The Proposed Goodwill Impairment Test – Implications for Preparers, Auditors and Corporate Governance

Accounting for goodwill is again controversial as Australia adopts international accounting standards from 1 January 2005. The current method of accounting for goodwill will change dramatically as detailed in the AASB’s ED109 and IASB’s ED3. Goodwill acquired in a business combination will no longer be amortised but rather goodwill will be tested for impairment annually (ED3, para 54). This paper explores the potential impact of the proposed changes to goodwill accounting for preparers, auditors and those involved with corporate governance. We compare and discuss the current goodwill treatment and the proposed treatment of goodwill, demonstrating the advantages and complexities of the proposed treatment for preparers and auditors. Auditors will be required in many instances to use their professional judgment and rely on managements’ abilities and integrity as well as sound corporate governance mechanisms (such as audit committees) in auditing the ‘fair’ valuation of goodwill and associated transactions. This paper raises the issues and challenges that preparers, independent auditors and those involved in corporate governance will face with the introduction of the new treatment for goodwill accounting.