Accounting for Goodwill

In the aftermath of the financial crisis, easing monetary policies provided financially strong companies with access to funding more efficiently and at a lower cost, allowing them to scale up their businesses and finance their merger and acquisition (“M&A”) activities. As a result, there has been a significant surge in the carrying value of accumulated goodwill among major corporations worldwide. This surge in goodwill has been particularly evident during active M&A periods, where acquisition prices tend to be higher.

As per the current global accounting standards, the International Financial Reporting Standard (“IFRS”), and the US Generally Accepted Accounting Policies (“US GAAP”), goodwill is not amortized but instead tested for impairment at least annually. However, concerns have emerged among stakeholders and regulatory authorities regarding management’s potential misuse of optimistic assumptions during impairment testing, possibly to downplay the impact of impairment losses on profitability.