Goodwill and Future Related Trends
Goodwill and Future related trendsIn January 2014, the International Accounting Standards Board (IASB) launched a post-implementation review of the accounting for business combination. This review was conducted with the intent to understand whether the provisions of International Financial Reporting Standard (IFRS) 3, business combinations are working as intended, specifically whether the standards provide information that is useful to users of financial statements, whether there are areas of standards that represent implementation challenges and whether unexpected costs have arisen when preparing, auditing or enforcing the requirements of the standard. This review focused significant attention on the impairment-only model for goodwill accounting. As previously mentioned the move to an impairment-only model was approximately 15 years ago when FASB issued statements of accounting standards and IASB issued IFRS3. Most of the major accounting bodies claimed better information about intangible assets was needed because of the increasing importance of intangible assets for many entities. This is also in line with the concepts we have learned regarding decision-usefulness of financial information which states that F/S should be prepared considering the needs of users so that they can make better informed decisions. The FASB and IASB claimed that many users did not regard goodwill amortization expense as useful information when analyzing investments. The Impairment-only model was introduced based largely on academic research suggesting that this model provides with superior and useful information compared to the previous amortization model in use. The research performed by KPMG International in 2014 found little value in systematic amortization charges and evidence that impairment charges better reflect the economic value of recorded goodwill.
However, in recent times, questions have arisen regarding the impairment-only model’s consistency of application, cost effectiveness and overall usefulness. These concerns motivated the IFRS3 post-implementation review in 2014 by IASB. The purpose of this review was to determine whether the regulations were being implemented and whether the introduction of IFRS3 had unintended consequences. These similar concerns motivated the KPMG investigate project. KPMG reported that actual users did not agree with the academic researchers claim that impairment-only accounting produces significant valuable information. Although many users believe IFRS3 achieves its objectives, most question whether the increase in cost has exceeded the benefits to users. These users claim that the standards fail to provide information that helps users hold management accountable. From the point of view (POV) of management and auditors many concerns have arisen regarding the cost and complexity of performing current goodwill impairment tests. On another note, while the application of IFRS 3 imposes significant costs on preparers, there is also a meaningful cost to investors as they seek to unravel the numbers produced by the Standard. Additionally, given the difficulties that investors often face interpreting this Standard, in their view, it is likely that it distorts the efficient operation of capital markets” (Investors POV). FASB and IASB included goodwill accounting in their current agenda and noted that some respondents supported the current model, others supported a return to the amortization model while the remaining respondents supported a hybrid model where goodwill would be amortized but the model also provides for possibility of periodic impairment. Supporters of the current model believe amortization charges are arbitrary allocation that fails to provide useful information. These participants strongly believe impairment model is useful because it provides confirmation of market valuation. Table 1 in the appendix lists the motivations and beliefs of those who support the amortization model. Supporters of the hybrid model believe that systematic amortization of goodwill is appropriate because it reflects the consumption of acquired economic resources over time, and its application would achieve sufficient level of verifiability and reliability of reported information, however these users also believe that a provision for periodic impairment testing also makes sense. IASB review also prompted a similar investigation of goodwill accounting by KPMG. The firm launched this project because, while the impairment-only model has been credited with contributing “to the efficient operation of [the] capital market,” KPMG had not seen the “same sense of importance of goodwill impairment testing from analysts and other market commentators, or even from preparers themselves.” Various interviews and academic research conducted by KPMG led to key findings and stakeholders views that included the subjectivity involved in goodwill impairment testing makes it complex, time consuming and limits its effectiveness and many companies consider the amount of investment related disclosures to be excessive. The key take away from the study was that there is considerable support for a return to the amortization or hybrid model. The research group also concluded that further improvement should be considered in the area of disclosure requirements. Externalities and free riding play a crucial role in information disclosure, since cost of disclosure is higher than its benefit firms are reluctant.