Goodwill and impairment of asset Report 2022

Running head: GOODWILL AND IMPAIRMENT OF ASSET
Goodwill and impairment of asset
Name of the Student
Name of the University
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Author Note

GOODWILL AND IMPAIRMENT OF ASSET1
Bottom Line Accounting
4A Broadway Road, North South Wales
Australia – 4005
Tel: 205 629
Subject: Issues raised by IASB in context of Goodwill and impairment
Aim of the memo is to highlight the issues recently raised by IASB in context of goodwill and
impairment. Goodwill is generally reported by the entity while it acquires any other entity and
the same is reported to reflect the future profit that is expected to be generated from the assets
those are acquired in the process of acquisition or merger not separately identified. Initially, in
accordance with AASB 136 / IAS 36, goodwill used to be tested only for annual impairment.
However, owing the users and investor’s concerns regarding the present practice IASB board is
considering reintroduction of goodwill amortization in replacement of the existing approach of
impairment-only. Hence, the memo will critically analyse the amortization approach as against
the impairment only approach.
As per IAS 36, Para 90, goodwill acquired in the process of business combination shall be
annually tested for the purpose of impairment irrespective of whether there is any warning for
impairment or not and the same came into force in 2004. However prior to that period IAS 22
business combination required that the acquired goodwill shall be amortised over the useful life
with the assumption that the useful life will not exceed 20 years. In case the assumption
invalidates, the goodwill acquired shall be tested for the purpose of impairment at least once at
the closing of each financial year regardless of whether there is any warning for impairment or
not. However, different issues identified by the board in context of the same are – (i) generally it
is impracticable predicting goodwill’s useful life along with the pattern in which the same
reduces. Owing to the same, amortisation amount is the best possible way to describe the amount
of goodwill consumption in arbitrary manner (ii) amortisation provided in straight line basis over
the arbitrary useful life is not able to provide the useful information (iii) in case operational and
rigorous impairment test is developed, the entity will be able to offer more useful information to
the users of financial statement where amortisation of goodwill is used.

GOODWILL AND IMPAIRMENT OF ASSET2
Hence, number of participants in PIR (post-implementation review) of IFRS 3 suggested
reintroduction of goodwill amortisation. Different advantages in context of the same also
highlighted are – (i) some of the investors were in the view that impairment-only method is
useful for associating price that is paid for acquiring and for computing return on the invested
capital, verifying acquisition is performing as per expectation. Further various participants felt
that the losses on account of impairment are identified too late or not identified in timely manner.
It was felt that the same have only confirmatory value and does not have predictive value (ii)
different participants felt that procedure of impairment test is time consuming, expensive,
complex and require significant judgements.
Arguments those can be placed for reintroducing the amortisation are – (i) consideration of PIR
was contentious or crucial in the development phase of standard and is anticipated to recognise
the areas where implementation issues or unexpected costs have been met. One of these crucial
issues is amortisation (ii) decision of the board for implementing the impairment–only approach
was established on conclusion that the same will offer more useful information to the financial
statement users and impairment test was operational as well as rigorous. Questionable conclusion
in context of the same were – (a) though some of the stakeholders feel that impairment test offer
useful information, value provided by the same is confirmatory only (b) losses on account of
impairment often are not reported in timely manner and it raise doubts regarding whether
impairment test is rigorous (iii) feedback specified that impairment test is time consuming,
expensive and complex and hence creates doubts whether it is operation to the extent it was
considered by the board.
On the other hand, arguments those can be placed for retaining impairment-only approach are –
(i) amortisation charge offers the financial statement users with no useful information in case the
useful life is arbitrary (ii) some of the investors informed that impairment-only approach is
useful for associating the price that is paid for acquiring and for computing return on the invested
capital, verifying acquisition is performing as per expectation. They further mentioned that the
information offered by impairment test is useful as it has confirmatory value. On the contrary,
they feel that goodwill amortisation in subsequent years may provide ambiguous price that is
originally paid and hence, become more difficult in analysing the stewardship. In addition,
amortisation will reduce opportunity of impairment to take place. Hence, introduction of