Buying another firm or organization is typical strategy corporations use to expand. These acquisitions are frequently sizable transactions, referred to as “business combinations” in IFRS Accounting Standards. The International Accounting Standards Board (IASB) is investigating ways to assist investors in holding businesses accountable for acquisitions and enhancing goodwill accounting in this project. According to the IASB’s preliminary opinion, a firm should be required to disclose information about its acquisition objectives as well as information about how the purchase in subsequent periods is meeting those objectives. Investors could hold the management of that business accountable for its acquisition choices with the use of such information. Since the “subsequent impairment tests can be endogenously determined by the initial accounting” (Zhang & Zhang, 2017, p. 244), it is crucial to investigate whether different motivations at the transaction analysis impact goodwill.
A strategically important business combination is one for which the achievement of the entity’s overall business plan would be seriously jeopardized if the objectives were not met, according to the IASB’s tentative ruling. The IASB agreed to suggest utilizing a closed list of thresholds to identify such company combinations. Organizational knowledge that meets any of those requirements would be considered strategically important.
The IASB has also been considering whether to alter how goodwill, an asset that a corporation reports on its balance sheet when it acquires a business, must be accounted for. A corporation must annually determine if goodwill is impaired or its value has decreased, although stakeholders have differing opinions on how successful this test is. Some contend that the impairment test alerts investors to the effectiveness of the acquisition. Others claim that the test is expensive and complicated and that goodwill impairment losses are frequently disclosed after the fact, making them useless to investors. The IASB has been investigating ways to simplify and improve the impairment test.
According to the IASB’s early assessment, “an impairment test is the only method applied to reduce goodwill” (Cavero, 2021, p. 245). There is no alternative methodology to pursue goodwill more effectively and affordably. The IASB is making suggestions on how to simplify the impairment test. The IASB also thought about reinstating goodwill amortization, which was required by IFRS Accounting Standards up to 2004 and involved a systematic write-down of goodwill over time. The IASB’s initial opinion is that the current approach, which only uses an impairment test of enterprises with charity and does not amortize goodwill, should be kept. If adopted, the IASB’s preliminary views, in its opinion, would offer the best means of holding an upper board responsible for its acquisition choices. The project’s principal goal is to determine whether firms can give customers more helpful information about the companies they buy from at a reasonable cost. Better information should make it easier for users to evaluate the success of companies that are making acquisitions and hold management more accountable for their choices to buy such companies.
The IASB decided in September 2021 to prioritize completing additional work to make provisional decisions on the package of disclosures concerning business combinations and analyze detailed feedback on the ensuing accounting for goodwill. At a later meeting, the IASB will discuss the project’s course. On September 20, 2022, the IASB convened to discuss some of the early opinions on business combination disclosures articulated in the Discussion Paper Business Combinations – Disclosures, Goodwill, and Impairment. The IASB proposed adding two new disclosure objectives to IFRS 3 Business Combinations. These objectives would necessitate an organization to expose data to assist financial statement users in recognizing the advantages that an institution estimated from a business combination once agreeing to the cost of buying a business and the degree to which an entity is succeeding in its goals a merger of companies. “All 11 IASB members agreed with this decision” (International Financial Reporting Standards, 2022).
There are several differences between GAAP and IFRS. First, when IFRS measures goodwill, it is presented as the difference between the purchase cost and the acquirer’s stake in the identified assets, liabilities, and contingent liabilities on an annual basis or more frequently if circumstances indicate more impairment. Otherwise, when GAAP measures goodwill, it is the disparity between the acquisition price and the net assets’ fair value. Secondly, GAAP uses two-step processes as their methods of testing, while it is not in use by IFRS. Although, when it comes to goodwill impairment, it occurs per year or more frequently if the significant impairment is indicated by the circumstances, both with IFRS and GAAP. The other similarities include prohibiting reversals of goodwill-related impairment losses and any acquisition discounts in the statement of profits and losses.
