- Ninety percent of investors and analysts were in "raging agreement" that the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) should stay on the same page in accounting for goodwill, the CFA Institute said in a report on the results of a survey of 1,607 members. The findings push back against the two standard setters, which are veering toward a split on the matter.
- Almost 60% of portfolio managers and analysts were in favor of retaining the impairment accounting approach and 66% wanted improved disclosures before any changes in impairment while less than one-third supported reintroducing amortization.
- “Our takeaway is — and the message for standard setters and regulators should be — that the reconsideration of goodwill accounting, post-acquisition, should not be construed as an accounting theory exercise… In our estimation, it is worth an extensive cost-benefits analysis – and an effects analysis – before the FASB decides to make an accounting change that would make 40% of the equity of the largest U.S. corporates disappear either immediately or over 10 years,” the CFA Institute said in their report.
Goodwill is the intangible value of an acquired company over and above the fair market value of its hard assets.
Under the model that FASB and IASB previously moved to about 20 years ago, goodwill is tested for impairment at least annually, but is not amortized. That accounting model is now the subject of a growing debate and FASB is moving toward adopting an amortization model with a 10-year default amortization period while the IASB is leaning toward retaining the impairment approach with some modifications.
What that change could mean for CFOs right now is still in flux, but the issue warrants watching in 2022, said Carla Nunes, managing director at global advisory firm Duff & Phelps, a Kroll business. A divergence in the standards could be particularly difficult for CFOs of big multinational companies, she said. “For them it’s more of a headache to have a difference because they have to have two sets of books,” she said. But all CFOs “need to be ready for however FASB decides to move.”
FASB’s examination of goodwill has been in the works for some time and is gaining momentum. A proposal is likely to be issued sometime in 2022, a FASB spokesperson said. Any decision from the IASB will likely take longer because the international standard setter’s process must take multiple countries into consideration, Nunes said.
The CFA survey could serve as important feedback for FASB from investors who traditionally don’t often formally take part in FASB’s comment process, said Nunes. “This was sort of in anticipation ... to say, ‘Look, FASB, don’t forget the investors,'” she said. “What the survey is saying is, ‘you’re forgetting about the useful data we get from the impairment model.'”
The survey comes as goodwill impairments in the U.S. are on track year-to-date to drop this year after spiking last year, according to Nunes. Driven by the pandemic, goodwill impairment for 2020 was recorded at about $143 billion, based on a preliminary assessment of more than 8,800 public companies by Duff & Phelps. By comparison, companies lost $71 billion in 2019. While the firm is still finalizing the study of 2021 and awaiting 4Q21 data, the current YTD U.S. goodwill impairments recognized are less than 10% of the overall goodwill impairment recorded in 2020, Nunes said.