IOSCO calls for inputs on Goodwill

IOSCO has published a Consultation on Goodwill, seeking input from market participants on addressing the risk of unrecognized impairment and related disclosures concerning accumulated goodwill balances resulting from business combinations.
Indeed, the accumulated goodwill balance of the S&P 500 has more than doubled since 2008, reaching USD 3.7 trillion in 2021. Similarly, the European Union witnessed a nearly 50% increase in reported goodwill from EUR 1.1 trillion in 2013 to EUR 1.6 trillion in 2019.
During active merger and acquisition periods, higher acquisition prices lead to an increase in goodwill balances. However, under current global accounting standards, goodwill is not amortized and is tested for impairment annually. Stakeholders have expressed concerns that management might use optimistic assumptions to estimate the recoverable amount, potentially understating impairment losses and impacting profitability.
Consequently, impairment losses may not be recognized adequately or in a timely manner. In some cases, companies only recognize impairment losses and significantly reduce goodwill when their financial performance deteriorates, leading to a „too little, too late“ scenario. Additionally, there is a lack of transparent disclosure regarding situations where there is a declining excess between the recoverable amount and carrying amount, known as “close call“ scenarios.
Given the changing economic environment, it is crucial for management to objectively assess the current economic conditions and reflect them in goodwill impairment tests. The application of financial reporting standards should ensure a fair presentation of the company’s financial position, performance, and cash flows, including accounting and disclosure for goodwill.
IOSCO supports the IASB’s efforts to enhance disclosures, providing investors with better information to assess acquisition performance and hold management accountable. IOSCO also encourages the IASB to explore opportunities to improve impairment tests. To aid IOSCO in formulating recommendations for regulators, auditors, issuers, and those charged with governance, input is requested from various stakeholders, including issuers, audit committees, investors, financial statement users, and external auditors.
Transparency and accurate financial reporting are emphasized by IOSCO. Goodwill should not be stated at an amount exceeding its recoverable amount, impairment losses should be recognized in a timely manner, and significant judgments and key assumptions related to recoverability should be transparently disclosed.
Stakeholders are invited to respond to the consultation to provide valuable insights that will inform standard-setting processes and address practical challenges. Responses to the consultation questions should be submitted by 20 September 2023. IOSCO remains dedicated to promoting consistent application and enforcement of high-quality reporting standards and disclosure regulations to ensure the proper functioning of capital markets.