Business combinations, goodwill and impairment

What’s the issue?

In March 2024, the International Accounting Standards Board (IASB) published an exposure draft: Amendments to  IFRS 3 and IAS 36: Business Combinations – Disclosures, Goodwill and Impairment, which set out proposals to change three aspects within IFRS 3 Business Combinations (IFRS 3) and IAS 36 Impairment of Assets (IAS 36). The overall aims being to enhance the reporting on business acquisitions to allow investors to directly assess the performance of acquisitions, and to respond to concerns about impairment losses not being recognised on a timely basis and concerns about the cost and complexity of the impairment test.

What does this mean?

What is a summary of the key changes?

These proposals are summarised as follows:

• New disclosure requirements for certain ‘strategic’ acquisitions that meet specific quantitative and qualitative thresholds;
• Clarifications over the allocation of acquired goodwill to cash-generating units (CGUs) and additional disclosures relation to goodwill; and
• Simplifications to the value in use testing for impairment purposes, specifically removing the constraint to exclude uncommitted future restructuring and asset improvements and allowing either a post-tax or pre-tax discount rate to be applied. 

What are more details about the changes?

IFRS 3 Business Combinations (IFRS 3)

The key proposed changes to IFRS 3 include the following:

• Introducing new disclosure objectives and additional disclosure requirements for certain ‘strategic’ business combinations, covering:
  • In the year of acquisition, information about management’s acquisition-date key objectives and the related targets for the acquisition; and
  • Subsequently, the extent to which those acquisition-date key objectives and related targets are being met.
• Introducing new disclosure of quantitative information about expected synergies in the year of acquisition.
• In identifying this disclosure, information provided to key management personnel should be used.
• There is a proposed exemption from disclosing some information if doing so can be expected to prejudice seriously any of the entity’s acquisition-date key objectives.

IAS 36 Impairment of Assets (IAS 36)

The key proposed changes to IAS 36 include the following:

• Clarifying that the highest level to which an entity can allocate goodwill, being at an operating segment level, is not a default. Instead, the focus for determining the goodwill’s cash‑generating unit should be at the lowest level at which the business associated with the goodwill is monitored for internal management purposes.
• Requiring an entity to disclose in which reportable segment a cash‑generating unit containing goodwill is included.
• Simplifying the calculation of value in use: By proposing to:
  • Remove the restriction on including cash flows from uncommitted future restructuring or asset enhancement; and
  • Add a requirement to calculate value in use on both a post-tax or a pre‑tax basis.

Removing these restrictions would bring inputs used in the impairment test closer to the information used by management, which should result in investors receiving more relevant information.

It should be noted that the proposals do not remove the impairment-only model (nor reintroduce the amortisation of goodwill).

When is this effective?

The next stage of the project is to issue the exposure draft feedback, with the exposure draft being open for comment until 15 July 2024, feedback will be expected during Q4 2024.

Who is this applicable to?

These upcoming amendments would be applicable to IFRS reporters that undertake business combinations, carry out impairment testing, and/of recognised goodwill in the statement of financial position.