Twenty years ago, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) changed goodwill accounting, which is still hotly debated today. When determining the value of a company, the question inevitably arises as to what makes one company more valuable than another. This question also speaks about the importance of determining the value of the company by appraisal, but also about the need to respect the market position of the company in the valuation process, because the market must in any case be an arbiter in determining the real value of the company.

What is Goodwill?

Goodwill is the excess of the consideration transferred (usually cash and/or shares) by the acquirer over the value of the acquired assets and liabilities of the target company. Prior to the 2001 exchange rate adjustment, goodwill was depreciated over a limited period of time, sometimes up to 40 years.

Some companies or their affiliates, and ultimately stores, would not be able to operate successfully if their company changed. Goodwill in marketing terms, to a large extent, is associated with image creation, because this term is usually translated as reputation, good reputation, reputation and the like.

Goodwill reporting

The boards of directors did not take the elimination of depreciation lightly. Various options were considered such as:

• Write off all or part of the goodwill immediately
• Reporting on goodwill as depreciable assets over their useful lives
• Reporting goodwill as an asset that is not depreciated but is tested for impairment
• Reporting on goodwill as an asset of which part is depreciated and part is not (mixed access).

A lengthy discussion between the Board and its stakeholders resulted in the option of “Reporting on goodwill as an asset that is not depreciated but is tested for impairment”. However, the depreciation debate never seemed to go away. Those who prepare financial statements often criticize the impairment model, and other models are often discussed.

Goodwill Accounting

Some stakeholders express interest only in writing off goodwill at the acquisition date, so they do not have to subsequently perform impairment tests and corroborate the results with independent auditors. Thus, as an option, they would rather return depreciation, which should alleviate the pressure of future impairment testing.

Some companies are predominantly acquisitive, so goodwill is one of the largest assets on the balance sheet. When it is put at cost, it withdraws all earnings in the years to come and can transfer more capital to the capital deficit.

What can be fixed in the goodwill system?

Even after 20 years of a stable system, cracks are visible in the accounting model developed in the US. In December 2020, the FASB attempted to return to the goodwill depreciation model and consider a straight-line approach for a period not exceeding ten years. This would be a significant departure from GAAP today and from IFRS, where the two accounting regimes are largely harmonized.

Management must issue a draft presentation, receive comments, and then reconsider all options before issuing a final standard. For any additional information, contact Grant Thornton experts!

Data source: Grant Thornton Global