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Accounting for Goodwill

17 Jan 2024

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.

In summary, maintaining a fair presentation of a company’s financial position, performance, and cash flows is paramount for the benefit of investors. Addressing concerns related to goodwill accounting, both in terms of disclosure enhancements and improvements to impairment tests, is essential to ensure that financial reporting standards support transparent and accountable business practices. This publication provides an overview of the existing challenges/expectation gaps and key considerations of the proposed amendments issued by the International Accounting Standards Board (‘IASB’)

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