It is vital to consistently work to raise the standard of GAAP to satisfy the demands of investors and other consumers of GAAP-based financial reporting, both inside and outside the U.S. It is anticipated that, as they have for more than 40 years (Financial Accounting Standard Board, 2019), the high-quality standards it creates will continue to impact the form and future course of international standards. Developing high-quality standards through a best-in-class standard-setting process is essential to act as a guide and benchmark for others. It is necessary to carefully assess whether adopting practices associated with specific IFRS standards would enhance U.S. financial reporting as it embarks on standard-setting processes. Regarding the exemption’s design, the IASB provided guidance. The IASB specifically instructed the staff to complement the exclusions with applicability instructions and allow the exemption when releasing a piece of information that can be expected to jeopardize any of the entity’s business combination objectives substantially.
According to U.S. GAAP, goodwill value is defined as the difference between the cost of an acquisition price and the fair market value of acquired net assets. It will be reported only when the residual value of goodwill is more significant than its suggested fair value. Companies typically recorded the entire amount of friendship in the books before the new accounting standards. They didn’t give each business’s separate reporting unit a goodwill value. By comparing the projected value of the operational team with the fair value of the identified net assets of the reporting unit, companies allocate the worth of goodwill to reporting units. A two-step impairment process should be used to determine probable goodwill impairment and calculate the amount of impairment loss to be recognized if any. The companies should use the first stage to compare the reporting unit’s fair value to its carrying amount to determine its fair value, including goodwill. The organization should go on to the following stage if the reporting units’ carrying value is higher than their fair value. Companies must adhere to accounting standards’ guidelines when calculating goodwill impairment loss.
Any purchasing firm in a business combination must account for goodwill as of the acquisition date. The goodwill calculation considers the fair value of the identifiable assets purchased and the total consideration transferred plus any appropriate value-added tax that was a non-controlling interest. The potential selling price of an investment that may be bought or sold in a recent transaction with willing parties is the proper value. At the very least once a year, at the same time each year, goodwill must be evaluated for deterioration. After being allocated to reporting units, goodwill is evaluated for impairment but is not amortized. An asset or liability must be related to the operations of the reporting unit to be assigned to it, and it must be considered when calculating the unit’s fair value. The U.S. GAAP “principles require a two-step approach” (Sedki et al.,2018, p. 24) when evaluating whether goodwill is impaired. To ascertain if the carrying amount of the subsidiary exceeds its fair value, a recoverability test is first carried out at the reporting unit level. If so, the second step calculates the impairment loss as the excess of the reporting unit goodwill’s inferred value over its carrying value. This discrepancy will represent the reported impairment loss, which must be recognized by modifying the goodwill’s carrying value.
IFRS contrasts the carrying amount to replacement cost instead of U.S. GAAP. In addition to the mandated annual test, IFRS requires that an entity test for goodwill impairment whenever an indicator is present. A combination of non-exhaustive internal and external elements, such as a loss in market value, subpar performance, and restructuring plans, should be taken into account by an organization when deciding whether any indicators might point to the necessity for goodwill impairment testing. The recoverable amount for each asset should be established if there is a sign of impairment.
References
Cavero Rubio, J. A., Martínez, A. A. & Mazón, A. C. (2021). Economic effects of goodwill accounting practices: systematic amortization versus impairment test. Spanish Journal of Finance and Accounting / Revista Española de Financiación y Contabilidad, 50(2), 224-245.
Financial Accounting Standard Board (FASB) (2019). Comparability in International Accounting Standards. Web.
International Financial Reporting Standards (IFRS) (2022). Goodwill and Impairment – Current Stage. Web.
Sedki, S. S., Posada, G. A. & Pruske, K. A. (2018). Differences Between U.S. GAAP and IFS in Accounting for Goodwill Impairment and Inventory: Tax Treatment Under the Internal Revenue Code. Journal of Accounting and Finance, 18(4), 23-29. Web.
Zhang, I. X., & Zhang, Y. (2017). Accounting discretion and purchase price allocation after acquisitions. Journal of Accounting, Auditing & Finance, 32(2), 241–270.