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26 Mar. 2020

AASB and IASB consult on ways to help investors hold companies to account for acquisitions and on goodwill accounting

The objective of this project is to improve the information companies provide to investors, at a reasonable cost, about the acquisitions those companies make and about goodwill. Better information should help investors more effectively hold a company's management to account for its acquisition decisions.

Better disclosures about acquisitions

Acquiring another business is a common way for companies to grow. However, acquisitions do not always perform in subsequent years as well as management initially expected. Investors would like to know more about how an acquisition is performing in relation to such expectations, not least so that they can hold a company’s management to account for its acquisition decisions.

In response to this feedback, the IASB is suggesting changes to IFRS Standards that would require a company to disclose information about its objectives for an acquisition and, in subsequent periods, information about how that acquisition is performing against those objectives.

Accounting for goodwill

The IASB has also considered whether to change how a company accounts for goodwill. Companies must test goodwill for impairment annually, but stakeholders have mixed views about whether this test is effective. Some argue that the impairment test informs investors about an acquisition’s performance. Others say that the test is costly and complex, and that impairment losses on goodwill are often reported too late.

The IASB tried to identify a better impairment test—one that would require a company to report at an earlier date if its goodwill had lost value. The current test provides information to investors, but it tests a broader set of assets than just goodwill. The IASB has concluded that there is no alternative that can target goodwill better and at reasonable cost. It expects that the new disclosure requirements would provide investors with the information needed on the performance of an acquisition.

Some stakeholders have suggested that the IASB should reintroduce amortisation—the gradual write-down of goodwill over time, which was the requirement in IFRS Standards until 2004. But, having considered the pros and cons of amortisation, the IASB’s preliminary conclusion is that it should retain the impairment-only approach, because there is no clear evidence that amortising goodwill would significantly improve the information that companies report to investors.

The Discussion Paper Business Combinations—Disclosures, Goodwill and Impairment  contains further proposals in addition to those outlined above, including proposals to reduce the cost of the impairment test for preparers.

The current view of the IASB is consistent with the findings in AASB Research Report No. 9 Perspectives on IAS 36: A Case for Standard Setting Activity: Summary of Outreach Results published in March 2019.

Please submit your comments to the AASB by 24 July 2020 via the AASB website, LinkedIn or email.