Last November, the International Accounting Standards Board (IASB) voted to retain the impairment-only approach to goodwill accounting. The IASB did not discuss whether the impairment-only model or the amortization model was conceptually superior, but whether there was compelling evidence to justify switching from one model to the other.

Arguments for and against amortization of goodwill

In voting, the IASB revisited the arguments in favor of introducing goodwill amortization to improve information:

• The impairment test does not work as intended – the IASB's decision to move to the impairment-only approach was dependent on a sufficiently rigorous and operational test, and the evidence suggests that it was not.
• For goodwill, there is now evidence that entities are required to make reliable estimates of the useful life of goodwill, as well as amortization expense that can provide useful information.
• Amortization would result in the recognition of an expense in the Statement of Profit or Loss that would reflect the consumption of benefits associated with goodwill.
• Amortization can hold management to account better than the impairment-only model.
• Unlike the impairment-only model, amortization would directly target goodwill.
• Disclosure should not be a tool to solve what is essentially a measurement problem—that is, the limitations of the impairment test.

These arguments are countered by arguments in favor of retaining the reduction-only model:

• A compelling argument for change has not been identified.
• Stakeholders' views are still strongly held and diverse.
• The impairment-only model and the amortization-based model have their limitations.
• Each model corresponds to a different view of the nature of goodwill.
• Reintroducing depreciation would not address the concern about impairment losses.
• The reintroduction of depreciation would not represent a significant improvement in financial reporting that justifies the disruption and expense of the change.

At the IASB meeting in November 2022, these two opposing views were very clearly presented:

“The conceptual debate about which is the most appropriate model for goodwill accounting remains. There are valid views, supported by well-considered evidence, on both sides. They reflect different perspectives on the nature of goodwill. The evidence suggests that these positions remain divergent and strongly held, and are unlikely to be reconciled, and do not currently present a compelling case for change.”

Goodwill – what are the next steps?

The IASB's position on retaining the impairment-only model showed that proponents of reintroducing estimated goodwill amortization were unable to formulate a robust transitional solution. If goodwill were to be systematically amortized, it would have to answer the question of retrospective or prospective application. The answer to this question is crucial as an equity effect because it has consequences not only for the structure of the statement of financial position, but also for existing financing agreements, earnings forecasts and the assessment of the economic success of business combinations.

There are considerations regarding additional disclosures in the notes to the financial statements, which should enable the assessment of the performance of the business combination in the foreseeable future. It is important to note that this evaluation period is almost always significantly shorter than any of the discussed periods associated with the useful life of goodwill. In some jurisdictions around the world, the acceptance of scheduled amortization of goodwill has always depended on the resulting cost of earnings and compliance with legal requirements that determine what the useful life of goodwill should be. The price, however, sets aside the business model and processes that have been put in place to preserve the value of the reporting entity.

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Data source: Grant Thornton International