The staff of Hong Kong Institute of CPAs and the staff of Accounting Standards Board of Japan (ASBJ) published a research paper (RP), Goodwill: Improvements to Subsequent Accounting and an Update of the Quantitative Study in March 2020. We would like to highlight some interesting findings from the paper:
A steady increase in the amount of goodwill recognized by companies. From 2014 to 2018, there was an increase in the total goodwill of the stock market companies of 60 percent for Hong Kong, 74 percent for Japan, 45 percent for U.S. and 26 percent for Europe.
The implied time to fully expense goodwill was 122 years for the U.S., 78 years for the EU, and 64 years for Hong Kong and Japan.
The paper raised the concern that impairment-only model has led to impairment made “too little, too late” issued among some stakeholders.
In general, Impairment of Assets seeks to ensure that an entity’s assets are not carried at more than their recoverable amount (i.e. the higher of fair value less costs of disposal and value in use). Goodwill impairment is usually considered as complex. Not only does external expert (usually valuation), but company also needs to have a reasonable definition of a cash generating unit. It involves quite a lot of steps before impairment (if any) is allocated to goodwill and other assets. For acquired goodwill, auditors may also need to check against the purchase price allocation done as of the completion date of the acquisition.
In view of the significant portion of goodwill in the market, we expect investors and also regulator will put more focus on scrutinizing fairness of the reported goodwill. Before any potential amendment towards amortization model, goodwill is still required to be tested for impairment annually. Although the process of impairment assessment is complex, it can be monitored consistently by proper records on rationale and inputs used in the valuation. Clean and supportable valuation model will help company to fulfill the annual impairment testing requirement on goodwill.