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Business trends

M&A costs to rise under proposed change to global accounting

Asian and European companies face billions of dollars in goodwill amortization

Japan's SoftBank is among companies in Asia that would have to book larger costs for acquisitions under changes to international accounting rules now under consideration.
Japan's SoftBank is among companies in Asia that would have to book larger costs for acquisitions under changes to international accounting rules now under consideration.   © Reuters

TOKYO -- An international body that sets corporate accounting rules has formally begun deliberations on reinstating goodwill as a periodic cost, a change that would push down the earnings of companies engaging in massive buyouts.

Hans Hoogervorst, chairman of the International Accounting Standards Board, told Nikkei about the discussions taking place. This move is prompted by the spate of mergers and acquisitions in recent years, in which purchasing companies often leave themselves exposed to losses tied to goodwill. A resolution could come as early as 2021.

Such a change could improve the predictability of corporate earnings, although others maintain that companies would face higher M&A costs that could hinder business activity.

Under the board's International Financial Reporting Standards, goodwill -- the difference between the purchase price and the fair value of the target company's assets -- is regarded as an intangible asset, and there is no requirement to book it as an expense.  

But IFRS rules do mandate that purchasing companies record goodwill as an impairment loss if the target company's finances deteriorate. There are cases where those losses surface out of the blue. Japanese technology group Toshiba famously booked substantial losses at Westinghouse Electric, a former U.S. nuclear power subsidiary, due to goodwill impairment, under U.S. accounting rules.

Hoogervorst said decisions corporations make concerning goodwill tend to be optimistic, and the timing of booking goodwill losses has often been delayed.

The IFRS did away with the amortization of goodwill when it revised standards for M&As in 2004. Although the International Accounting Standards Board has been aware of the problems relating to goodwill, discussions on reforms had yet to get off the ground because the faction wishing to maintain the status quo dominated.

But the sentiments of Hoogervorst and others eventually broke through, and the board officially decided in July to begin talks on amortizing goodwill. The board will collect opinions from regulatory agencies and other stakeholders before reaching a final decision on the issue.

The IFRS is adopted in over 120 markets, mainly in Europe. But the standards are gaining traction in Asia -- especially in South Korea, which requires that all listed domestic companies use the international rules. China ensures that its national accounting standards are compatible with IFRS, so it will likely take steps should the global standards be changed. In China, the top 100 companies carry about $89 billion in combined goodwill.

Japanese blue chips like SoftBank Group, Mitsubishi Heavy Industries and Takeda Pharmaceutical utilize IFRS for earnings reports. About 160 Japanese companies overall have adopted the standard, and hold an aggregate goodwill of roughly 14 trillion yen ($125 billion).

In Europe, 600 major corporations hold about $2 trillion in goodwill in total. If the IFRS decides to institute annual goodwill amortization over two decades, the change could squeeze profits at Japanese and European companies by approximately $116 billion a year.

But paying off goodwill is typically the way of life in corporate Japan, where businesses mainly adopt Japanese generally accepted accounting principles. The rules already dictate the amortization of goodwill equally on an annual basis over a span of no more than 20 years.

The conventional wisdom in the Japanese business community is that goodwill needs to be written off as a cost. It is based in part on the idea that goodwill will decrease in value over time, as well as on the demand for greater transparency in financial disclosures.

On the other hand, the U.S. and Europe do not generally believe that booking goodwill as a recurring cost is necessary. The view is that if the fair value of a target company undershoots the book value by a large extent, then the parent can just reduce the value of the goodwill and take the loss.

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