Why Private Equity Needs Global Standards for Goodwill Impairment

Accountants calculating goodwill impairment

By Jeffrey Bartel, Chairman and Managing Director at Hamptons Group, LLC

Goodwill is an intangible asset accrued when a business is acquired for a price greater than its net value (its assets minus its liabilities). The U.S. Financial Accounting Standards Board (FASB) ended its efforts to reintroduce amortization of goodwill (the systematic, gradual reduction in the goodwill asset) to standardize goodwill accounting. The decision signifies that goodwill is not depreciated or amortized over time but is tested for goodwill impairment.

Had the FASB moved forward with its recommendations, its approach would have differed significantly from that of the International Accounting Standards Board (IASB), which decided not to reintroduce amortization in 2017 and, instead, to concentrate on improving impairment models.

FASB and IASB models remain distinct from each other, but there are good arguments for implementing global standards for the impairment of goodwill.

Investors want global goodwill impairment standards

The CFA Institute surveyed its members in December 2021 to determine what investors felt about convergence between IASB and FASB methods related to goodwill impairment accounting and testing. Around 90% of respondents wanted the two organizations to follow the same approach in accounting for goodwill.

Maximizing M&A value using intangible assets

Intangible assets are vital to private equity buyers. Most buy companies and create returns by improving company operations and investing in other intangible assets that make the business attractive to future buyers.

Ensuring those intangible values and goodwill resonate on the sell-side M&A process can be challenging, which is why optimizing financial reporting through PAA is essential.

Amortization, while convenient for preparers from an administrative perspective, simply does not provide a complete picture for investors. There is little doubt that goodwill is an asset, but there is a great need to standardize how it is valued and measured to improve financial reporting for investment decision-making.

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