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:
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.