20 September 2023
Mr. Jean-Paul Servais
Chair
The Board of the International Organization of Securities Commissions

Re: Consultation on Goodwill
Dear Mr. Servais,
The Corporate Accounting Committee (CAC) of the Securities Analysts Association of Japan(SAAJ) is pleased to comment on “Consultation on Goodwill” (hereinafter referred to as the“Consultation Paper”) published by the Board of the International Organization of Securities
Commissions (IOSCO) on 22 June 2023.
The SAAJ is a not-for-profit organization for professionals in the areas of investment and finance,
offering education and certification programs in these fields. Its certified member analysts (holdingthe CMA designation) number around 28,000.
The CAC is a standing committee of the SAAJ established in March 1977. It is composed of 12members including equity and credit analysts, portfolio managers, and academics.
In this comment letter, we respond to Question 1 under “4.1 General” and Questions 2 - 9 under“4.2 Questions for Investors and other users of financial statements” in “Chapter 4 – IOSCO
Consultation Questions for Stakeholders” of the Consultation Paper.

General CommentsOn 28 December 2020, we submitted our comment letter on the Discussion Paper “BusinessCombinations - Disclosures, Goodwill and Impairment” published by the International AccountingStandards Board (IASB) on 19 March 2020 1. The main points on our comment letter to the IASB areas follows:
The IASB’s package of preliminary views includes some proposals which help improve theinformation provided to investors, such as enhanced disclosure of performance after goodwill

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https://www.saa.or.jp/account/account/pdf/ikensho_201228en.pdf―1―acquisition. However, it also includes a lot of proposals such as providing companies withrelief from having to perform an annual quantitative impairment test. These proposals could
go against resolving and in fact rather exacerbate the problem that impairment losses on
goodwill are recognized as “too late” which investors are most concerned about.
The IASB’s proposal to improve disclosure in order to ease investor dissatisfaction and tosimplify impairment tests in order to eliminate preparer dissatisfaction would be an easycompromise and would not contribute to improved accounting for goodwill. Therefore, westrongly oppose the proposal.

The IASB needs to recognize that the problem that impairment losses on goodwill arerecognized as “too little, too late” became apparent after the 2008 financial crises that happened
after 2004 when the IFRS changed the accounting of goodwill to non-amortization. The IASB
needs to withdraw the preliminary view of “it should retain the impairment-only model andnot reintroduce amortization” and fundamentally change its view on goodwill accounting
treatments based on the premise of reintroducing amortization.

In order to solve the problem that impairment losses on goodwill are recognized as “too late”
which was identified in a Post-implementation Review and which investors are most concerned
about, and in order to reduce the burden on preparers, the proposal to simplify impairment tests
would be inappropriate as it would not resolve the problem. We hope that the IASB could more
seriously consider reintroducing the amortization of goodwill and setting new IFRS Standards
for a “regular amortization + impairment” approach to respond to the “too late” problem.

However, at its November 2022 meeting, the IASB tentatively decided to retain the impairmentonly approach to accounting for goodwill. As a background for this tentative decision, the IASB statedthat there is not a compelling case to explore reintroducing amortization of goodwill. The tentativedecision of the IASB is consistent with the tentative decision of the Financial Accounting Standards
Board (FASB) to deprioritize and remove the goodwill project from its technical agenda.
We still believe that, from the perspective of addressing the “too little, too late” issue and faithfully
representing the economic substance of a company, the reintroduction of goodwill amortization is abetter approach than the IASB’s direction to simplify impairment tests and add disclosure
requirements on an acquisition and its subsequent performance. On the other hand, we understand that
the IASB’s tentative decision makes the reintroduction of goodwill amortization no longer a shortterm option. We therefore believe that the improvement of disclosure led by the IASB is useful as thenext best approach.

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In this context, we strongly agree with IOSCO’s refocus on the “too little, too late” issue in theConsultation Paper. If IOSCO believes that the “too little, too late” issue is not just an issue forindividual companies, but could have a significant impact on the overall economy and the financialsystem, we believe that IOSCO should examine the reasons why the accounting standard setters did
not consider the “too little, too late” issue in the process of reviewing accounting for goodwill andraise the issue with them.
Below are our comments on each question.

