statement of financial position of the acquiree, Entity B, would have been nil under IFRS.
In economic terms it might be contended that the ‘deferred marketing costs’ intangible
asset in the example above comprises the value that would have been attributable under
IFRSs to the acquired customer relationships. However, unless Entity A concluded that
not recognising the customer relationship intangible asset was an error under its
previous GAAP, it would not be able to recognise the customer relationship intangible
asset upon adoption of IFRSs.
Under IFRS 1, assets acquired and liabilities assumed in a business combination prior to
the date of transition to IFRSs are not necessarily valued on a basis that is consistent
with IFRSs. This can lead to ‘double counting’ in the carrying amount of assets and
goodwill as is illustrated in the example below.
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Example 5.21: Impairment testing of goodwill on first-time adoption
Entity C acquired a business before its date of transition to IFRSs. The cost of acquisition was €530 and
Entity C allocated the purchase price as follows:
€
Properties, at carry-over cost
450
Liabilities, at amortised cost
(180)
Goodwill
260
Purchase price
530
The goodwill under Entity C’s previous GAAP relates entirely to the properties that had a fair value at date
of acquisition that was significantly in excess of their value on a carry-over cost basis. In Entity C’s opening
IFRS statement of financial position the same assets, liabilities and goodwill are valued as follows:
€
Properties, at fair value
750
Liabilities, at amortised cost
(180)
Provisional IFRS goodwill
(before impairment test)
260
Total carrying amount 830
Entity C used the option to measure the properties at fair value at its date of transition in its opening IFRS
statement of financial position. However, IFRS 1 does not permit goodwill to be adjusted to reflect the extent
to which the increase in fair value relates to other assets recognised at the time of the acquisition. The total
carrying amount of the acquired net assets including goodwill of €830 may now exceed the recoverable
amount. When Entity C tests the ‘provisional IFRS goodwill’ for impairment on first-time adoption of IFRSs,
the recoverable amount of the business is determined to be €620. Accordingly, it will have to recognise an
impairment of goodwill of €210 and disclose this impairment under IFRS 1.
In some cases the write-off will completely eliminate the goodwill and thereby any ‘double counting’.
However, in this particular case the remaining goodwill of €50 in truth represents goodwill that was internally
generated between the date of acquisition and the date of transition to IFRSs.
The IASB accepted that IFRS 1 does not prevent the implicit recognition of internally
generated goodwill that arose after the date of the business combination. It concluded
that attempts to exclude such internally generated goodwill would be costly and lead to
arbitrary results. [IFRS 1.BC39].
As the business combinations exemption also applies to associates and joint
arrangements, a transition impairment review should be carried out on investments in
associates and joint arrangements if they include an element of goodwill. However, the
goodwill embedded in the amount of an investment in an associate or an investment in
a joint venture will not be subject to a separate impairment test. Rather the entire
carrying amount of the investment is reviewed for impairment following the
requirements of IAS 36. In performing this impairment review of the investment in
associate or joint venture, in our view, an investor does not reverse a previous GAAP
impairment that was recognised separately on the notional goodwill element embedded
in the investment. However, if the previous GAAP impairment had been recognised as
a reduction of the entire investment (without attribution to any particular embedded
account), the first-time adopter is able to reverse such impairment if it is assessed to no
longer be necessary. Consider the two scenarios below:
First-time
adoption
261
Example 5.22: Previous GAAP impairment of goodwill embedded in equity
method investment
Scenario 1 – Impairment was recognised on the notional goodwill element embedded in the investment under
previous GAAP
On 1 January 2012, Entity A acquired an investment in Entity B, which it accounts for using the equity
method (the investment would qualify as an associate under IFRSs). The cost of investment was €1,500
compared to B’s identifiable net assets of €500; therefore, notional goodwill of €1,000 was included in the
carrying value of the investment at that time. The previous GAAP required the entity to:
• Amortise the notional goodwill of the associate on a straight-line basis.
• Test the equity accounted investment for impairment at the investment level.
• Allocate and recognise the impairment loss (if any) against notional goodwill.
• Goodwill impairments (including those on notional goodwill) are not permitted to be reversed and
therefore affect future amortisation.
Therefore, under its previous GAAP, Entity A tested its investment in Entity B for impairment, and
recognised an impairment loss of €500 in the year ended 31 December 2012. This reduced the notional
goodwill to €500, which Entity A amortises over 10 years (€50 annually). By its date of transition to IFRS,
1 January 2018, notional goodwill had been amortised by 5 years × €50 (€250), reducing notional goodwill
to €250. Net assets are unchanged since acquisition, leaving the investment with a carrying value of €750.
Entity A applies the exemption from retrospective restatement for past acquisitions of investments in associates.
