29 September 2016

EFRAG: A quantitative study on goodwill and goodwill impairment

EFRAG published a quantitative study “What do we really know about goodwill and impairment?”. The objective of the quantitative study is to facilitate the debate related to the accounting for goodwill by providing evidence on how goodwill and goodwill impairment have evolved over time.

In its study, EFRAG presents a quantitative analysis of a sample of European companies from 2005 to 2014 and compares the European data to other samples of US, Australian and Japanese companies.

Main findings in Europe

• From 2005 to 2014 the total amount of goodwill recognised increased from 935 billion euros to 1.341 billion euros, representing an increase of 43%;
• A small number of companies account for a large share of the carrying amount of goodwill;
• The ratio goodwill to total assets has remained fairly stable over the years at approximately 3,7%. The ratio is significantly higher when entities in Financials industry are excluded but has been gradually decreasing since 2009;
• The ratio goodwill to net assets has been decreasing since 2008, but it was still significant in 2014 (29%);
• The amount of impairment losses recognised was at the highest level in 2008 and 2011, years when the performance of the financial markets was negative. On average, impairment losses represented 2,7% of the opening balance of goodwill;
• Impairment losses are significantly concentrated in a small number of companies, particularly in the Telecommunications and Financials indus­tries; and
• Absolute and relative levels of goodwill and impairment losses vary significantly across industries.

International comparison

Chapter 3 of the study compares the sample of 328 European companies to samples of companies in the US, Australia and Japan. The companies in the Japanese sample apply Japanese GAAP, which requires goodwill to be amortised. This part of the study was carried out in collaboration with the Accounting Standards Board of Japan (ASBJ).

Andrew Watchman, EFRAG TEG Chairman said: “The question of how best to account for goodwill is a difficult one and this debate still has a long way to run. EFRAG strongly believes that financial reporting developments should be informed by evidence. We think this study of trends in goodwill capitalisation and impairment will contribute to the available evidence: it doesn’t provide all the answers but it will help to inform the debate going forward. We have worked closely with the Accounting Standards Board of Japan in conducting this study, and I would like to express my appreciation for the positive and collaborative spirit shown by the ASBJ throughout.” 

Full study

© EFRAG - European Financial Reporting Advisory Group