A mix of stakeholders participated in a full-day roundtable discussion at FASB headquarters in Norwalk, Conn., on November 15. The topic: the FASB’s Invitation to Comment (ITC) on moving from the current impairment model for goodwill to one of amortization or a hybrid approach. Other issues included whether other intangible assets should be subsumed into goodwill and whether there should be more disclosures about goodwill and intangible assets.
The valuation profession was well represented at the roundtable—and so were users of financial information (including investors), practitioners, preparers, academics, standard-setters, and regulators. Members of the valuation profession have serious concerns over going back to a model that treats goodwill as a wasting asset. Here are some key points that were made during the morning session of the roundtable:
- Most users support impairment—there is definitely “news” in an impairment charge. That is, it is not solely a lagging indicator of company performance (academic studies support this), so the impairment process is “overwhelmingly” useful as a signal of what’s to come.
- The acquisition of a business assumes a going-concern premise, so the concept of goodwill amortization is not compatible with this premise.
- In practice, an acquired firm and its goodwill get integrated into an operating or reporting unit and it becomes nearly impossible to track goodwill back to the specific acquisition in order to evaluate performance. Added disclosures about future impairment charges should talk about the reason—whether it’s because of the acquisition or the legacy operations.
- The higher up you go in terms of the level at which you test goodwill, the less meaningful it becomes. Testing at the entity level (versus an operating-unit level) could mask poor performance at lower levels.
- Goodwill has different elements, some which may be wasting but others may not be (such as synergies, as one commenter pointed out—but that’s debatable). Different companies can have very different goodwill elements of variable magnitudes. Some commenters are inclined to let management decide the useful lives of the components, while others disagree because you’ll get a wide disparity in lives.
- Increased disclosures will be helpful (such as what the primary intangible asset was that the acquirer wanted), but there’s a concern about information overload.
- If a default useful life is used with amortization, it should be set at a minimum of 10 years and allow for management judgment (with disclosure) and also triggering events. A commenter from Japan said they use a combination of amortization and impairment and most companies choose 10 years or less for useful lives (20 years is the max).
- There is a general agreement that it is important for global standards (IFRS) to converge. The IASB is also exploring whether to amend its approach to accounting for goodwill, but it is divided about the benefits of reintroducing goodwill amortization to IFRS standards. The IASB plans to release a Discussion Paper in early 2020 for a 180-day comment period to weigh stakeholder interest in amending IFRS 3, Business Combinations and IAS 36, Impairment of Assets.
- Speaking of convergence, commenters from the M&A world had different experiences about the impact of accounting rules on deals. One said that, at the margin, different accounting rules may scuttle a deal. When using an EPS model, acquirers will pay more when impairment is used versus amortization (academic research backs this up). But another commenter said that, in his 20 years of M&A experience, he never saw that happen.
- In response to a concern about what methodologies valuation experts use in valuing intangibles, it was stressed that there is a “very robust” body of knowledge and standards that all experts follow, such as The Appraisal Foundation’s financial reporting valuation advisories and AICPA guides, such as the upcoming guide on business combinations.
The afternoon session of the roundtable had the same mix of stakeholders, but the individual players changed. We’ll have coverage of that session in the next issue of BVWire.
What’s next: The FASB has done an excellent job of laying out the issues and soliciting comments from a wide variety of stakeholders. But this is just the first step. Next, the comments will be processed, and a presentation will be made to the FASB board, which will decide on what action to take. Typically, an exposure draft would be issued and go through one or more revisions before rules are finalized. This entire process can take up to several years to complete.
Please let us know
if you have any comments about this article or enhancements you would like to see.