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This article was first published in the February 2017 international edition of Accounting and Business magazine.

The English football pundit Gary Lineker once said, ‘Football is a simple game. Twenty-two men chase a ball for 90 minutes and in the end, the Germans win.’

Yet for a simple game, football generates more debate and ideas than many other topics in society. It can be simple and enjoyable, but it really is a game of opinions. Part of the fun is in the discussion.

Whilst accounting standards may not lead to the same level of heated debate as the relative merits of José Mourinho versus Pep Guardiola, there are certain topics that can get the juices flowing. They may not get the airtime of some of the more high-profile business controversies, but they cause great discussion amongst those of us who are unashamed to have favourite accounting standards. 

One such topic is the accounting treatment for goodwill. Ever since the introduction of IFRS 3, Business Combinations, it has been a source of constant debate and opinion. Following the post-implementation review (PIR) of the converged IFRS 3, the International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) in the US both have projects focusing on goodwill and intangible assets recognised in a business combination.

This is one of the research projects that the IASB will look to develop in 2017. The IASB has issued two staff papers to demonstrate progress, focusing on two main areas.

Goodwill and other intangibles 

The PIR identified concerns that, for some intangible assets, the requirement to include them at fair value is costly (because of the need to use valuation specialists), complex and time consuming.

Some users commented that valuations can often involve such subjectivity that they do not provide any useful information, commonly citing customer relationship intangible assets and brands as problematic areas. Conversely (and as this is goodwill, there are always going to be strongly opposing views), some users support recognising these intangible assets separately because this provides an insight on why an acquisition was made and about the primary assets/value drivers of the acquiree.

So, the IASB stands in the unenviable position of taking this forward and coming up with progress that is cost-effective and provides useful information for the users. Knowing (and acknowledging) that this will almost certainly be a foray into the game of opinions, IASB has chosen some key areas to look at.

Consideration has been given to subsume some of the intangible assets into goodwill rather than recognise them separately. This would be either where reliable measurement is difficult, or for internally generated intangible assets. However, it would create a paradoxical problem: whilst this would be consistent with IAS 38, Intangible Assets in the non-recognition of internally generated intangible assets, it would be inconsistent with IAS 38 in the accounting for acquired intangible assets that are identifiable.

Whilst there is merit in the subsuming approaches, there appears to be little demand to exclude other intangibles if it would have the effect of being rolled up into goodwill, given the challenges that are facing the IASB with impairment of goodwill.

In summary, IASB staff feel that there needs to be a strong argument in making changes to IFRS 3 in respect of other intangibles, particularly as the requirements for intangible assets in a business combination have already been amended twice since 2004. 

Despite this, there is an acknowledgement that the guidance about intangible assets acquired in a business combination could be improved, and this is where that IASB’s focus will be on the issue. With the continuing development of technology and customer data, the IASB suggests that some attention should be paid to providing guidance over customer-related intangible assets.

As companies now keep much more significant information about customers, one proposal is to refer to this information as customer data rather than customer lists. In addition, the IASB staff do not think that the basis for recognising these as assets should result from whether the customer has a contract with the entity or not. While data protection laws may prohibit personal data from being sold, general information about buyer preferences and demographics may well be more freely transferred. If this customer data is considered separable rather than contractual, then this may become significant in recognising it separately from goodwill.

Subsequent accounting for goodwill

Many participants from the PIR suggested reintroducing amortisation of goodwill, believing it reflects the consumption of the resources acquired over time. Despite this, many respondents still favoured an impairment-only approach, and it is this approach that the IASB is largely focusing on. Whilst mixed amortisation and impairment will be looked at, it appears much more likely that the current impairment-only model will hold, with improvements.

The major criticism that the IASB is considering is that impairment is often recognised too slowly and in too small amounts, being therefore ‘too little, too late’. One way in which the IASB is responding to this is through the development of a new approach within the current impairment-only model, called the pre-acquisition headroom (PH) approach.

Pre-acquisition headroom approach

The PH approach relates to circumstances in which acquired goodwill is allocated to pre-existing cash-generating units (CGUs) of the acquirer. Here, the concern is that the CGU may have a recoverable amount higher than its carrying amount at the date of acquisition, meaning that when the goodwill is allocated to the CGU, this excess (the pre-acquisition headroom) will effectively shield the goodwill from impairment.

The PH approach aims to incorporate the PH, measured at the acquisition date, into the impairment test calculation, so that this ‘sheltering effect’ is removed (see illustration).

The future

There is clearly a long way to go on the goodwill project. The IASB has come up with some interesting thoughts on how to better clarify and improve accounting for goodwill. Clearly it will never be met with universal approval, but as we know, part of the enjoyment is in the debate. It may not quite be the talk of the town for ordinary members of the public, but for those of us with a keen interest, there is plenty to keep us going. 


Illustration of the pre-acquisition headroom (PH) approach

A company has several cash-generating units (CGUs) and acquires a new subsidiary in the year. As the subsidiary is a supplier of components to two specific CGUs, CGU A and CGU B, it allocates the goodwill evenly across these two CGUs.

Swipe to view table

  $000  $000
Carrying amount of net assets at acquisition 1,500 1,500
Recoverable amount of CGU at acquisition 1,600 2,000
Pre-acquisition headroom   100 500
Allocated net assets of subsidiary at acquisition 800 800
Allocated goodwill of subsidiary at acquisition 600 600

Under the current treatment, the recoverable amount of the CGUs at acquisition would simply show that neither is impaired, but is used for no other purpose. Under the PH approach, it could be seen that CGU A has a PH of $100,000, while CGU B has a PH of $500,000. This headroom will be considered in future impairment calculations.

At the date of the impairment review, let’s assume that the recoverable amounts of the CGUs (including the allocated net assets and goodwill) decrease to $3.1m and $3.2m respectively. We’ll assume that the carrying amounts remain unchanged at the date of the impairment review. Under the current method, this would give the following result:

Swipe to view table

  $000 $000
Carrying amount of net assets (including subsidiary) 2,300 2,300
Allocated goodwill 600 600
Total carrying amount 2,900 2,900
Recoverable amount of CGU 3,100 3,200

Currently, the recoverable amount of both CGUs exceed the carrying amount of the net assets and goodwill, so no impairment would be recorded to either.

If we consider the same figures using the PH approach:

Swipe to view table

  $000 $000
Carrying amount of net assets (including subsidiary)  2,300  2,300
Allocated goodwill 600 600
PH (not recognised as an asset) 100 500
Total carrying amount including PH 3,000 3,400
Recoverable amount of CGU 3,100 3,200

Under this treatment, CGU A would still not be impaired. CGU B would now have to record some impairment, as the recoverable amount of $3.2m is lower than the carrying amount plus PH of $3.4m. The PH approach shows that while the goodwill appears to be unimpaired using the recognised net assets, this is due to the shielding effect of the pre-acquisition headroom. Once this is included in the calculation, goodwill is impaired by $200,000. 

The current suggestion is that the PH is only calculated on acquisition, and not subsequently remeasured, unless a further subsidiary is acquired, at which point it will then be remeasured at this date.