Business valuation—not amortisation or impairment—should be at the centre of goodwill reporting

BVWire–UKIssue #33-1
December 7, 2021

“Once every decade or so, accountants fret over goodwill and reconsider how best to report it in financial statements—should it be amortised, impaired, amortised and impaired, or something else?” So say Steve Cooper and Dennis Jullens in last week’s edition of their Footnotes Analyst.

“There is no obvious right answer, positions are entrenched, and debate usually gets nowhere,” they begin in “Goodwill Accounting—Investors Need Something Else.”

The goodwill debate, covered extensively by BVWire—UK over the last year, is now coming to the end of yet another of these cycles. The financial professions “need to move on to what really matters—reporting about business value,” the authors argue.

Most business valuers agree that the amortisation schemes financial regulators around the world propose:

  • Reduce the amount of information available to investors or analysts; and
  • Eliminate the often significant requirement that management attests to the current value of their acquisitions.

The debate about amortising goodwill hides the fact that valuers can rarely look to impairment tests to learn much about the riskiness of a business or its acquisitions either. The authors remind all financial analysts that impairments, if triggered at all, are “almost certainly less” than the business value lost, and those valuations are often shielded by either management resistance or unreported internally generated goodwill from the rest of the business.

Investors learn that goodwill can contain many things—but standards and good practise require business valuers to separate identifiable intangibles. Financial reports may be the last place to look to quantify the intangibles relating to employees, restructuring opportunities, synergies, customer lists, or growth plans.

Cynics might say that the only remaining “unidentifiable” intangible left over in many goodwill conclusions is overpayment. On this topic, The Footnotes Analyst is merciless:

We all know that research shows that the average acquisition destroys value, which is often the result of overpayment. Theoretically this overpayment should result in an immediate impairment loss and not be added to goodwill; however, we cannot recall this ever happening—in part no doubt due to management hubris and in part due to goodwill shielding…. Clearly, ascribing a useful life to the overpayment component of goodwill is meaningless.

The authors conclude this thoughtful analysis by supporting business valuation as the only solution. “Eliminating goodwill through immediate write-off (generally expressed as a deduction from equity in the form of a consolidation adjustment, rather than reporting an expense) is not new. It was applied in several jurisdictions prior to their adoption of IFRS and was permitted under IFRS prior to 1993…. This does not mean that goodwill should be ignored—far from it. We think that information about goodwill and about business combinations is important and should be part of wider reporting about business value.”

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