Quick summary

  • The current goodwill impairment testing regime is seen by some as costly, while frequently failing to deliver timely and relevant information.
  • Amid calls for changes, discussions are ongoing on whether IFRS® Standards should be amended to improve disclosure.
  • Our conversation with investors considered:
    • whether the impairment-only model should be replaced by annual amortisation;
    • whether the impairment test could be simplified; and
    • whether other improvements to companies’ disclosures would help fill the perceived information gap.
  • There is still no consensus on which model is superior – investors agree that consistent, transparent disclosure is the key to holding management to account.

What’s the issue?

The way in which companies account for acquired businesses has long been a contentious area of financial reporting. Much of the debate hinges on the accounting treatment of goodwill – an item that has variously been written off immediately to reserves, recognised as an asset and either amortised or impaired as accounting standards have evolved.

For almost two decades, IFRS has required companies to perform annual tests of cash-generating units (CGUs) containing goodwill to ascertain whether the book value is still supportable. If not, some or all of the goodwill is written off as impaired.

In recent years, the current model has come under increased scrutiny. Many commentators believe that the accounting model does not provide investors with timely, decision-relevant information. This is particularly the case with goodwill impairment, which is often seen as being ‘too little, too late’; appearing in interim or annual financial statements after share prices already reflect a loss of value. Additionally, annual impairment testing is perceived by some as a time-consuming and costly distraction for management.

Is there a better way?

There have been calls to assess whether a return to the previous annual amortisation model would be advantageous. (Under this model, goodwill is gradually written down to zero over an estimated ‘useful life’ in a similar way to many physical non-current assets.) Proponents argue that it is a simpler model to apply and ensures that goodwill does not remain on a company’s balance sheet indefinitely.

Users want to understand whether an acquisition has been successful or not and hold management to account accordingly. There has been criticism that existing accounting and disclosure requirements do not adequately address that objective, leading to calls for extended disclosure to better meet this need.

The International Accounting Standards Board (the Board) has decided to examine the way acquisitions are reported and has issued a discussion paper which is open for stakeholder comment until 31 December 2020. We recently gathered members of the investor community to discuss the proposals. Our discussion focused on three areas.

  • Should the current impairment-only model be retained or should another, such as goodwill amortisation, replace it?
  • Can the impairment test be simplified?
  • What improvements to disclosures would help deliver timely, relevant information enabling investors to hold management to account?

What do investors think?

Impairment vs amortisation

Our discussion with investors focused on the limitations of the current impairment-only model, with a view to determining how these might be addressed – either by a return to goodwill amortisation, or even by the immediate write-off of goodwill after completing the acquisition.

The following considerations stood out.

  • Goodwill is often shielded from write-off by the way acquired and incumbent businesses are often combined into a single CGU. The entire CGU is tested for signs of impairment, not the newly acquired goodwill itself.
  • There remains no consensus among financial statement users on whether goodwill has a limited or an indefinite useful life, which complicates the decision on which model is best.
  • Companies’ reluctance to report impairments may be more of a human problem than an accounting one – doing so would require a management team to admit to a strategic error.

The discussion revealed that all the proposed methods have their own drawbacks, so it might not be possible to reach a ‘correct’ answer on which model is superior.

However, participants did agree that the key goal of any changes to the accounting regime should be to mandate disclosures that give investors enough information to hold management to account for an acquisition’s performance over time.

Simplifying the impairment test


When discussing whether the impairment test could be simplified, participants were split on the question of whether annual impairment testing is indeed onerous.

  • One view is that it is difficult to argue that the annual test – once it has been set up – is an onerous requirement in subsequent years.
  • Another view is that some businesses change in nature from year to year to such an extent that annual impairment testing is, in fact, a significant challenge.

One suggestion from the Board to simplify the test is to switch from annual to ‘trigger-based’ impairment testing, under which the test is only carried out when there is an indicator of impairment. This could reduce cost but relies on management to identify robust triggers.

However, some consider that the ‘too little, too late’ issue could be exacerbated by less frequent testing. Concerns have also been expressed that in simplifying the test in isolation, the useful disclosures that accompany the annual test could be lost if the test is not performed, reducing transparency.

Improving disclosures


Participants in our discussion agreed that improving disclosures – both on the strategic rationale and subsequent performance of an acquisition – is key to achieving better accountability for the way investors’ capital is used, while recognising that commercial sensitivity can sometimes be a barrier to disclosure.

Our discussion raised three areas in which more granular disclosure could prove useful to investors.

  • Strategic rationale: The subsequent reporting over time of acquired businesses should be anchored in the metrics used by management to decide to make an acquisition at the price agreed. Disclosure of those metrics on acquisition – followed by periodic reporting of actual performance against them – increases relevance, reduces incremental reporting effort and provides better information to investors to hold management to account.
  • Underlying assumptions: More specifically, there were requests for disclosure of the assumptions underlying the models used to assess CGUs in the short-term (e.g. the first two years post-acquisition).
  • Acquired brands: It was suggested that the discrete post-acquisition performance of acquired brands should be disclosed by the acquirer if those brands were a key part of the strategic rationale for making the acquisition.

Investors prioritise consistency and transparency

From our discussion, it seems as though investors are less concerned with the exact method used to account for goodwill, particularly as most of them make their own adjustments in this area. They are much more interested in receiving precise, consistent and transparent information on the strategic rationale for an acquisition and its subsequent performance. This would enable them to assess how well capital has been deployed and hold management to account.

Our roundtable discussion on goodwill and impairment was held on 14 October 2020. It is one of a series of investor outreach events where we discuss and share perspectives on how corporate reporting, auditing and assurance, and stewardship can evolve to meet investors’ needs today and in the future.

To find out more, visit our web page or follow KPMG Investor Insights on LinkedIn. If you would like to discuss any of the areas in more detail on a one-to one basis, contact us.