29/01/2021 - EFRAG Comment Letter on Business Combinations – Disclosures, Goodwill and Impairment
EFRAG has published its final comment letter in response to the IASB's Discussion Paper DP 2020/1 Business Combinations – Disclosures, Goodwill and Impairment. In the letter, which benefits from the results of the extensive outreach conducted with European stakeholders, EFRAG supports the objective to explore whether companies can, at a reasonable cost provide investors with more useful information about acquisitions and address some practical aspects from such requirements. EFRAG notes room for improvement in goodwill accounting. Considering that an accounting policy should only be changed if it would provide reliable and more relevant information, EFRAG suggests the IASB further explore improvements to existing impairment test and any cost and consequences of reintroducing amortisation.
In its Final Comment Letter, EFRAG supports the objective to explore whether companies can, at a reasonable cost provide investors with more useful information about acquisitions. However, EFRAG notes that the IASB’s Discussion Paper (‘the DP’) does not aim at addressing, through disclosure or enhancement of the impairment model, the perceived shortcomings in goodwill accounting. Accordingly, the proposals would address some of the current perceived shortcomings but would leave room for improvement in this area.
EFRAG acknowledges that the proposed information about the strategic rationale and management’s objectives for an acquisition as at the acquisition date and subsequent disclosures about whether an acquisition is meeting those objectives would be useful. However, EFRAG notes that there would be some practical issues to consider in relation to those disclosures, both to ensure that users receive sufficient and relevant information and that the costs of preparing/disclosing the information would not outweigh the benefits. In this regard, EFRAG considers that the IASB should further examine whether some of the disclosures should rather be included in the management commentary. EFRAG also notes that some of the proposed information would be considered commercially sensitive and, although the hurdle should be high, it should be possible for entities not to present commercially sensitive information.
These considerations also apply to the suggested disclosures on expected synergies. In addition, EFRAG notes that for the benefits of these disclosures, which reliability would depend on the specific circumstances, to outweigh the costs, it may be necessary to introduce some flexibility in relation to when/how quantitative information should be presented.
EFRAG does not consider that the benefits would outweigh the costs for the proposal to disclose cash flows from operating activities as part of the requirements currently included in paragraph B64(q) of IFRS 3 Business Combinations. Furthermore, EFRAG assesses that presenting the amount of total equity excluding goodwill on the statement of financial position could result in confusion.
To remediate some of the perceived practical shortcomings of the current impairment model, EFRAG considers that the guidance on how goodwill is allocated (or reallocated) to cash generating units, in general and in case of disposals, can be improved. In addition, EFRAG suggests disclosures to mitigate the risk of management over-optimism.
EFRAG appreciates the IASB’s attempts to simplify the impairment test. However, EFRAG has reservations about introducing an indicator-only approach. EFRAG does not support the approach in connection with the impairment-only model.
EFRAG notes the controversial nature of the question of whether the impairment-only model should be kept, subject to suggested improvements, or the amortisation of goodwill should be reintroduced and valid arguments exist in both camps. EFRAG acknowledges the conceptual and practical arguments for both the impairment only model and reintroduction of amortisation and notes that more and more voices are raised in favour of the latter mainly for practical reasons. However, considering that an accounting policy should only be changed if it would provide reliable and more relevant information, EFRAG suggests the IASB further explore improvements to existing impairment test and any cost and consequences of reintroducing amortisation (including how to determine the useful life, amortisation method, the impairment test to be applied under the amortisation model and transitional provisions which should be regarded as a package).
EFRAG’s responses to the questions in the DP do not depend on whether the outcome is consistent with US GAAP. However, EFRAG considers that the IASB outcome could be influenced by the FASB’s current work and notes that divergence with the FASB on the disclosures for acquisitions could impact perceptions around the fairness of such requirements.
Finally, EFRAG would recommend that the issue on whether some intangible assets could be included in goodwill should be considered in a second phase of the project following a revision of IAS 38 Intangible Assets.
