IFRS Accounting Valuations

Potential changes to reporting on business combinations and accounting for goodwill under IFRS 3 Business Combinations and IAS 36 Impairment of Assets

Following on from feedback from the Post-implementation Review of IFRS 3 Business Combinations (“IFRS 3”), the International Accounting Standards Board (“IASB”) established a research project on the topic of goodwill and impairment (“Project”) with a view to changing the requirements of IFRS 3 and IAS 36 Impairment of Assets (“IAS 36”).

As part of this ongoing Project, the IASB provided an update on its current position in September 2019. It stated that the key objective of the Project is to increase the amount of useful information about acquisitions made by companies reporting under IFRS that is provided to users of their financial statements. In addition to assessing possible improvements to required disclosures in this area, the IASB has also raised a number of fundamental questions about the nature and treatment of goodwill.

Enhancing disclosures about acquired businesses

One of the IASB’s preliminary views is that the best way of meeting its key objective of the Project is to enhance the disclosures required, both at acquisition and on an ongoing basis, about the performance of businesses acquired by a reporting company. Specifically, the IASB believes that users would benefit from the disclosure of management’s objectives for a business combination in the year of acquisition, along with an explanation of the metrics it will use to monitor those objectives and quantification of the synergies it expects from the acquisition. In subsequent annual reports, management would then be required to provide updates on the performance of the acquired business with reference to those objectives and metrics.

It is clear that enhancing disclosure requirements – while increasing the required time and cost of annual reporting and arguably adding already cluttered disclosures in financial statements – is the most immediate and influential way in which reporting on the ongoing performance of business combinations can be improved. Currently, a company is only required to disclose information about acquisitions made in prior periods if an adjustment which has been recognised in the current reporting period relates to one of those acquisitions; however, this is a lagging indicator, and does not provide investors and other users with useful information on a timely basis in order to make decisions in their capacities as stakeholders.

In the absence of better information, these stakeholders often use the impairment test of goodwill as a barometer of whether an acquired business’ forecast cash flows support the carrying value of goodwill. However, given the nature of the test as an assessment of a group of assets, this is not (as the IASB points out) a direct test of the impairment of goodwill; in addition, using these disclosures to draw conclusions about a specific acquired business is even more difficult if a company integrates or combines that business into one of its existing cash-generating units for the purpose of carrying out the test.

Questions over the nature and treatment of goodwill

The IASB also affirmed its current position regarding the status of goodwill as a non-wasting, and therefore non-amortisable, asset, although it notes that this was upheld only by a slim majority of the IASB’s members in a vote and as such is requesting further feedback from stakeholders.

The primary argument in favour of treating goodwill as an amortisable asset made by those members was that the current impairment test is not effective at recognising goodwill impairment losses on a timely basis, and the reintroduction of an amortisation charge would help hold management of reporting companies to account.

However, in our view, the treatment of goodwill as a wasting asset and its resultant amortisation over a defined useful life does not accurately reflect its nature as an asset. An acquisition by a company is effectively a transfer of consideration in exchange for the rights to future cash inflows into perpetuity. Some of those cash inflows can be attributed specifically to identified tangible and intangible assets, which have a finite life, and a proportion of the consideration transferred equal in amount to those specific cash flows is attributed to each identified asset as part of the purchase price allocation process. The remaining consideration is then attributed to goodwill and represents the price which the company has paid for (rather than the fair value of) those future cash inflows into perpetuity which cannot be attributed to identified assets. Goodwill on the balance sheet is therefore an asset which embodies the effective cost of future economic benefits that will be received over an indefinite period into the future, and as such it is not conceptually consistent to allocate the cost of that asset over a finite period by amortising it.

This is consistent with the view of a recent Perspectives Paper published by the International Valuation Standards Council (“IVSC”), which set out three key points in its argument in favour of continuing to classify goodwill as a non-wasting asset. The IVSC argues that the going concern assumption implicit in the acquisition of an ongoing business, the nature of the inseparable assets (e.g. a business’ reputation, the knowledge base of its workforce and likely synergies) which comprise goodwill and concepts of deal pricing all support this position.


We believe that the IASB will both alleviate the reliance of users on this impairment test for valuable information about past acquisitions and relieve pressure from questions regarding the need for goodwill to be amortised by seeking first and foremost to improve the reporting of business combinations by enhancing IFRS 3’s disclosure requirements; we agree that this should be the IASB’s primary focus.

Future developments

The IASB is continuing to deliberate this topic as part of their ongoing Goodwill and Impairment Project and plan to publish a discussion paper in February 2020.

Additionally, the IVSC is planning to publish another two articles in its series on the nature of goodwill over the coming months.