Question 1: Is there anything we can add in Chapter 1, 2 and 3, in order to adequately describe
the background and issues surrounding goodwill?
The impairment-only approach tentatively decided by the IASB cannot eliminate the risk thatmanagement may use overly optimistic assumptions in estimating the recoverable amount of goodwill.
As a result, the “too little, too late” issue remains unaddressed, where impairment losses on goodwill
are not recognized on a timely basis and insufficient. We strongly agree with IOSCO’s refocus on the“too little, too late” issue in the Consultation Paper.
When the IASB began its review of accounting for goodwill, it had the perspective of addressing
the “too little, too late” issue. However, we understand that this perspective gradually disappeared,
and the focus shifted to improving disclosure regarding the subsequent performance of an acquisitionand simplifying impairment tests, resulting in the IASB’s tentative decision to retain the impairmentonly approach to accounting for goodwill.
As goodwill accumulates and economic uncertainty increases, the “too little, too late” issue is not
limited to individual companies, but could have an even greater impact on the overall economy andthe financial system through increased stock market volatility 2 and procyclicality.
What should be added to the Consultation Paper is an examination of why the IASB and the FASB
did not consider the “too little, too late” issue in the process of reviewing accounting for goodwill.
Capital market authorities should not be directly involved in the process of setting accounting
standards. However, if IOSCO believes that the “too little, too late” issue is not just an issue forindividual companies, but could have a significant impact on the overall economy and the financialsystem, we believe that IOSCO should examine the reasons why the accounting standard setters did

Under IFRS and U.S. GAAP, a goodwill impairment often results in a single large loss, which would
have a significant impact on the stock market and increase stock price volatility.

2―3―not consider the “too little, too late” issue in the process of reviewing accounting for goodwill andraise the issue with them.

Question 2: How can the impairment test for goodwill in IAS 36 be improved to address theconcerns around the timely identification and recognition of an impairment charge?
Two of the main reasons for the concerns that impairment losses on goodwill are not recognized ona timely basis are overly optimistic estimates by management and shielding.
As we stated in our comment letter to the IASB, the negative effect of overly optimistic estimatesby management may not be limited to impairment losses on goodwill. In addition, goodwill that is notamortized on a regular basis could encourage acquisitions at inflated prices. We believe that there is
no better approach to mitigate these overly optimistic estimates by management than the regularamortization of goodwill. Since a shielding effect is inevitable in impairment testing, we believe that
this effect would make it very difficult to improve the effectiveness of impairment tests.
We do not believe it is possible to significantly improve the effectiveness of impairment tests.
Some suggested that in some cases, such as innovative businesses, it may be very difficult to support
future projections used for impairment testing with objective data.

Questions 3 - 9 relate to improving disclosure. Before commenting on each question, we would liketo provide our general comments on improving disclosure.
We believe that additional disclosure requirements on an acquisition and its subsequent performanceled by the IASB are useful as the next best approach. We also believe that the improvement ofdisclosure regarding initial recognition of goodwill, impairment tests, etc., as suggested in theConsultation Paper, would complement the additional disclosure requirements led by the IASB andwould further contribute to enhancing investor predictability regarding goodwill impairment risk.
However, the improvement of disclosure may only leave the decision of goodwill impairment risk
to investors, which is unlikely to curb the accumulation of goodwill and the associated increase inuncertainty. As we stated in our comment letter to the IASB, the improvement of disclosure is not a
fundamental solution to the “too little, too late” issue. It is just considered the next best approach.
In addition, companies should be permitted to reduce disclosure by applying materiality criteria incases where the risk of impairment is low or the amount of goodwill is small relative to net assets.

―4―Question 3: Do disclosures around business combinations, including qualitative descriptions ofwhat makes up the goodwill balance at acquisition (such as expected synergies from combining
operations, intangible assets that do not qualify for separate recognition or other factors), currently
provide decision useful information? If not, how can they be improved?
We do not believe that the current disclosures are sufficient. In order for investors to be aware ofindications of goodwill impairment, it is first necessary to clarify at the time of acquisition how theacquired business is (or is not) incorporated into the existing business and, consequently, how theresults of performance and cash flows of the acquired business are included in each operating segment
or cash-generating unit (CGU) of the acquirer. Then, disclosure of the future cash flows (includingsynergies), WACC and growth rates for each business segment or CGU as assumed at the time of theacquisition will enable investors to confirm the progress of the subsequent performance of theacquisition and any indications of goodwill impairment if disclosure continues in the same category
in the next period and thereafter.

