At £391bn, goodwill represents 51% of net assets for UK FTSE 350 and AIM reporters. Accounting for goodwill after its initial recognition is a topical issue, featuring on the IASB’s agenda and the focus of a recent global report by the CFA Institute.
The UKEB’s research project aims to explore the potential impact for UK stakeholders if the IASB’s current impairment-only model for the subsequent measurement of goodwill were to change to a hybrid model. Under the hybrid model, impairment testing would be supported by an annual amortisation charge, with context provided by supporting disclosure.
Empirical evidence included in the UKEB Secretariat’s 2021 response to the IASB’s Discussion Paper Business Combinations: Disclosures, Goodwill and Impairment showed that:
- Goodwill had increased by 69% for the FTSE 350 since the introduction of an impairment-only model for UK IFRS reporters in 2005.
- Under the impairment-only model, goodwill was not impaired as might have been expected given changing economic conditions, such as the 2008 global financial crisis.
- The impairment-only model could be leading to over-inflation of balance sheets.
Our response recommended exploring a hybrid model for the subsequent measurement of goodwill because:
- Amortising goodwill provides a faithful representation of those goodwill assets whose benefits are consumed over time. Statement of profit or loss information under a hybrid model would provide relevant information through a faithful representation of the economic benefits consumed in the period.
- Amortisation requires subsequent measurement of individual goodwill balances, and therefore mitigates the shielding effect which arises under the impairment-only model, where goodwill balances can be allocated to large CGUs.
- Disclosures on management’s assumptions about the useful life of goodwill could provide relevant information about the expected economic benefit consumption pattern to users of financial statements.
- A hybrid model could reduce the risk of financial shock due to delayed recognition of impairments.
- If goodwill were split into components for amortisation purposes, the amortisation charge and related disclosures could provide investors with further relevant information and a more faithful representation of the underlying economics following each acquisition.
- A hybrid model would provide more consistency with the subsequent measurement of tangible non-current assets, and there is no clear conceptual basis for a different reporting treatment.
- Recognising goodwill as an asset supports the stewardship function of financial statements and helps to hold management to account for acquisitions.