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On March 19, 2020, the International Accounting Standards Board (IASB, hereinafter referred to as the "Board") released the first discussion paper "Business Combinations-Disclosures, Goodwill and Impairment" and Impairment) (discussion draft) (hereinafter referred to as the discussion draft), the deadline for soliciting comments is September 15, 2020. In the discussion draft, the board of directors proposed to increase the disclosure requirements for business merger-related performance information, retain the method of only performing impairment testing on goodwill, simplify the method of testing goodwill impairment, and continue to separate the identifiable intangible assets obtained in business combinations to confirmation as preliminary decisions. The Council hopes that through the discussion draft, it will solicit opinions and suggestions from all sectors of society on the usefulness and feasibility of performance information disclosure requirements, and obtain further views and reasons on how to conduct subsequent accounting treatment of goodwill, so as to Investors provide more useful accounting information.
1. Related background
In March 2004, the Board of Governors issued "International Financial Reporting Standards No. 3-Business Combinations" (hereinafter referred to as "IFRS 3"), replacing the original "International Accounting Standards No. 22-Business Combinations" ", And replaces the goodwill amortization method as stipulated in the original standard with a method of only performing impairment tests on goodwill (ie, at least at the end of each year).
In July 2013, the Council conducted a post-implementation review of International Financial Reporting Standards No. 3 to address changes in the financial reporting environment and regulatory environment and respond to the concerns of global stakeholders. The Council received the following feedback during the review after implementation of IFRS 3:
First, the sufficiency and usefulness of information disclosure related to business combination is insufficient. The information related to business combination disclosed by the enterprise cannot meet the information needs of accounting information users to effectively evaluate whether the transaction consideration paid by the purchaser is reasonable and whether the key objective of the business combination can be achieved.
Second, the goodwill impairment test conducted in accordance with the relevant requirements of International Accounting Standards No. 36-Impairment of Assets (hereinafter referred to as International Accounting Standards No. 36) is too complicated and requires high execution costs.
The third is that the impairment of goodwill determined by the goodwill impairment test method lags behind the occurrence of the impairment event, and cannot effectively reflect the impact of the impairment event on goodwill in a timely manner.
Fourth, when an enterprise conducts a goodwill impairment test, it particularly depends on the subjective judgment of the enterprise in determining the key assumptions used to calculate the value in use (the present value of the expected future cash flow) and apportioning the book value of goodwill to the asset group This may lead to insufficient or delayed confirmation of goodwill impairment losses, which affects the effectiveness of the goodwill impairment test.
Fifth, investors have doubts about whether identifiable intangible assets (such as customer relationships, trademarks, etc.) that are independent of goodwill recognition can bring useful information. These individually-recognized intangible assets usually do not have an active market, their measurement is subjectively affected, the valuation method is relatively complex, and the reliability of valuation is difficult to determine.
In order to effectively solve the above-mentioned problems, the Board of Directors decided in February 2015 to reconsider the accounting treatment of goodwill in IFRS 3, and identified "goodwill and its impairment" as a research project.
Since the establishment of the "Goodwill and Impairment" project, it has aroused widespread concern and heated discussions among stakeholders: the Council held 24 discussions at the monthly regular meeting, and the Accounting Standards Advisory Forum (ASAF) conducted 9 discussions , The Global Reporting Forum (GPF) has held 7 discussions, the Capital Market Advisory Committee (CMAC) has conducted 5 discussions, the Emerging Economies Working Group (EEG) has conducted 2 discussions, and the World Standards Setting Body Meeting (WSS) Two discussions were held successively to conduct in-depth discussions on issues such as improving disclosures related to business combinations in the "goodwill and its impairment" project, whether to reintroduce the goodwill amortization method, and how to simplify the impairment testing method.
On the basis of full discussion and extensive opinions, the Council drafted and issued a discussion draft based on the results of the preliminary research on the "goodwill and its impairment" project, and further solicited opinions and suggest from all sectors of society on the Council ’s preliminary resolution on the project.
2. Preliminary resolutions of the Council
In the discussion draft, the Council proposed to improve the subsequent performance information disclosure of the business combination, it is impossible to propose a more effective impairment test method on the basis of reasonable costs, do not re-introduce the goodwill amortization method, new in the balance sheet The preliminary resolutions include adding subtotal items of "owner's equity after deducting goodwill", simplifying the subsequent accounting treatment of goodwill, and continuing to separately recognize the identifiable intangible assets obtained in the business combination.
(1) Improve disclosure of information related to business merger performance
1) Increase disclosure of subsequent performance information of business combination
"IFRS 3" stipulates that the purchaser should disclose the main reason for the business combination.
The discussion draft proposes to amend this rule so that the purchaser should disclose the strategic reasons for the business combination and the specific objectives of the management. Among them, strategic reasons refer to the overall business strategy that companies generally disclose in management reviews; specific management goals refer to specific financial and non-financial goals that management expects to achieve through business combinations.
The discussion draft also recommends that management disclose the following information: First, in the current period when a business merger occurs, the indicators used by management to assess whether the subsequent performance achieves the expected goals; Second, the above indicators are used to assess the extent to which the subsequent performance achieves the expected goals; Third, The reasons for the management not assessing whether the subsequent performance achieves the expected goals; the fourth is the reason why the management stops evaluating the subsequent performance in the next year of the business combination; the fifth is the change in the indicators adopted by the management when evaluating the subsequent performance to achieve the expected goals the reason.
2) Improve the disclosure objectives and requirements of IFRS 3
The discussion draft suggested that the disclosure objective of IFRS 3 is not only to help users of accounting information to assess the nature of the business combination and its financial impact, but also to add two goals: The first is the expected earnings of the enterprise management at the agreed price for the enterprise merger, The second is the extent to which the objectives of management are achieved.
