In early 2020, the International Accounting Standards Board (IASB) issued Discussion Paper DP/2020/1 Business Combinations–Disclosures, Goodwill and Impairment, which contained the IASB's preliminary views on proposed changes to business combination disclosures and the impairment test for goodwill and other intangible assets.

After feedback, the project aims to improve the disclosures included in financial statements about business acquisitions, in order to make management more accountable for its acquisition decisions.

It also seeks to reduce the cost and complexity associated with accounting for the impairment of goodwill and other intangible assets.

What are the key proposals?

Disclosure enhancements

It’s proposed that for each acquisition monitored by an entity’s chief operating decision-maker, the entity must disclose the strategic rationale for the acquisition, the objectives, and the subsequent performance of those acquisitions. Any expected synergies from the acquisition would also be reported.

Taking this ‘chief operating decision-maker approach’ is expected to elicit the most important information about the most important acquisitions.

AASB view

The AASB received mixed feedback on the usefulness of the proposed disclosures. Some stakeholders suggested such disclosures weren't necessary and others were concerned about their reliability.

Based on this feedback, the AASB does not support requiring disclosures about the subsequent performance of acquisitions in the financial statements. This includes the metrics used by management to monitor these acquisitions. This information may be better located in the management commentary.

Streamlining impairment testing

The IASB received feedback that current impairment testing is complex, time-consuming and requires significant judgement. So it proposed removing the requirement for an annual quantitative impairment test if no impairment indicator is present.

An annual assessment of the presence of impairment indicators would still be required, but an impairment test itself would only be done if such an indicator is found.

It also proposed to streamline the value in use model. Entities may include cash flows from future uncommitted restructurings or improving or enhancing an asset’s performance. They may also use either pre or post-tax cash flows and discount rates.

AASB view

The AASB does not support this approach. We’re concerned it could decrease the robustness of the impairment test process when it’s required. It may also mean the loss of useful information from the financial statements. Importantly, there is no evidence of significant cost savings.

There were mixed views about including uncommitted restructuring or asset enhancement cash flows. These may be open to manipulation and may delay recognising impairment losses if overly optimistic cash flows are used.

The AASB supports using either pre- or post-tax cash flows and discount rates.

Presenting total equity excluding goodwill on the face of the balance sheet

To provide greater transparency about goodwill, the Discussion Paper proposes that entities present total equity, excluding goodwill, on the face of the balance sheet.

AASB view

The AASB does not support this proposal. Presenting total equity exclusive of goodwill is inconsistent with the idea that goodwill is an asset. Also, as goodwill must be separately disclosed anyway, calculating total equity, excluding goodwill, should be straightforward for users of financial statements.

Treatment of goodwill

The Discussion Paper also raises the prospect of reintroducing goodwill amortisation, but the IASB concluded there is not enough support for this to justify changing accounting for goodwill again

AASB view

There are mixed views on this. Some preparers and auditors prefer amortisation to reduce costs and remove some of the judgement associated with the impairment test. Other users of financial reports generally favour impairment-only as it provides better information about the success of an entity's acquisitions and avoids arbitrary amortisation charges.

The AASB noted that some of the shortcomings identified in the current impairment test may be addressed with additional guidance on implementation.

What are the next steps?

Comments on the Discussion Paper closed in December 2020. The IASB is expected to consider stakeholder feedback during 2021 before deciding on the project's next steps.

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