IASB to Review Goodwill
The International Accounting Standards Board is reviewing how companies present goodwill on their balance sheets.
Goodwill refers to an accounting value recorded when a company acquires another company, measuring the value of intangibles that go beyond what the physical assets alone are worth. It is a complex and at times controversial area, as it is fundamentally a subjective valuation based on estimates of future cash flows. Some time ago, the IASB decided to remove amortisation of goodwill from the IFRS accounting standards, in favour of an “impairment only” approach.
“Often, the projections of future cash flows from cash generating units tend to be on the rosy side. Impairment losses therefore tend to be identified too late” says Hans Hoogervorst, Chairman of the IASB, in a speech in Tokyo last Wednesday.
“In such cases, the balance sheet may give an overly optimistic representation of a company’s financial health. Although sophisticated investors should be able to see through inflated goodwill numbers, others may not,” Hoogervorst said. The IASB has therefore decided to revisit this question.
The treatment of intangibles in company reporting, within the financials, as well as in Integrated Reporting and other non-financial frameworks is a critical part of risk analysis, capital formation and company valuation in the modern age. Agreeing ways of making this information more reliable, more comparable… and more digital, are squarely in the interests of everyone in the global economy.
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