Subsequent Measurement of Goodwill and Acquired Intangible Assets

The AcSB continued discussing proposals for inclusion in a future exposure draft on its Subsequent Measurement of Goodwill and Acquired Intangible Assets project. The exposure draft proposals will offer relief from recognizing intangible assets acquired in a business combination (relief) in Part II of the CPA Canada Handbook – Accounting.

The AcSB tentatively decided that that the policy choice to amortize goodwill should be applied retrospectively to the goodwill balance at transition, and that a “catch-up” adjustment of goodwill amortization be applied from the original recognition date using a default five-year amortization period, unless the entity can demonstrate that another useful life not exceeding 10 years is more appropriate. The Board also tentatively decided that the policy choice to elect the relief be applied retrospectively at transition to all past business combinations, and that earlier application of both proposals be allowed.

The AcSB continued discussing how a change in accounting policy would be applied and whether any potential amendments were needed to Section 1506, Accounting Changes. The Board directed staff to conduct further analysis for consideration at a future meeting.

The AcSB will continue discussing the exposure draft proposals at its December 2024 meeting.

The Private Enterprise Advisory Committee received an update on the AcSB’s tentative decisions related to its Subsequent Measurement of Goodwill and Acquired Intangible Assets project. The exposure draft proposals will offer an option to amortize goodwill as well as relief from recognizing intangible assets acquired in a business combination (relief) in Part II of the Handbook.

The Committee discussed transition guidance. Most Committee members agreed with staff’s recommendation that the policy choice to amortize goodwill should be applied retrospectively to the goodwill balance at transition, and that a “catch-up” adjustment of goodwill amortization be applied from the original recognition date using a default 5-year amortization period, unless the entity can demonstrate that another useful life not exceeding 10 years is more appropriate. Most Committee members also agreed that the policy choice to elect the relief be applied retrospectively at transition to all past business combinations and that earlier application of both proposals be allowed.

The Committee also discussed changes in accounting policy. The Committee supported the AcSB’s tentative decision that the relief and the goodwill amortization accounting policies be applied consistently to all business combinations and not on a transaction-by-transaction basis. The Committee agreed that an exception in paragraph 1506.09 of Section 1506, Accounting Changes, should be provided for both the relief and the amortization of goodwill, so that an entity could change its accounting policy even if it doesn’t meet the more reliable or relevant information criterion. The Committee also agreed with staff’s proposal that a change in accounting policy should be accounted for on a modified retrospective basis.

Finally, the Committee discussed subsequent sales of acquired intangible assets. Committee members noted that, based on their experience, subsequent sales of intangible assets acquired through business combinations are not common in practice.

The AcSB will consider input from the Committee at its meeting on November 26-27, 2024.

The AcSB continued discussing proposals for inclusion in a future exposure draft on its Subsequent Measurement of Goodwill and Acquired Intangible Assets project. The exposure draft proposals will offer relief from recognizing intangible assets acquired in a business combination (relief) in Part II of the Handbook.

The AcSB tentatively decided to require disclosure of qualitatively significant intangible assets acquired in a business combination that are subsumed into goodwill, when these assets are readily identifiable.

The AcSB also discussed proposals that will allow goodwill amortization in Part II of the Handbook. The Board tentatively decided that goodwill should be amortized on a straight-line basis over a default period of 5 years, unless the entity can demonstrate that another useful life not exceeding 10 years is more appropriate.

The AcSB also tentatively decided that the relief and the goodwill amortization accounting policies be applied consistently to all business combinations and not on a transaction-by-transaction basis. The Board considered how a change in accounting policy would be applied and whether any potential amendments were needed to Section 1506, Accounting Changes. The Board directed staff to conduct further analysis for consideration at a future meeting.

The AcSB will continue discussing the exposure draft proposals at its November 2024 meeting.

The AcSB considered feedback from extensive preliminary outreach activities on potential proposals for inclusion in a future exposure draft on its Subsequent Measurement of Goodwill and Acquired Intangible Assets project.

The AcSB discussed proposals to provide relief from recognizing intangible assets acquired in a business combination (relief) in Part II of the CPA Canada Handbook – Accounting (the Handbook). The Board discussed that a key objective of the project is to provide relief to entities when the cost of separately recognizing and measuring intangible assets at fair value exceeds the benefit to financial statement users. The Board tentatively decided to propose in an exposure draft that the relief would:

• be provided as an accounting policy choice, provided the entity amortizes its goodwill, which would include any subsumed intangible assets;
• apply to all intangible assets acquired in a business combination; and
• require an entity to provide qualitative disclosures for a subset of intangible assets included in goodwill.

The AcSB also discussed preliminary proposals to allow goodwill amortization in Part II of the Handbook. The Board tentatively decided to propose that entities not opting for the relief would have an accounting policy choice to amortize goodwill. The Board explored options for the amortization period and method for goodwill, but no decisions were made.

