An IASB staff analysis on March 23, 2021, said there is global support for the board to work with U.S. accounting rulemaker, the FASB, to converge on the subsequent accounting of goodwill.
The Boards may have a tough time getting to convergence because respondents’ feedback on whether to amortize goodwill–which the FASB said it would do–was split, according to board discussions.
IASB members did not signal a preference during the non-decision making discussions, but said they needed to get a better understanding of the topic, as an evolution of thinking has developed in international waters.
“I have been struck by the evolution in thinking that has been developed in particular in Europe including in the views of users,” IASB member Françoise Flores said. “I would be happy to understand more.”
Goodwill is an accounting term for the figure that is recorded on the balance sheet after subtracting the book value of a business from the higher price that was paid for it. It can be worth billions of dollars and impact profit if it substantially declines in value.
The discussion comes as most respondents to IASB’s March 2020 Discussion Paper, Business Combinations—Disclosures, Goodwill and Impairment, said convergence on the subsequent accounting of goodwill with US GAAP was desirable,” according to the staff analysis of comment letters.
Respondents also said “maintaining convergence was more important than adopting a particular accounting model for goodwill,” and “many respondents said that their view did not depend on maintaining convergence, or that the Board should base its decision on the evidence it has collected rather than solely on maintaining convergence,” the staff analysis states.
Some board members said they needed more information about the population comprising “many” and the “most” to gain better insight on the topic.
“We’re certainly hearing these comments about convergence and it’s really important for us to understand them better,” IASB member Ann Tarca said. “Give us more information about what that ‘most’ means…also the ‘many,’” she said.
How much convergence?
Some board members also said they would like to gauge how tight a convergence companies are aiming to achieve.
“I encourage us to get a clear view of exactly what [convergence] means,” IASB member Tom Scott said. “And even when we go to do that, how tight will be convergence? I’m not saying I’m supporting amortization per se, but one of the things as we go forward – a lot of people who wrote in supporting amortization made the point that you could probably come up with something more meaningful, whether it was a management approach or some other approach,” he said.
Scott said if the board looks at amortizing goodwill, it should think about whether “we are going to go for just a simple completely arbitrary thing or are we going to follow the suggestion of many stakeholders and try and seek something more meaningful.” That decision “may even be more important as we get down to the U.S. when talking about convergence,” he said.
FASB’s decisions on amortization
The FASB is in the early stages in its project on the subsequent accounting of goodwill.
The U.S. board in December 2020 tentatively said it would require public companies to amortize goodwill over a 10-year period on a straight-line basis only, without exception. The board said that for an amortization period a company’s management can deviate from the default period if management could justify the reasons for doing so. The amortization period would need to be elected on a transactional basis.
The decisions were made under the assumption that the existing impairment model and unit of account would not change, and pending other changes.
The board decided not to pursue an evolving model for the subsequent accounting for goodwill. An evolving model is one in which goodwill amortization may not immediately start but begin after some period of time after the business combination.
Many financial statement preparers have said an evolving amortization approach could be complex with operability concerns associated with the model.
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