New IAS 36 changes: will they help curb management overoptimism?
Since IFRS proposed their new changes to IAS 36: Impairment of Assets, a variety of questions have since been raised on whether the new standard would reduce management overoptimism. For years companies have hid underperforming acquistions in high-level cash generating units (CGUs) to delay their inevitable goodwill impairment.
IAS 36 now requires management to disclose what CGUs their goodwill is allocated to through reportable segment performance metrics. This change, both Allianz and KPMG argue, would assist external users in tracking acquisition performance. Consider the following example: if Wesfarmers acquired Aldi, IAS' proposed changes would require Wesfarmers to disclose the CGU where Aldi's goodwill is tested for impariment (e.g. their Kmart Group). Possibly, then, Wesfarmers' CGU disclosure would allow for greater stewradship scrutiny which may encourage managers to be more diligent in ensuring their allocation assumptions are not overoptimism and remain true and fair.
Critics of the new changes argue that cognitive biases and organisational pressures drive overoptimism itself, which disclosures alone do not address. Both PwC and HSBC argue that unless IAS 36 changes address these underlying issues, the proposed disclosure requirements would have limited efficacy as managers cannot adjust assumptions that they are not aware are overoptimistic. Perhaps, IAS 36 has grounds to improve by requiring disclosures on underpinning assumptions (e.g. growth rates) of CGU allocation which may further curb overoptimism.
It is likely that additional disclosures will have weight in ensuring that managers think twice about their CGU allocations, but whether they will reduce overoptimism itself is a question better answered in an academic journal.
Sources
Amel-Zadeh, A., Glaum, M., & Sellhorn, T. (2021). Empirical goodwill research: Insights, issues, and implications for standard setting and future research. European Accounting Review, 32(2), 415–446. https://doi.org/10.1080/09638180.2021.1983854
Johansson, S.-E., Hjelström, T., & Hellman, N. (2016). Accounting for Goodwill under IFRS: A critical analysis. Journal of International Accounting, Auditing and Taxation, 27, 13–25. https://doi.org/10.1016/j.intaccaudtax.2016.07.001