Therefore, at 1 January 2018, its transition date, Entity A also tests the investment for impairment in accordance
with IAS 36. At 1 January 2018, the value of the investment in Entity B recovered, and is €1,500 based on its current
listed share price. Under this scenario, the previous impairment to notional goodwill is not reversed, since the use
of the business combination exemption as it applies to associates means that the goodwill determined under the
previous GAAP acquisition accounting together with the subsequent accounting up to the transition date is
effectively grandfathered in a similar way in which a subsidiary’s goodwill would be, in accordance with paragraph
C4(g) of IFRS 1. Therefore, the carrying value of the notional goodwill as determined under previous GAAP
becomes the embedded notional goodwill at transition unless specifically required to be adjusted. [IFRS 1.C4(h)].
Scenario 2 – Impairment was recognised at the investment level under previous GAAP
The same as Scenario 1, except that Entity A’s previous GAAP impairment test was performed at the
investment level, using a test similar to that required under IAS 36. Because of applying this approach, when
Entity A recognised an impairment loss of €500 in the year ended 31 December 2012, the carrying amount
of the investment was €1,000. Similar to Scenario 1, a
t 1 January 2018, the value of the investment in Entity B
has recovered, and is €1,500 based on its current listed share price.
Under this scenario, the previous impairment of notional goodwill, which is embedded in the full amount of
the investment, is reversed. However, the impairment can only be reversed up to the pre-impairment equity
accounted value that results from the application of the business combination exemption.
5.2.5.A Prohibition
of
other adjustments of goodwill
IFRS 1 prohibits restatement of goodwill for most other adjustments reflected in the
opening IFRS statement of financial position. Therefore, a first-time adopter electing
not to apply IFRS 3 retrospectively is not permitted to make any adjustments to
goodwill other than those described above. [IFRS 1.C4(h)]. For example, a first-time adopter
cannot restate the carrying amount of goodwill:
(i) to exclude in-process research and development acquired in that business
combination (unless the related intangible asset would qualify for recognition
under IAS 38 in the statement of financial position of the acquiree);
(ii) to adjust previous amortisation of goodwill;
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(iii) to reverse adjustments to goodwill that IFRS 3 would not permit, but were made
under previous GAAP because of adjustments to assets and liabilities between the
date of the business combination and the date of transition to IFRSs.
Differences between the goodwill amount in the opening IFRS statement of financial
position and that in the financial statements under previous GAAP may arise, for
example, because:
(a) goodwill may have to be restated as a result of a retrospective application of IAS 21
– The Effects of Changes in Foreign Exchange Rates (see 5.2.6 below);
(b) goodwill in relation to previously unconsolidated subsidiaries will have to be
recognised (see 5.2.7 below);
(c) goodwill in relation to transactions that do not qualify as business combinations
under IFRSs must be derecognised (see 5.2.1 above); and
(d) ‘negative goodwill’ that may have been included within goodwill under previous
GAAP should be derecognised under IFRSs (see 5.2.5.B below).
Example 5.23: Adjusting goodwill
Entity A acquired Entity B but under its previous GAAP it did not recognise the following items:
• Entity B’s customer lists which had a fair value of ¥1,100 at the date of the acquisition and ¥1,500 at the
date of transition to IFRSs; and
• Deferred tax liabilities related to the fair value adjustment of Entity B’s property, plant and equipment,
which amounted to ¥9,500 at the date of the acquisition and ¥7,800 at the date of transition to IFRSs.
What adjustment should Entity A make to goodwill to account for the customer lists and deferred tax
liabilities at its date of transition to IFRSs?
As explained at 5.2.4.B above, Entity A cannot recognise the customer lists (internally generated intangible
assets of acquiree) when it uses the business combinations exemption. Accordingly, Entity A cannot adjust
goodwill for the customer lists.
Entity A must recognise, under IAS 12 – Income Taxes – the deferred tax liability at its date of transition
because there is no exemption from recognising deferred taxes under IFRS 1. However, Entity A is not
permitted to adjust goodwill for the deferred tax liability that would have been recognised at the date of
acquisition. Instead, Entity A should recognise the deferred tax liability of ¥7,800 with a corresponding
charge to retained earnings or other category of equity, if appropriate.
5.2.5.B
Derecognition of negative goodwill
Although IFRS 1 does not specifically address accounting for negative goodwill
recognised under a previous GAAP, negative goodwill should be derecognised by a first-
time adopter because it is not permitted to recognise items as assets or liabilities if IFRSs
do not permit such recognition. [IFRS 1.10]. Negative goodwill clearly does not meet the
definition of a liability under the IASB’s Conceptual Framework and its recognition is
not permitted under IFRS 3. While not directly applicable to a first-time adopter, the
transitional provisions of IFRS 3 specifically require that any negative goodwill is
derecognised upon adoption. [IFRS 3.B69(e)].
