The Continuing Saga of Goodwill Accounting

In January 2014, the International Accounting Standards Board (IASB) launched a post-implementation review of the accounting for business combinations by releasing a Request for Information. The intent of this review was to learn whether the provisions of International Financial Reporting Standard (IFRS) 3, Business Combinations, are working as intended, specifically: * Whether the standard provides information that is useful to users of financial statements, * Whether there are areas of the standard that represent implementation challenges, and * Whether unexpected costs have arisen when preparing, auditing, or enforcing the requirements of the standard. (1) Of particular interest to many in this review of business combination accounting is the impairment-only model for goodwill accounting. The move to an impairment-only model was made approximately 15 years ago when the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, in 2001, which is now Accounting Standards Codification[R] (ASC) Topic 350, Intangibles--Goodwill and Other. Three years later the move continued when the IASB issued IFRS 3 in 2004. (2) In the summary for SFAS No. 142, the FASB claimed that information about intangible assets was needed because of the increasing importance of intangible assets for many entities. The FASB stated that financial statement users indicated that they did not regard goodwill amortization expense as useful information when analyzing investments. The IASB made similar claims about improvements from moving to an impairment-only goodwill accounting model when it discussed and later passed IFRS 3. Those claims fueled the switch to the current impairment-only model now part of both U.S. and international Generally Accepted Accounting Principles (GAAP). But introduction of the impairment-only model was based largely on academic research suggesting that an impairment-only model provides superior information compared with the previous amortization model. The research found little value in systematic amortization charges and evidence that impairment charges would reflect the economic value of recorded goodwill. As noted by KPMG International (KPMG) in an April 2014 investigative project, academic research finds that goodwill impairment charges ... are associated with economically significant reductions in market value, and these findings better reflect changes to the underlying economic goodwill than do amortisation charges. (3) Unfortunately, since the implementation of the impairment-only model, questions have arisen regarding its consistency of application, cost effectiveness, and overall usefulness. Such questions motivated the IASB review that began with its January 2014 Request for Information on the post-implementation review of IFRS 3. The IASB noted that its Request for Information would allow it to assess whether the accounting regulations for business combinations are being implemented on a consistent basis and whether there have been unintended consequences arising from the passage of IFRS 3. (4) Similar concerns previously had prompted the FASB to place goodwill accounting on its agenda in the fall of 2013. And those same questions motivated the KPMG investigative project. KPMG found that while academic researchers still claimed impairment-based accounting produces significant valuable information, actual users did not agree. (5) Responses to the IASB The IASB received 93 comment letters in response to its Request for Information. In an attempt to further enhance its understanding of the sentiment regarding current rules of accounting for business combinations, the IASB also participated in 30 outreach activities in conjunction with the request for comments. While the IASB project dealt with all aspects of accounting for business combinations, the focus of this article is specifically on the participants' views of the impairment-only model of accounting for goodwill. …