In this blog piece, StudyOnline.ie financial accounting lecturer, Colm Foley, discusses the issue of Goodwill as an Intangible Asset, current accounting treatment, weaknesses in the current treatment and possible future changes. This blog piece is particularly relevant for students of ACCA Strategic Business Reporting and CPA P2 Advanced Corporate Reporting.
Definition & Measurement
In a business combination scenario, goodwill is recognised when one company purchases another. Specifically, the amount of goodwill to be measured is calculated as the excess of the aggregate of:
(i) the consideration transferred measured in accordance with this IFRS, which generally requires acquisition-date fair value and,
(ii) the amount of any non-controlling interest in the acquiree measured in accordance with this IFRS
The fair value of the net assets of the acquiree as measured at the date of acquisition.
The net figure is carried as positive goodwill , which is an Intangible Asset is the consolidated statement of financial position.
IFRS ceased amortising goodwill in 2004. This move was taken to achieve convergence with US GAAP but was in conflict with local GAAP in the UK and Japan, where amortisation of goodwill continued. Instead of amortising, IFRS requires Goodwill to be tested annually for impairment.
Treatment of Acquired Goodwill versus Internally Generated Goodwill
Goodwill acquired in a Business Combination is recognised in the Consolidated Statement of Financial position but internally generated goodwill is not allowed to be recognised, per IAS 38 Intangible Assets. This leads therefore to an inevitable inconsistency between the results reported by groups who grow through acquiring other businesses versus those groups who have grown organically. The Non current assets reported by acquisitive groups will tend to be higher, whilst post acquisition profits will be reduced by any required impairment expense.
Is there any argument to be made for capitalising internally generated goodwill for groups which grow organically? IAS 38 allows for development expenditure to be capitalised once certain criteria (the PIRATE criteria) are met. Should be there be a similar provision introduced for internally generated goodwill?
Criticism is growing around the current goodwill disclosures . In particular the disclosures do not indicate whether or not the acquisition has been successful in terms of increased profit growth. This is regarded as shortcoming in the degree to which the accounts provide a measure of management’s stewardship of their resources. To improve the level of disclosure around post acquisition performance, the International Accounting Standards Board (IASB) is said to be considering a number of disclosure options – for example, a table showing the year on year change in profits analysed between organic growth and acquisitions.
Change is likely to occur in the accounting treatment of goodwill under IFRS. However, there seems to be some way to go before the IASB achieves consensus on what proposals to make. Input from interested stakeholders, such as investors, analysts and auditors will be required to ensure the changes made are appropriate. One could say, a little goodwill from all parties will be needed.