Goodwill has resurfaced as a valuation topic globally this year, so much so that the IVSC’s first article on the subject, ‘Is Goodwill a Wasting Asset?’ has been downloaded thousands of times already. The IVSC plans two more articles on this subject due later this fall. BVWire—UK highly recommends this thoughtful first analysis, available free.
BVWire—UK’s discussions with many business valuers indicate that many in the profession think proposed changes to acquisition accounting are bad for investors, the clarity of financial reporting, and even the integrity of the audit process. There’s also suspicion in some circles that the changes are motivated by a desire of the auditors at the Big Four to do less work, particularly as they absorb changes in leasehold accounting and elsewhere required by new IFRS schemes effective this year.
From the valuation profession, there are serious concerns that the concept of amortisation of goodwill (rather than impairment testing) is not compatible with the principals of business valuation. As simply stated in the IVSC discussion paper, ‘If one were to assume goodwill is a finite lived and wasting asset, it would be inconsistent with the premise of going concern inherent in the consideration paid to acquire nearly all businesses’ (the IVSC sees one possible exception being businesses comprised nearly entirely of tangible assets).
BVWire—UK has heard less polite comments on the contradictions inherent in amortising goodwill. Some complaints:
- Acquired assets assigned to goodwill will be the only amortised asset (‘why not amortise the Apple stock you bought last month?’ one business valuer asked).
- Amortisation assumes a finite life of acquisitions, such as 15 years. Several of our readers have commented that there’s nowhere else in valuation or finance theory where assets have finite lives.
- The users of financial statements aren’t asking for this change, and in fact many are concerned that this step removes a valuable ‘early warning’ sign for investors concerned about problem acquisitions. It’s noteworthy that the CFA Institute is responding to international accounting standards-setters and the U.S. FASB with the position that their members (the investors) depend on current systems of acquisition asset impairment testing.
- The discipline required to review acquisitions with an eye toward potential impairment is beneficial to corporate leadership. One BVWire—UK reader who works for one of the largest audit firms said she feels that impairment testing issues bring nonfinancial executives into the audit process, creating valuable alignment.
- Business valuation, built on its assumptions of ‘going concern’ and ‘terminal value,’ looks longer term, which counters the prevailing tendencies that often focus on the most recent quarterly report. Amortising goodwill would eliminate this balance between short-term goals and strategic results.
- Synergies in acquisitions often appear in the goodwill allocation. But no analyst looks at a deal and thinks that synergies will sunset. ‘If you project a 2% cost savings, that synergistic benefit will continue indefinitely. They don’t go away and they aren’t finite lived,’ one valuer told BVWire—UK. They continue into perpetuity.
- It appears that the debt issuers—whether banks or private capital—generally support continuing the current practice of testing assets.
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