Discussion Paper on Accounting Treatment for Goodwill
A recently published Discussion Paper (DP) 'Should Goodwill still not be Amortised? - Accounting and Disclosure for Goodwill' by a research group comprising of the Italian standard setter Organismo Italiano di Contabilità (OIC), European Financial Reporting Advisory Group (EFRAG), and the Accounting Standards Board of Japan (ASBJ), argues that amortization of goodwill shall be reintroduced.
The DP contributes to the hot discussion on the ways of accounting and disclosing goodwill. As per International Financial Reporting Standard (IFRS) goodwill is subject to a yearly impairment test and is not amortized. However, with reference to post implementation review of International Financial Reporting Standard (IFRS) 3 – Business Combinations, the debate over the strengths and weaknesses of the existing method gained momentum again.
The Group explains possible ways to overcome the shortcomings identified by the members of the group in the DP:
· The impairment only approach leading to the limited usefulness of the information
· Subjectivity and cost of the impairment testing as per IAS – 36, and
· Delayed recognition on impairment losses
The Group has considered one or more in combination of the following in its Discussion Paper:
a) Making requirements of the impairment testing better
b) Varying the accounting requirements of goodwill
c) Improving the disclosure requirements in IAS – 36 (Impairment of Assets)
The Group as a result to its analysis concluded that it would be appropriate to reintroduce the amortization of goodwill as it logically reflects the usage of the economic resources taken over under a business combination over a period of time and can be applied in a verifiable and reliable way. The Research Group, in addition to this, concluded that there is a lot room available for improvement in the head of disclosure requirement.
A detailed chapter is included in the DP giving Research Group’s observations, in case the International Accounting Standard Board decides over to reintroduce the impairment and amortization approach.
The EFRAG, OIC and ASBJ invite comments and suggestion on Discussion Paper by maximum 20th of September 2014.