19 May 2014

FEE comments on IASB's post-implementation review

FEE agrees that one of the key issue to be addressed as part of this Request for Information (PiR) is whether the differentiated treatment for acquisitions of assets as opposed to acquisitions of business is justified. Indeed, while FEE believes that this differentiated treatment is conceptually justified with respect to goodwill, FEE has serious doubts when it comes to the other differences in accounting treatment. Also, FEE considers that there are significant practical difficulties in distinguishing the two in certain circumstances and, particularly, in certain industry sectors. Consequently, FEE believes that it would be beneficial for the IASB to provide further clarification as to the crucial defining characteristics of a “business”.

FEE supports the application of fair value to business combinations. FEE does, however, have some concerns that the current requirement to separate out identifiable intangible assets from goodwill does not always produce meaningful and relevant information for the users of the financial statements.

FEE favours the concept of separating other intangible assets from the residual goodwill but FEE has identified practical problems that arise from this requirement, particularly with regards to recognising intangible assets arising from non-contractual customer relationships.

FEE supported the requirement for an annual impairment review of goodwill and indefinite-life intangible assets, as opposed to amortisation, when it was introduced into IFRS 3. In the years since implementation, it has become apparent that there are significant issues arising from the practical application of annual impairment reviews.

The impairment approach has also been criticised because the significance of judgements involved in the performance or impairment test and of the perception that impairment losses are sometimes recognised too late. This consequently leads to problems for auditors in obtaining the same level of assurance as would be the case for many other items in the financial statements.

Having said that, there are also problems with the amortisation approach, particularly related to the relevance of what could be seen as arbitrary annual charges to the financial statements.

FEE Member Bodies have different experiences relating to the practical application of annual impairment reviews as opposed to amortisation. Some FEE members support the requirement for annual impairment-only reviews contained in the Standard, albeit as the “least-worst” option. Others favour amortisation of goodwill over its limited useful life combined with regular impairment testing.

Consequently, FEE believes that there is a need for the IASB to further research the comparative merits of both the impairment only and amortisation approaches and also review the appropriateness of immediate write-off through profit and loss of negative goodwill as part of the PiR process.

FEE also suggests that the IASB considers whether modifications to IAS 36 could improve the effectiveness and robustness of the impairment tests.

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