The IASB spares the Ibex an 8.5 billion euros hit to its annual profits

Ibex35Madrid Stock Exchange

The IASB board, in a close vote and against the opinion of the Spanish government, has rejected the implementation at international level of the straight-line goodwill amortisation method.

The rules for the preparation of financial statements do not seem to be the most likely subject to generate major disputes, but the International Accounting Standards Board (IASB) yesterday experienced the closest thing to a drama, according to Expansión newspaper.

In a close vote, 8 of the 14 members of the IASB decided to maintain the current method of accounting for goodwill, after two and a half years of debate between regulators and companies over whether to change the current system.

At present, companies that follow international accounting standards (IFRS) – the case of Spanish listed companies – maintain indefinitely in their assets the value of goodwill, which is the difference between the price paid in an acquisition and the book value of the absorbed business. It is only adjusted downwards if a significant deterioration in its value is perceived, in the event of a worsening of the profitability expectations on which the amount paid was based.

The Instituto de Contabilidad y Auditoría de Cuentas (ICAC, part of the Spanish Ministry of Economy), other governments and also many companies wanted to move to a straight-line amortisation system, whereby goodwill is reduced to zero over a set period (10 years) by passing on a fixed expense each year. This is already the case for small Spanish companies that follow local rules.

In the case of the Ibex 35 groups, they had goodwill of around €85 billion in 2021, having made provisions of €13.6 billion in 2020 for the impact of the pandemic. Switching to straight-line amortisation, therefore, would have implied a negative impact on annual profit of 8.5 billion euros.

At the end of last year, Telefónica had goodwill of 16.519 billion euros, Santander 12.713 billion, Iberdrola 8.312 billion and Grifols 6.228 billion.

With the IASB’s decision, companies will be able to continue to depreciate these assets only when there is a clear impairment. According to the IASB, “it has concluded that the extensive evidence received does not demonstrate that there is a compelling case to change the previous decision on the accounting for goodwill”.

Globally, goodwill is estimated to be worth about $7 trillion, of which more than half (about $4 trillion) is held by US companies. Last June, the US accounting regulator FASB also decided to maintain the impairment test method, without introducing amortisation.

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The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.