Goodwill and impairment

The IASB staff began as usual by presenting their paper, which was a resume of the tentative decisions that the Board has taken to date in response to the post-implementation review of IFRS 3, Business Combinations. These decisions were around relatively small amendments to the annual impairment testing of goodwill and related to IAS 36, Impairment of Assets. They sought to respond to feedback that annual impairment testing of goodwill can be onerous and costly. However, rather than opening with a discussion and voting on the staff proposals, Board chairman, Hans Hoogervorst, gave a short speech in which he explained his growing concerns about the direction of the project. He noted that he did not believe that the amendments to the existing provisions were a proportionate response to the significance of the issues in this area. Possibly with the example of Carillion in mind, although he did not explicitly refer to it, he mentioned the fact that companies often have balance sheets dominated by goodwill even when that goodwill has ceased to have real value. While sophisticated investors may understand the underlying position of the company, others less familiar with accounting and analysis may not realise that without the goodwill, the financial health of such a company may look very different. Such non-professional investors and users of the financial statements could include politicians who look at the accounts after a company’s collapse and ask questions about how it could have been the case that financial statements based on IFRS were so misleading. To avoid such issues arising, the Board could consider introducing a very simple requirement for companies to disclose their equity less the carrying value of goodwill so cases in which a balance sheet is being propped up by goodwill will become apparent.