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This article was first published in the April 2018 international edition of Accounting and Business magazine.

Intangible assets have become increasingly relevant in modern business, raising many questions for preparers around the recognition, valuation and impairment calculations associated with them. Many large, technology-based entities have huge parts of their value tied up within intangible assets; if these assets are internally generated, they are generally prohibited from being recognised under IAS 38, Intangible Assets.

Bizarrely, footballers also come under this category. If a club acquires a footballer, it acquires their playing registration. This can be capitalised and amortised over the life of the contract. However, if the footballer has come through the club’s youth system, they represent an asset that is internally generated, and no value can be placed on them. I have spent many an enjoyable hour in Liverpool telling students that Steven Gerrard was in fact worth nothing.

One intangible that has generated significant discussion recently is goodwill. When we think of acquired goodwill, we simply think of it as the difference between the amount paid for an entity and the fair value of its net assets at acquisition. As the acquisition price of an entity will be based on that entity’s estimated future cashflows, the recognition of goodwill is effectively recognising that the group has paid for access to these cashflows, creating an asset for the business. All of this seems reasonable, but it does raise the question: when does a large goodwill balance simply represent overpaying for an entity as opposed to an actual asset?

This is where the impairment of goodwill is supposed to kick in. As IFRS 3, Business Combinations, prohibits the amortisation of goodwill, it is instead subject to an annual impairment review. Currently this impairment review is done by comparing the carrying amount of the entity to see if it has fallen below its recoverable amount.

Renewed focus

Goodwill is in the news following the liquidation of a number of high-profile entities. In January, Carillion, one of the UK government’s biggest contractors, filed for liquidation. At the date of its liquidation, the company had goodwill valued at £1.57bn on its statement of financial position. This was listed as the single biggest asset on the Carillion books, representing more than a third of the company’s total assets. This goodwill had initially been correctly calculated and had arisen from the acquisition of numerous entities over many years.

The intangible assets note in the most recent Carillion financial statements shows the annual impairment review had been performed and there was deemed to be no impairment in goodwill. To many non-financial onlookers, this seems confusing. How can an insolvent entity have £1.57bn of goodwill, which has been largely unimpaired?

The real answer, of course, is that it couldn’t. The goodwill should surely have been impaired over time. The problem is that if the directors had decided to write down the goodwill, it could have moved the entity further towards liquidation, so they pursued other avenues, such as acquiring further contracts to boost potential cashflows, at the expense of short-term liquidity.

In March, the International Accounting Standards Board (IASB) held its global preparers forum. Alongside the disclosure project and primary financial statements project, goodwill and impairment came up for discussion.

It had been on the board’s workplan for some time, but issues such as the Carillion collapse pushed goodwill to the forefront of discussions once again. The IASB knows from feedback that entities delay recognition of impairments in goodwill. It has tentatively decided not to reintroduce the amortisation of goodwill and is looking at improving the impairment-testing model for goodwill instead.

The major concerns around goodwill impairment are that the entity-specific nature of a value-in-use calculation gives scope for management optimism, allowing the recognition of any impairment to be avoided. In addition, there is potentially a ‘shielding’ effect from internally generated goodwill. To combat this effect, the IASB has proposed taking a headroom approach.

Instead of comparing the recoverable amount of a unit with its carrying amount at the current date, the headroom model takes a two-period approach. The total headroom of a unit at the current date will be compared with total headroom at the previous period. If that total headroom decreases, there is a rebuttable presumption of an impairment of acquired goodwill of the difference.

Headroom example

The IASB has produced the following headroom example. Company X tests the impairment of a cash-generating unit annually. There is no change in the level of business activity, and monetary amounts are denominated in currency units (CUs). The recoverable amount and the carrying amount of the unit over three years can be seen in the table on this page.

Under the current impairment rules, there is no impairment at any date, as the recoverable amount of the unit exceeds the carrying amount, despite the decline in recoverable amount.

The headroom approach considers the movement in total headroom in each period. This total headroom is calculated as the difference between the recoverable amount of an entity and its net assets. Of this total headroom, only the CU100 goodwill in the example is recognised. Although unrecognised in the financial statements, the remainder is still used to assess whether the goodwill requires impairment.

Using the measure of total headroom, a decline can be seen in the overall headroom each year: 20 in year 1 and a further 5 in year 2. Applying this approach to impairment would give an impairment of 20 in year 1 (taking goodwill to 80), and a further impairment of 5 in year 2 (taking goodwill to 75).

If adopted, this approach is likely to lead to earlier recording of goodwill impairments than is current practice. The board also hopes it will discourage management from making over-optimistic projections of cashflows because any difficulty in maintaining the over-optimism year on year would affect the total headroom and result in impairments to goodwill. It is important to note that this method would require precise measurement of the recoverable amount each year, so costs are likely to be higher than under the current impairment model.

Recognition at acquisition

In addition to looking at impairment, the IASB is considering possible alternative treatments for the separate recognition of identifiable intangible assets acquired in a business combination.

There are four approaches currently under discussion:

  • Approach A – retain current IFRS 3 requirements. Currently identifiable intangible assets must be recognised separately from goodwill at their fair value. The main criticism of this approach is that separate recognition of acquired intangibles is of limited value unless there is a market for the intangibles.
  • Approach B – require disclosures similar to those under IFRS 13, Fair Value Measurement. Under this approach, the separate recognition of intangibles at fair value would continue, but with expanded disclosures to include information on the valuation techniques and inputs used.
  • Approach C – allow indefinite-lived intangible assets to be included within goodwill. This is the easiest course of action, and the accounting is already similar, as both types of asset are subject to annual impairment reviews rather than amortisation. However, this may not provide useful information if any of the intangible assets generate independent cashflows, such as licensing income.
  • Approach D – segregating intangible assets into wasting assets and organically replaced assets. The IASB believes that many people use this distinction and has supplied the following definition: wasting intangible assets are those separable from the entity, have finite useful lives and lead to identifiable revenue streams, such as wireless spectrum and patents; organically replaced intangible assets are those that are difficult to distinguish from the entity as a whole, such as customer lists and brands, and are replenished through the marketing and promotional expenditure of the company. Only wasting intangible assets would be recognised separately and would be amortised, with the organically replaced intangible assets subsumed within the goodwill figure.

The accounting for intangibles and impairment remains under scrutiny by many commentators and is likely to remain highly relevant in the future as technology plays an ever increasing part in the success of many entities. The proposals from the IASB are likely to lead to increases in goodwill impairment, but it remains to be seen whether they go far enough to convince the sceptics.

Adam Deller is a financial reporting specialist and lecturer

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IASB’s headroom approach example


Year 0



Year 1



Year 2



Recoverable amount







Carrying amount of other net assets








Acquired goodwill








Total headroom (recoverable amount less net assets)