5.2.5.C
Goodwill previously deducted from equity
If a first-time adopter deducted goodwill from equity under its previous GAAP then it
should not recognise that goodwill in its opening IFRS statement of financial position.
Also, it should not reclassify that goodwill to profit or loss if it disposes of the subsidiary
First-time
adoption
263
or if the investment in the subsidiary becomes impaired. [IFRS 1.C4(i)(i)]. Effectively, under
IFRSs such goodwill ceases to exist, as is shown in the following example based on the
implementation guidance in IFRS 1. [IFRS 1.IG Example 5].
Example 5.24: Goodwill deducted from equity and treatment of related
intangible assets
Entity A acquired a subsidiary before the date of transition to IFRSs. Under its previous GAAP, Entity A:
(a) recognised goodwill as an immediate deduction from equity;
(b) recognised an intangible asset of the subsidiary that does not qualify for recognition as an asset under
IAS 38; and
(c) did not recognise an intangible asset of the subsidiary that would qualify under IAS 38 for recognition
as an asset in the financial statements of the subsidiary. The subsidiary held the asset at the date of its
acquisition by Entity A and at the date of transition to IFRS.
In its opening IFRS statement of financial position, Entity A:
(a) does not recognise the goodwill, as it did not recognise the goodwill as an asset under previous GAAP;
(b) does not recognise the intangible asset that does not qualify for recognition as an asset under IAS 38.
Because Entity A deducted goodwill from equity under its previous GAAP, the elimination of this
intangible asset reduces retained earnings (see 5.2.4.A above); and
(c) recognises the intangible asset that qualifies under IAS 38 for recognition as an asset in the financial
statements of the subsidiary, even though the amount assigned to it under previous GAAP in A’s
consolidated financial statements was nil (see 5.2.4.B above). The recognition criteria in IAS 38 include
the availability of a reliable measurement of cost and Entity A measures the asset at cost less
accumulated depreciation and less any accumulated impairment losses identified under IAS 36 (see 7.12
below). Because Entity A deducted goodwill from equity under its previous GAAP, the recognition of
this intangible asset increases retained earnings. However, if this intangible asset had been subsumed in
goodwill recognised as an asset under previous GAAP, Entity A would have decreased the carrying
amount of that goodwill accordingly (and, if applicable, adjusted deferred tax and non-controlling
interests) (see 5.2.5.A above).
The prohibition on reinstating goodwill that was deducted from equity may have a
significant impact on first-time adopters that hedge their foreign net investments.
Example 5.25: Goodwill related to foreign net investments
Entity B, which uses the euro (€) as its functional currency, acqui
red a subsidiary in the United States whose
functional currency is the US dollar ($). The goodwill on the acquisition of $2,100 was deducted from equity.
Under its previous GAAP Entity B hedged the currency exposure on the goodwill because it would be
required to recognise the goodwill as an expense upon disposal of the subsidiary.
IFRS 1 does not permit reinstatement of goodwill deducted from equity nor does it permit transfer of goodwill
to profit or loss upon disposal of the investment in the subsidiary. Under IFRSs, goodwill deducted from
equity ceases to exist and Entity B can no longer hedge the currency exposure on that goodwill. Therefore,
exchange gains and losses relating to the hedge will no longer be classified in currency translation difference
but recognised in profit and loss after adoption of IFRSs.
If a first-time adopter deducted goodwill from equity under its previous GAAP,
adjustments resulting from the subsequent resolution of a contingency affecting the
purchase consideration, at or before the date of transition to IFRSs, should be
recognised in retained earnings. [IFRS 1.C4(i)(ii)]. Effectively, the adjustment is being
accounted for in the same way as the original goodwill that arose on the acquisition,
rather than having to be accounted for in accordance with IFRS 3. This requirement
could affect, for example, the way a first-time adopter accounts for provisional amounts
relating to business combinations prior to its date of transition to IFRSs.
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Example 5.26: Adjustments made during measurement period to provisional
amounts
Entity C acquired Entity D on 30 September 2017. Entity C sought an independent valuation for an item of property,
plant and equipment acquired in the combination. However, the valuation was not completed by the date of transition
to IFRS (1 January 2018). Under Entity C’s previous GAAP, any goodwill was written off against equity as incurred.
Five months after the acquisition date (and after the transition date), Entity C received the independent valuation.
In preparing its opening IFRS statement of financial position, Entity C should use the adjusted carrying
amounts of the identifiable net assets (see 5.2.4.C above) with the corresponding adjustment being recognised
in retained earnings.
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