Goodwill – convergence or divergence?

Two years ago, this English columnist married an American. Mrs Deller moved from Orlando, Florida to Warrington, England, prompting the inevitable question (‘but why?’) in every shop she goes in.

I elicit a similar response when I inform Americans of my plans to visit all 50 states (12 so far, and counting), with particularly unfair questioning over why I would visit the Dakotas. Anyway, since then, we have understood that while we may share a common language (of sorts), there are still many differences between the two countries and cultures.

So it is with the state of play of International Financial Reporting Standards and US GAAP. The convergence of IFRS and US GAAP is a topic that has not really been on the radar in recent years.

Sizeable differences

While both bodies recently adopted new lease standards – namely, IFRS 16 for international accounting standards and ASC 842 for US GAAP – there are still sizeable differences in the detail.

Both have similar principles of increasing the recognition of liabilities in the balance sheet, but also have notable differences in the income statement, with the US GAAP treatment generally remaining a straight-line expense rather than being considered a financing arrangement.

So when the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) met on 23 July to discuss various topics, the discussions around each body’s goodwill and impairment projects were interesting to see. Both bodies are deep into the projects and have currently suggested moving in different directions.

Differences of opinion

It is probably important to start with the most contentious issue by far – that of whether to amortise goodwill or retain an impairment-only approach. What is interesting to note is that both bodies received similar feedback from respondents and yet have come to different tentative decisions on the way forward.

In both studies, supporters of the amortisation approach tend to note the wasting nature of goodwill. In addition to this, they note that the current impairment test is not working and can be costly. The belief is that the reintroduction of amortisation would reduce the pressure on the impairment test and could hold management to account due to needing to generate sufficient profits to recover the cost related to the goodwill.

Supporters of the impairment-only approach do not believe that goodwill is a wasting asset and believe that an arbitrary amortisation calculation does not provide useful information. They believe that introducing amortisation will not significantly reduce the costs required under an impairment review, as this will still be required.

As both sets of feedback appear very similar, it could be imagined that both boards may look at similar ways forward. However, this is not the case.

• US response: in December 2020 the FASB tentatively decided to introduce goodwill amortisation. This would be on a straight-line basis over a 10-year period, unless the company could justify another period. Any other period would be subject to a cap.
• IFRS response: the March 2020 discussion paper reached a narrow preliminary view (8 out of 14 board members) to retain the impairment-only model, rather than reintroducing amortisation.

Continued similarity

While the big difference between the approaches for amortisation and impairment remain, there continue to be areas of similarity. The IASB has concluded that it is not feasible to design a different impairment test that is significantly more effective than the current test under IAS 36, Impairment of Assets. The FASB has also considered if there is a need to move from the current impairment calculations, but there appears to be little appetite to move this forward.

A current consideration under both models is to remove the need for an annual quantitative impairment test for cash-generating units (CGUs) containing goodwill and move to an indicator-based approach. The received opinions on this note that users don’t particularly object to removing the need for an annual impairment test. They found that the strongest support for this was among those who favoured the amortisation approach rather than the impairment-only approach.

Next steps

While there is plenty that unites IFRS and US GAAP in accounting for goodwill, it appears that divergence currently remains on the cards in respect of the amortisation. The next steps outlined by both offer a potential glimmer of hope that this may not be the case.

The FASB appears to be committed to the amortisation principle and has tentatively decided to require a cap for entities that select a different amortisation period. One of their outlined next steps is to direct the staff to perform research to inform the length of the cap.

The IASB appears less committed to its current approach of impairment only. In September 2021 the staff plan to ask the Board for an initial decision on whether to reintroduce amortisation of goodwill. It is possible that meetings such as the one on 23 July may lead to the two standards remaining largely converged rather than taking separate paths as has seemed to be the way forward.