Goodwill in accounting—an intangible asset that is recorded when a buyer acquires a business—has risen up the political agenda on both sides of the Atlantic.

In the UK we have seen pressure applied to the London-headquartered International Accounting Standards Board (IASB) in the wake of highprofile failures such as Carillion, the construction giant that went into liquidation two years ago, with goodwill inaccurately blamed as the basis for such failures.

More recently in the US we have seen the imposition of significant goodwill impairments—the accounting charge imposed when goodwill's carrying value on financial statements exceeds its fair value. High-profile examples include GE and Kraft Heinz.

These cases have been used as political fuel to elevate goodwill to the top of the agenda of the US Financial Accounting Standards Board (FASB).

In a letter to the FASB this January, CFA Institute underscored why changing the accounting standards for goodwill is not in the best interest of investors, because it equates all acquisitions—good and bad. It does not allow investors to see when management has paid too much for an acquisition.

AUDITORS' ROLE OFTEN UNDERANALYSED Recent business failures in the UK, such as Carillion, have raised the broader question of audit quality. We at CFA Institute certainly agree that business failures are problematic and create significant consequences not only for investors but also for other stakeholders in an organisation.

But although failures tend to be extensively reported by the UK media, significant analysis is usually lacking as to the causes of such failures and the degree to which audit failures, aggressive accounting, fraud, and market conditions that resulted in liquidity issues were contributory factors.

Of course, audits do not necessarily prevent business failures. Business failures stem from a lack of cash resulting from liquidity issues that can manifest quickly. Also, audit failures are not necessarily indicative of underlying business issues.

IASB AND FASB UNDER PRESSURE But we highlight the issue of goodwill not to debate the merits of the accounting for goodwill, but rather to highlight the media's often flawed analysis of many of the accounting, auditing, and business issues.

Media attention on the issue of goodwill in the UK increased political pressure on the IASB to reconsider, beginning in 2018, the issue of goodwill amortisation (a gradual writeoff), rather than impairment, under International Financial Reporting Standards.

Simultaneously, a significant writeoff of goodwill by GE in October 2018, followed by the Kraft Heinz goodwill write-down one year ago, appears to have created an opportunity for certain stakeholders to request that the FASB address accounting for goodwill under US Generally Accepted Accounting Standards.

FINDING THE BEST WAY FORWARD But delayed write-downs by poor management at several high-profile companies, or in connection with high-profile corporate failures, should not be seen as widespread evidence of the need to replace impairment with amortisation of goodwill.

Amortisation of goodwill, and certainly amortisation without impairment, would not have cured either overpayment for acquisitions or company failures.

For that reason, we do not believe these examples should be used as the basis by some stakeholders to further reduce the economic relevance and meaningfulness of financial statements.

We believe the IASB and FASB must be resolute in ensuring that financial statements provide economically relevant information.

Delayed recognition of impairment is the problem that needs to be addressed. We do not believe that amortisation is the best response to this problem.

£For more content on financial reporting, sign up for the Market Integrity Insights newsletter at cfa.is/marketintegrity £By Mohini Singh, ACA, Director of Financial Reporting Policy at CFA Institute READ MORE ONLINE Read more at: cityam.com/cfa-institute

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