The AcSB will continue discussing the exposure draft proposals at its September 2024 meeting.

The Private Enterprise Advisory Committee discussed potential proposals to include in a future exposure draft. These proposals will provide relief to private entities and as relevant not-for-profit organizations, from the recognition of intangible assets acquired in combinations and allow them to amortize goodwill.

Goodwill amortization

Most Committee members supported reintroducing goodwill amortization as an accounting policy choice. Committee members noted that this approach allows an entity to choose an accounting policy that meets its needs and its users’ needs. One Committee member noted that the impairment charge may be useful information for users and moving away from the impairment-only model might remove that useful piece of information.

Committee members expressed mixed views on a default 10-year amortization period for goodwill. Most Committee members welcomed this practical solution, citing the difficulty in determining the useful life of goodwill. A few Committee members expressed concerns that the 10-year period, while aligned with other jurisdictions, lacks conceptual merits. Most Committee members indicated that, even if a default amortization period is provided, the entity should have the possibility to amortize goodwill over another useful life if the entity determines that the latter is more appropriate.

Relief from recognizing intangible assets acquired in a business combination

Committee members agreed that any relief to recognize intangible assets acquired in a business combination should be provided as accounting policy choice, and that this policy choice should be contingent on the entity amortizing its goodwill. Committee members also agreed that this accounting policy choice should be applicable to all in-scope transactions entered into and not on a transaction-by-transaction basis.

Committee members expressed mixed views on the scope of the relief. Some Committee members expressed concerns with not recognizing certain intangible assets that generate income or that could be subsequently sold. Others preferred relief applied to all intangible assets, because there are significant valuation costs to measure even a few intangible assets at fair value. These Committee members stressed the importance of weighing costs against benefits when providing this information.

Committee members agreed that, if relief is elected, the entity should provide qualitative disclosures about the separately identifiable intangibles that were acquired in the business combination and subsumed into goodwill.

The AcSB will consider input from the Committee and from other outreach activities at its meeting on July 17, 2024.

The AcSB discussed and approved a project proposal for a standard-setting project allowing private enterprises and, to the degree impacted, not-for-profit organizations to amortize goodwill and to provide relief from recognizing certain or all intangible assets acquired in a business combination. To streamline the process, the Board opted for extensive preliminary outreach, including public engagement, rather than issuing a consultation paper. This approach aims to expedite financial reporting relief and ensure well-informed proposals for inclusion in an exposure draft.

The AcSB plans to complete preliminary outreach activities with interested and affected parties in May and June 2024. Opportunities to participate in outreach activities will posted on the Subsequent Measurement of Goodwill and Acquired Intangible Assets project page. Feedback from preliminary outreach will be discussed at the Board’s July 2024 meeting, leading to decisions on proposals for inclusion in an exposure draft.

The AcSB discussed research findings and feedback from its Not-for-Profit Advisory Committee, Private Enterprise Advisory Committee and Small Practitioners Working Group on the challenges related to the subsequent measurement of goodwill and the recognition of intangible assets acquired in a business combination. The Board also discussed a potential standard-setting project that would allow private enterprises to amortize goodwill and offer relief from the recognition of intangible assets acquired in a business combination.

The AcSB agreed that the project should address both the subsequent measurement of goodwill and the relief from recognition of acquired intangible assets. The Board also determined that this project should consider the implications for entities applying both Parts II and III of the CPA Canada Handbook – Accounting. The Board highlighted the need to conduct more public outreach before issuing an exposure draft.

The AcSB will discuss a project proposal at its March 2024 meeting.

The Private Enterprise Advisory Committee discussed challenges related to the subsequent measurement of goodwill and recognition of intangible assets acquired in business combinations. The Committee also explored the idea of allowing private enterprises to amortize goodwill and offering relief from the recognition of intangible assets acquired in a business combination.

The Committee expressed concerns about the cost and complexity of goodwill impairment tests. Many Committee members indicated that goodwill often lacks information usefulness for financial statement users like creditors and lenders as banks typically do not factor in goodwill for lending decisions. Therefore, most Committee members supported reintroducing goodwill amortization but as an accounting policy choice.

Most Committee members preferred not separately recognizing some or all intangibles acquired in business combinations, provided goodwill is amortized. They noted that separately valuing intangibles upon acquisition is costly and of limited value to most private enterprise financial statement users because lenders rarely consider intangibles as security and often do not differentiate between goodwill and other intangibles.

Some Committee members suggested qualitative disclosure for separately identifiable intangibles in a business combination, particularly those that can be sold or licensed independently from other assets.

In January 2024, the AcSB will discuss the Committee’s feedback as part of the Board’s ongoing research. The Board will also consider the input from the Small Practitioners Working Group and the Not-for-Profit Advisory Committee then decide whether to advance to the project-proposal stage.