CFAI argues listed companies cannot afford proposed ‘wasting asset’ treatment of goodwill

BVWire–UKIssue #11-2
February 18, 2020

fair value for financial reporting
goodwill, fair value, goodwill impairment, impairment testing

BVWire—UK continues to cover the response to early-stage efforts to amortize the world’s goodwill assets. The message currently: the process is in the early stage. Regulators in the UK, U.S., and elsewhere have received an outpouring of concern from auditors, financial leaders, and the business valuation profession. The auditors tend to believe that the existing process of impairment testing is costly and provides insufficient benefit. Others tend to feel that annual acquisition goodwill tests force listed companies to defend their business strategies and the impairment results are the only way shareholders can learn about potential problems.

Given the fractured points of view, if IFRS, IASB, or the U.S. FASB ultimately do anything to change the required valuation and reporting of goodwill, it will not be in 2020.

Two great position papers on how to account for goodwill from business combinations were published in recent weeks. First, the CFA Institute (CFAI) recently submitted its lengthy and very thought-provoking comment letter (41 pages) to UK regulators, and as part of the U.S. FASB’s Invitation to Comment (ITC) process.

Citing the Carillion failure, CFAI told the UK agencies:

Recent business failures in the UK and the related media attention have, again, raised the question of audit quality. There has been much in the press that has inflamed the reaction of many stakeholders (e.g., investors, politicians, pension trustees, and the broader public). We certainly don’t disagree that such business failures are problematic and create significant consequences for not only investors but also other stakeholders to an organization. While extensively reported upon by the UK media, there is much reaction to, but not significant analysis of, the causes of such business failures and the degree to which audit failures, aggressive accounting, fraud, or market conditions that resulted in liquidity issues contributed to the lack of timely recognition of such business failures.

Perhaps most dramatically, CFAI analysts and international regulators ‘have not considered the magnitude of the goodwill balances they would likely put on a schedule to amortize over a period of ten years.’

How much are we talking about? CFAI concludes that amortization would require U.S.-listed companies alone to write off $5.6 trillion in balance sheet assets during this period—a non-cash accounting adjustment that would put many listed companies into negative net income situations for the next decade.

For this and other reasons, the CFAI has serious concerns about the reversion back to goodwill amortization.

The business valuation community is (for the most part) united in its opinion that, from a user perspective, the benefits of the transparency and information the current impairment model provides outweigh the costs. The cost-benefit issue was what triggered the international accounting regulators to revisit this issue in the first place. A coordinated effort is underway in the business valuation profession to continue to provide feedback to rule makers and to educate users on this important issue.

The second recent example of input from the valuation community on this issue comes from London’s IVSC, which issued their second position paper on the subject earlier this month. ‘Information Value of the Current Impairment Test: Leading or Lagging Indicator’ analyses the accounting framework to better understand why goodwill impairments in certain situations fail to be a leading indicator. IVSC identifies four primary reasons why goodwill impairments often lag market sentiment, and utilises examples to articulate the fact patterns which lead to these outcomes. (The first IVSC on amortising goodwill was covered by BVWire—UK here. The final paper, ‘Practical Solutions to Enhance the Current Goodwill Impairment Framework,’ is due in April.)

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