Goodwill Research Project

The UKEB has published its research report Subsequent Measurement of Goodwill: a Hybrid Model. The report contributes to the ongoing international debate on the subsequent measurement of goodwill.

The report explores the effects of the application of the impairment-only model for UK IFRS reporters from 2005 to 2021. It finds that:

• The carrying amount of goodwill in the FTSE 350 increased from £227 billion in 2005 to £397 billion in 2021.
• A total of 228 companies in the FTSE 350 reported goodwill in 2021, representing on average 18% of total assets and 63% of net assets.
• Current disclosures on goodwill and impairment provide limited insight into the age of goodwill or the acquisitions that led to its recognition on companies’ balance sheets.  

The report explores the practical implications of a potential transition to a hybrid model for subsequent measurement of goodwill. Under a hybrid model, an annual amortisation charge would be combined with indicator-based impairment testing and disclosures to increase management accountability for acquisitions.

The report presents the results of a survey, field test and stakeholder outreach which explored the implications of a transition to a hybrid model for subsequent measurement of goodwill. 23 companies representing 17% of the FTSE 350 by market capitalisation completed the survey, and 9 UK IFRS preparers took part in the field test. 33 users of accounts, 20 audit firms, and 5 academics took part in roundtables and meetings to explore the field test output.

The research indicates that a transition to a hybrid model would be practically feasible as:

• The majority of preparers involved in our outreach believe it is possible to estimate a useful life for goodwill through consideration of a range of relevant factors and if sufficient application guidance is provided. However, significant challenges were identified in estimating the useful life of goodwill by one third of field test participants.
• A similar model works effectively under UK GAAP.
• Suitable transition arrangements could be provided for legacy goodwill.
• No significant adverse consequences for financial stability or for processes, operations or costs were identified. Further work would be required to be able to conclude definitively on this point.  

Thank you to everyone who contributed to the research.