IASB Discussion Paper on Business Combinations — Disclosures, Goodwill and Impairment

The International Accounting Standards Board (“IASB”) has published the Discussion Paper Business Combinations—Disclosures, Goodwill and Impairment in March 2020 (the “Discussion Paper”). The Discussion Paper considers four major topics, including (1) improving disclosures about acquisitions, (2) improving effectiveness of impairment test, (3) simplifying the impairment test, and (4) changing the range of recognisable intangible assets. As an experienced valuation and financial advisory firm, AVISTA has outlined the key points in the Discussion Paper and potential impacts to valuation and corporate transactions.

Improving disclosures about acquisitions

In response to some investors’ concern on not having sufficient information for understanding the subsequent performance of an acquisition and achievement of the management’s objectives for the acquisition, the IASB believes that companies should disclose the strategic rationale and management’s objective for undertaking an acquisition, and the metrics for monitoring achievement of objectives at acquisition date. Subsequent to the acquisition date, disclosure regarding the information and metrics used by the management to monitor and measure the progress of objectives achievement should be required. The metrics to be disclosed could be financial (e.g. profitability) and/or non-financial (e.g. product launches).

Another suggested additional disclosure is the factors making up goodwill, such as nature, amount, and timing of, and related costs required for the synergies expected to be realised. The company is required to provide qualitative description of factors that make up the goodwill recognised and to quantify an estimate of expected synergies in determining and agreeing the acquisition price.

Improving effectiveness of impairment test

Under the current IAS 36 — Impairment of Assets requirement, companies have to test cash-generating units containing goodwill for impairment at least annually. The Discussion Paper has examined (1) ways to improve the effectiveness of impairment test at a reasonable cost; and (2) whether to reintroduce amortisation of goodwill.

Regarding the improvement on the effectiveness of impairment test at a reasonable cost, the Discussion Paper has preliminary concluded that it is not feasible to design a significantly more effective impairment test than the currently adopted one as required in IAS 36 — Impairment of Assets.

In the context of reintroducing amortisation of goodwill, the views among IASB members are controversial, with majority of them voting in favour of retaining the impairment-only model and not reintroducing amortisation of goodwill, as the determination of useful life of goodwill would be arbitrary and amortisation of goodwill could not be an effective measure of management’s accountability for acquisition decisions.

Simplifying the impairment test 

There are three reliefs proposed by the IASB to simplify the impairment test, including (1) removing the requirements for a company to perform annual impairment assessment for cash-generating units containing goodwill if there is no impairment indication, intangible assets with indefinite useful lives and intangible assets not yet available for use; (2) removing the restriction on including uncommitted restructuring and asset enhancement cash flows; and (3) removing the requirement to use pre-tax cash flows and pre-tax discount rates in estimating value in use.

The IASB is in the preliminary view that these measures could reduce the cost and complexity for performing impairment test.

Changing the range of recognisable intangible assets

The Discussion Paper has examined whether some intangible assets could be included in goodwill to reduce costs and complexity for companies in identifying and valuing particular intangible assets. Having considered varying views from stakeholders on this topic, the IASB concluded that there is no compelling evidence suggesting that a change in the range of recognisable intangible assets is favourable.

To read the full Discussion Paper released by IASB, please click here.

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We are closely following up on the latest development of this accounting standard update. For further information or enquiry regarding the potential valuation impact of the Discussion Paper to you, please feel free to contact us.

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