Question 4: Do you agree with the IASB's tentative decisions about business combinations,particularly regarding the disclosure of the performance of business combinations afteracquisition?
We agree with the IASB’s tentative decisions. In addition to qualitative information, quantitative
disclosures, such as the subsequent performance of an acquisition, would facilitate the analysis ofperformance forecasts. In this case, as we comment in Question 3, the acquired business should be
disclosed consistently in each business segment or CGU of the acquirer.

Question 5: Do disclosures around the impairment tests of goodwill currently provide sufficientdetail about the assumptions used and the sensitivity of the estimate to changes in thoseassumptions? If not, what is lacking?
We do not believe that the current disclosures regarding the assumptions used in goodwill
impairment testing and the sensitivity of the estimate to changes in those assumptions are sufficient.
Specific quantitative information regarding them should be disclosed to the extent practicable.
In addition, there are many cases where the sensitivity analysis is not disclosed because therecoverable amount significantly exceeds the carrying amount. Even in those cases, the percentage ofthe excess should be disclosed. See our comment on Question 8.

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Question 6: Have you identified instances where the assumptions used in the impairment test of
goodwill are inconsistent with other assumptions used for other financial and non-financial
estimates? If yes, in what instances?
Although we may not directly answer this question, the following are instances of inconsistentaccounting between a subsidiary and the consolidated basis.
There was an instance where an overseas subsidiary of a Japanese company that voluntarily applied
IFRS Accounting Standards recognized a huge impairment loss while the parent company did not do
so on a consolidated basis. In this case, the parent company recognized a huge impairment loss on aconsolidated basis several years later, and this became a serious problem.
Although instances of such huge impairment losses are rare, there are some instances where asubsidiary recognizes an impairment loss while the parent company does not do so on a consolidated
basis because the impact on the consolidated financial statements is minimal. In such instances, there
is a risk that investors may overlook the impairment of the subsidiary based solely on the disclosureof the parent company.

Question 7: Do disclosures around the initial recognition of goodwill and the impairment tests ofgoodwill provide appropriate entity-specific information?
Although it is depend on companies and cannot be generalized, as we comment in Questions 3 and5, we do not believe that the current disclosures around the initial recognition of goodwill andimpairment tests are sufficient.
We understand that many disclosures only describe general accounting procedures and do notprovide any indication of the risk of goodwill impairment. Even for those companies that disclose their
specific information, many disclose only growth rates and discount rates, which by themselves do notprovide useful information to investors. See our comments to Question 3 for additional informationthat investors may need.

Question 8: How can disclosures around the goodwill impairment test be improved? What
additional information would be useful? Would disclosure of the percentage by which the fair valueor the value in use exceeds the carrying amount of the cash generating unit provide decision usefulinformation?

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Disclosure of the percentage by which the fair value or the value in use exceeds the carrying amountof the cash generating unit is useful information in incorporating impairment risk into performance
forecasts. At the same time, sensitivities such as assumptions and interest rates in estimating the fairvalue or the value in use should be appropriately disclosed. See our comments on Question 5.

Question 9: When disclosed, do key audit matters (KAMs) related to impairment tests of goodwill
provide sufficient entity-specific information to users of the financial statements? If not, whatadditional information could be provided to enhance transparency in KAMs?
In cases where goodwill impairment testing is included in the KAMs, more detailed information isdisclosed. However, there are few cases where key assumptions, sensitivities and margins aredisclosed. As investors, we would like to request auditors to encourage audited companies to disclosesuch information so that auditors can include it in the KAMs.
In addition, audit reports will be more valuable if KAMs include the auditor’s findings onimpairment testing.

Sincerely yours,

Satoshi Komiyama
Chair
Corporate Accounting Committee―7―