LONDON (Reuters) - A global accounting standard setter has said it will review how companies calculate “goodwill” on their balance sheets to avoid misleading investors with overly optimistic assessments of financial health.
Goodwill refers to an accounting value recorded when a company acquires another company, a measurement that goes beyond how much physical assets alone are worth.
It is up to a company to decide each year how much, if any, this goodwill becomes “impaired” and should be written down, a step that can plunge a company in the red.
Amortisation, or the systematic reduction in goodwill over time, was banned by the IASB in 2004, though it is still used in countries like Japan that have their own national accounting rules.
“The risk is that goodwill just keeps on accumulating over time even when the economics do not justify this,” Hans Hoogervorst, chairman of the International Accounting Standards Board (IASB), said in a speech in Tokyo on Wednesday.
The IASB writes standards used in 144 jurisdictions, including the European Union, to check the books of thousands of listed companies.
“In such cases, the balance sheet may give an overly optimistic representation of a company’s financial health. Although sophisticated investors should be able to see through inflated goodwill numbers, others may not,” Hoogervorst said.
The question of whether to re-introduce amortisation will be put in a forthcoming IASB discussion paper.
“Before Japan puts out the flags, however, let me warn you that it is far from a foregone conclusion that this discussion paper will lead to a re-introduction of amortisation.”
Amortisation was banned by the IASB because it was impossible to determine objectively over how long it should occur, and it was not immediately clear that ending the ban would pass the IASB’s cost-benefit analysis test, Hoogervorst said.
Reporting by Huw Jones; Editing by Mark Potter