Paper examines goodwill impairment as a leading indicator

BVWireIssue #208-2
January 15, 2020

goodwill, goodwill impairment, impairment testing, intangible

As accounting rule makers ponder the idea of upending the current goodwill impairment model and reverting back to one of amortization, a series of papers is exploring this topic. The papers, issued by the International Valuation Standards Council (IVSC), examine whether the principles of business valuation are compatible with the concept of goodwill amortization. The valuation profession feels strongly that they are not compatible.

News value: The first paper (which has been downloaded thousands of times) concluded that goodwill is not a wasting asset, a conclusion supported by empirical evidence. The IVSC has released the second paper in this series, “Information Value of the Current Impairment Test: Leading or Lagging Indicator?” It concludes that, while the current impairment model provides “significant” information to users of financial statements, it’s performance as a leading indicator has been inconsistent. The paper points out various reasons for this inconsistency and says that reverting back to amortization would only make matters worse. The paper lays the groundwork for “practical solutions to enhance the information value of the goodwill impairment test,” and these solutions will be presented in the upcoming third and final installment.

The FASB’s project on this matter is in “initial deliberations” and the IASB will issue a discussion paper in February. A coordinated effort is underway in the business valuation profession to continue to provide feedback to rule makers on this important issue.

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