The IVSC has received a number of questions from constituents asking whether the principles underlying business valuations are compatible with the concept of goodwill amortisation. The IVSC Boards have discussed the topic and concluded that the best way to aid public discussion is by publishing a three-part article series to explore the fundamental perspectives with the goal of aiding capital markets by informing financial statement preparers, reviewers, and users.

Questions the IVSC explore in the three-part article series include:

In this, the second of three articles, the IVSC explores the information content of the goodwill impairment test and highlights some reasons for its perceived flaws and limitations as a leading indicator. As the artilce demonstrates, the current goodwill impairment framework provides inconsistent results as a leading indicator.

Rather than attempt to analyse historical observations or draw a consensus from the existing academic studies on the topic, the IVSC has instead analysed the accounting framework to better understand why goodwill impairments in certain situations fail to be a leading indicator. In doing so, we identify four primary reasons for why goodwill impairments often lag market sentiment, and utilise a number of examples to articulate the fact patterns which lead to these outcomes.

In the third article in this series, we will then discuss some practical solutions to enhance the current goodwill impairment framework.