Reasons for and against impairment and amortization in goodwill
Current accounting standards mandate that goodwill is measured at cost less any accumulated impairment losses. The acquirer must test goodwill for impairment annually or more frequently. Previous standards required goodwill to be amortized annually. The debate however is still open, should we impair or should we amortize goodwill? If we amortize it we are implying that goodwill loses value on a systematic manner no matter what the market conditions are while if we choose the impairment option we will understand that goodwill will only lose value once evidenced that in the market the value is lower than the one recorded in our financial statements.
Supporters and detractors are today more vocal than ever, however, the IASB clearly supports the impairment option
Even though the impairment model has been used by IFRS (International Financial Reporting Standards) adopters for more than 10 years, the debate, both in theory and in practice, remains today unresolved. Supporters and detractors are today more vocal than ever, and the IASB clearly supports the impairment option but there are some other positions supporting the amortization as the preferred option for the recognition of goodwill depreciation. An example of that can be found on the recent EFRAG’s Discussion Paper (European Financial Reporting Group, 2014) where the research group claims to support the reintroduction of amortisation and a mixed impairment-amortisation approach.
Main disclosures on goodwill treatment
However, other streams of literature analyse the impairment option in terms of complexity, cost, subjectivity or comparability and conclude that the accounting treatment introduced by IFRS can be quite complex and subjective regarding estimations and calculations required. At the same time, disclosures are also more complex and the empirical studies analysed have documented low levels of compliance regarding goodwill and impairment assumptions.
It is true that the impairment option is seen as quite a subjective, costly and complex one
In summary, many papers have been dedicated to the discussion and analysis of goodwill accounting treatment. While there seems to be quite a consensus regarding the advantages of goodwill impairment option in relation to the adequate representation of the underlying economic conditions and its usefulness for some performance measurement, it is also true that the impairment option is seen as quite a subjective, costly and complex one. Therefore, we conclude that there is a need for additional rigorous research in this area from jurisdictions adopting or moving towards the adoption of IFRS.
Post written by PhD Soledad Moya, professor in the Finance and Management Control Department at EADA