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International Working Committees
The debate on the goodwill amortization vs. the
impairment of goodwill is quite vigorous also amongst
CFOs. Moving from the CFOs sustaining the amortization
we can read the following observations against the
impairment test:
a. «
Impairment test is worth to assess at a given
period the value of the assets compared to a
straight amortisation method. However given
high incidence of semi objectives variables in the
future cash flows calculations (interest, beta,
assumptions) the value can differ significantly
and results are often forced to obtain a given
value. A straight depreciation method reflects
the original paid value amortisation that should
be strengthened by the impairments test
»;
b. «
Previous amortization process, while not
perfect, was a better solution. Impairment test
has a tendency to be misused and will hit mostly
during downturn economical cycles
»;
c. «
The old process of amortization was easier
to deal with from a forecasting and cost stand
point. Impairment has caused hard to forecast
changes»
;
d. «I
n my point of view, the impairment test has
been using just as a formal process. Without any
implications on the company management
».
On the other hand, another stream of thought within
these professionals asserts that: «Impairment tests
are useful in that any projections made one year can
be reviewed the following and are more difficult to
manipulate. Market values based on DCFs are somewhat
subjective but will always be better than accounting/
book measures unrelated to market valuations».
A CFO stresses how often the trouble is not the decision
to impair or not impair the goodwill but with the
measurement of the impairment loss. He/she adds:
«The first problem is the uncomplete standardization
of schemes, choice of comparables, interest rates,
“premium” on cost of capital, WACC, g-rate, perpetuity,
etc. which creates a general situation of discretionality.
But on top of this the bigger problem in my opinion is
volatility. When I take the data of my comparables, they
are at a precise closing date (and with different schemes
I can’t be sure of a perfect comparability), the interest
rates and the “premium” for small-medium caps had
fluctuated a lot in the past month to month. So we take
punctual data of comparables, under a non-complete
standardization of methods and schemes, moreover
under a very volatile capital market, while we pretend
to book in a very definitive way a GWO (in fact non
recourse for a subsequent revaluation of it)». He/she
continues suggesting the introduction of the possibility
of reversals of goodwill write-offs: «If we have to accept
the “principle based” approach (so no mandatory
schemes and no real standardisation), and moreover if
we have to accept volatility of many data contributing at
impairment calculation (especially since 2008 onward),
that’s OK... but in such a situation, we have then to
accept even up and down volatility of Goodwill value
as a consequence (so at least revaluation admitted)». A
further point raised for goodwill amortization is stated
by another CFO: «…I repute as workable the goodwill
amortization. It has been quite clearly demonstrated
that a healthy industrial cycle has a duration of
maximum 30 years (and recently... even shorter and
shorter). By creating databases of “healthy economic
cycles” sector by sector, in the future could be available
standardised methods to amortise Goodwill in a
comparable way among comparables». A CFO proposes
also an alternative accounting method for goodwill: «An
alternative to Goodwill amortization could be a “clever
cap” at the goodwill, so that people will obliged to a
GWO when exceeding it. For example (free cash flow x
20) = max cap allowed for Goodwill. Something simple
and possibly based on data of the applicant itself, so
that it can’t be so much arguable. I propose the free
cash flow because the cash flow scheme in IAS-IFRS is
most standardised one and therefore discretionality will
be limited “by definition”».
Two competing perspectives from CFOs may condense
the conclusion of this paragraph. While a CFO
stressed the independence of the directors and senior
management stating that: «As a professional Chartered
Accountant my integrity is to do the calculation of
GWO to the best of my ability. The Directors and senior
managers I have worked with would always try and
do the right thing. People and companies in general
try to do this...there is always one bad apple however
that makes your questions fair!»; another CFO argues
that companies cannot avoid to use “accounting
cosmetics” in a financial world which is not transparent,
doing earnings management is a “self-defence action”
employed by the companies.
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