The discussion draft also recommends the following targeted improvements to the disclosure requirements of IFRS 3:
First, modify the qualitative description of the goodwill formation factors to the following: First, the expected synergy effect, second, when the synergy effect is expected to be achieved, third, the estimated amount or scope of the synergy effect, and fourth, estimated cost or scope of the above synergy effect.
Second, the company is explicitly required to disclose the liabilities arising from the fund-raising activities undertaken by the acquiree in the merger and the confirmed amount of the defined benefit pension liabilities.
Third, International Financial Reporting Standard No. 3 requires companies to disclose the revenue and net profit realized by the purchased party since the date of purchase, as well as the revenue and net profit realized under the assumption that reporting entity after the merged has existed throughout the reporting period，The discussion draft proposes to modify the above “net profit” to “operating profit before deducting transaction costs and integration costs related to business combinations (operating profit as defined in“ General Listing and Disclosure (Draft for Comment) ”).
Fourth, increase the disclosure of the cash flow of operating activities realized by the purchased party since the date of purchase, and the cash flow of operating activities realized under the assumption that the combined reporting entity has always existed during the reporting period.
(2) Subsequent accounting treatment method of retaining goodwill
With regard to the subsequent accounting treatment of goodwill, the discussion draft mainly focuses on three issues: first, whether the effectiveness of the goodwill impairment test can be further improved; second, whether the goodwill should be amortized; and third, whether the goodwill impairment test can be appropriate simplify.
1) Consider that there is no method to further improve the effectiveness of the goodwill impairment test, and continue to use the current method of goodwill impairment test
The Council once proposed the "Headroom Approach" to effectively solve the "untimely and inadequate provision of goodwill impairment" problem in the goodwill impairment test, with a view to improving the effectiveness of the goodwill impairment test. However, this method needs to rely more on the subjective judgment of the accounting personnel, and will increase the complexity and cost of the impairment test. The Board believes that it is impossible to redesign a more effective method of goodwill impairment test on the basis of reasonable costs and decides Abandon the "net value method", in the discussion draft, it was initially decided to continue the current method of goodwill impairment test.
2) Do not reintroduce the goodwill amortization method, and continue to retain the method of only performing impairment tests on goodwill
Since it is impossible to significantly improve the goodwill impairment test method on the basis of reasonable costs, the Board of Directors had considered reintroducing the amortization method in the subsequent accounting treatment of goodwill. The Council pointed out that the impairment test method and amortization method for the subsequent accounting treatment of goodwill have their own limitations: under the impairment test method, because goodwill cannot generate cash flow independently and cannot be traded separately, companies cannot directly measure Recovery amount and direct impairment test; under the amortization method, because the service life and consumption pattern of goodwill cannot be reasonably estimated, enterprises have difficulties and challenges in applying the amortization method, and the amortization method affects the goodwill-related The quality of accounting information. After full discussion and extensive listening to relevant opinions, the Board believes that there is insufficient evidence to show that the amortization method can significantly improve the financial report. The preliminary resolution in the discussion draft does not re-introduce the amortization method, and continues to retain only the impairment test method. The Council hopes that stakeholders will provide further feedback and suggestions on this issue.
3) Add a subtotal item of "Owner's equity deducting goodwill"
Because goodwill is not directly measurable, cannot generate cash flows independently of other assets or asset groups, and has characteristics different from other assets, the board of directors recommended in the discussion draft that the consolidated balance sheet should list "Equity" subtotal project to highlight the risks of goodwill and help users of accounting information to better understand the financial situation of the enterprise.
(3) Simplify the current goodwill impairment test
1) Exempt the compulsory requirements for companies to conduct annual goodwill impairment test
The Board of Directors recommended in the discussion draft that the mandatory requirements for the annual impairment test of goodwill be relaxed, and that only goodwill tests be conducted if there are signs that goodwill may be impaired. The proposal in the discussion draft is also applicable to intangible assets with uncertain service life and intangible assets that have not yet reached their intended usable status. The Council hopes that through this change in accounting policy, the cost of goodwill and intangible asset impairment testing can be effectively reduced. The council is considering whether to revise the relevant requirements for signs of impairment, such as adjustments based on improved disclosure of business combinations.
2) Take appropriate measures to simplify the calculation method of use value
In the discussion draft, the Council recommended that the use value calculation method be simplified to reduce the complexity of the impairment test. Specifically, the discussion draft recommends that when calculating value in use, companies are no longer required to deduct cash flows related to future restructuring or future asset improvements that they have not yet committed; companies are allowed to estimate based on after-tax cash flows and after-tax discount rates，which means that enterprises are allowed to use pre-tax or post-tax cash flows and discount rates to calculate use value. The basis for determining the cash flows and discount rates is consistent. The simplified method of the discussion draft is not only applicable to the goodwill impairment test, but also to other assets and asset groups regulated by "International Accounting Standards No. 36".
(4) Continue to separately account for identifiable intangible assets
International Financial Reporting Standard No. 3 requires companies to separately identify and measure the identifiable intangible assets obtained in a business combination and not to include them in goodwill. Some stakeholders believe that some identifiable intangible assets (such as customer relationships, trademarks, etc.) are more difficult to determine their book value and amortization method. It is recommended that these identifiable intangible assets be included in goodwill. The Board considers that the above reasons are insufficient, and recommends that the relevant requirements for the separate identification of identifiable intangible assets be retained to help users of accounting information to more accurately understand the specific assets acquired by the enterprise in the merger. The Council hopes that stakeholders will provide further feedback and suggestions on this issue.