Goodwill impairment testing and IFRS 13
01 November 2013
It’s approaching that time of year again when the annual goodwill impairment test comes around. This calendar year end is the first when IFRS 13, Fair Value Measurement applies to impairment tests using fair value rather than value in use. But will it make any difference?
Are there any differences this year?
Well, most think that the only difference should be increased disclosure of assumptions. In practice, however, we might also see an effect on the impairment test for listed subsidiaries.
Over the years different ways to test impairment of these assets have evolved. Some have used discounted cash flows, some market capitalisation (P x Q) and some market capitalisation plus a premium for control.So what might change? IFRS 13 requires use of a level 1 input if available. So the fair value of a listed subsidiary is based on the listed share price. That rules out a DCF model.
And is a premium for control allowed? According to IFRS 13, no. The standard says that other than when the portfolio exception applies (which it doesn’t for a subsidiary), a level 1 input is used without adjustment. So it seems that only one option remains – P x Q without the premium for control. But is that the right answer?
What is the debate?
I hear some say ‘That’s wrong, because in the US we can add a premium for control and the fair value standards are converged.’ Indeed the fair value standards are largely converged but differences still exist in other standards and this is one of them.
Both the IFRS and US standards on fair value refer to other standards for the unit of account. The US impairment testing standard allows a premium for control to be added when measuring a listed subsidiary at fair value. The IFRS standard has no similar provision.
Others say ‘That’s wrong, because the Board has been debating this very issue and tentatively agreed that the unit of account in IAS 36 is the package of shares in the subsidiary. There is no listed price for the package of shares so P x Q doesn’t apply.’ That’s true but the Board has also tentatively concluded that P x Q overrides unit of account. We are back where we started!
So where are we?
At the moment we have to measure the fair value of a listed subsidiary (or associate) at P x Q. I think this is where we have always been although others say the standards are not clear.
There is a persuasive argument that, if fair value is to represent what a market participant would do, it should acknowledge the value of a controlling stake or a significant holding. Do you agree? Should the Board take this into account in their discussions?