including those that have prescribed aprinciple for determining the amortisation period, prescribe a maximum period for theamortisation period.
46. As discussed earlier in this paper, the ASBJ supports adopting a principles-based approach todetermining the amortisation period.

Following this principle, prescribing a maximum period

for the amortisation period may impair the relevance of the information provided.
On the other hand, generally speaking, predictions are less reliable when they are more out inthe future.

Some think that it is necessary to prescribe a maximum period in order to ensure acertain level of relevance, and the ASBJ thinks it is worth exploring this issue.
As long as management can justify the amortisation period it adopts, even if that period becomesvery long period, using that period for amortisation would be consistent with the principle
discussed earlier.

Accordingly, if a maximum period were to be prescribed, the ASBJ thinksthat it is appropriate to make it rebuttable.
47. The maximum period for the amortisation period, under the assumption that it would be
rebuttable, would be difficult to determine objectively. Nevertheless, considering the fact that
accounting standards issued recently prescribe a maximum period for the amortisation period of
10 years and based on the research results of some academic papers16, the ASBJ thinks 10 years
is most likely to be accepted by constituents.

16

The ASBJ reviewed academic papers including the following:
Healy, P., Serafeim, G., Srinivasan, S. and Yu, G. (2011). Market competition, government efficiency, andprofitability around the world. Working paper, Harvard Business School. Available at SSRN 1865878.
Nissim, D. and Penman, S. H. (2001). Ratio analysis and equity valuation. Review of Accounting Studies, 6, 109–
154.
Obinata, T. (2013). Sustainability and mean reversion of profitability. Chuokeizai-sha, Inc.
Palepu, K. G. and Healy, P. M. (2012). Business analysis and valuation 5th edition - International edition, Cengage
learning.

Palepu and Healy showed the empirical research results that excess operating returns on equity diminished within 5 to
10 years. Nissim and Penman explored the period of the mean reversion for decile portfolios formed on excess
operating profit and found that excess operating profit for the highest decile remained over 10 years.

19Discussion Points
Do you agree with the determining the amortisation period based on the management’s
estimate of the period for which the future net cash inflows would increase due to thebusiness combination?

Do you support providing a rebuttable presumption regarding the maximum period
for the amortisation period?

If so, how should that maximum period be prescribed?

20