To the International Organization of Securities Commissions (IOSCO)

Keidanren appreciates the opportunity to submit public comments on "Consultation on Goodwill" (hereinafter "Public Consultation"). Our comments are as follows.

[General]

Question 1:

• Working to resolve the issue that the recognition of impairment losses on goodwill is "too little, too late" (hereinafter the "too little, too late" issue) only by improving the impairment test and related disclosure lacks effectiveness and efficiency and is not rational. To begin with, a portion of the monitoring metrics and other information used in the impairment test is non-financial information and should inherently be disclosed outside of the framework of financial statements. For a fundamental resolution, an improvement of the "subsequent accounting for goodwill" is essential, and the reintroduction of amortisation (that is, the "amortisation and impairment approach") is the best solution.
• Regarding the "subsequent accounting for goodwill," the IOSCO Public Consultation takes the present "impairment-only approach" as a given and seeks a solution for the "too little, too late" issue only by improving the impairment test and related disclosure. The necessity of revising the "subsequent accounting for goodwill," which is essential for a fundamental resolution of the issue, should be mentioned once again.

[Questions for Issuers]

Question 16:

• There are limits to resolving the "too little, too late" issue by improving the impairment test. For the following reasons, the only rational method of resolving the "too little, too late" issue is the "amortisation and impairment approach." We strongly request the reintroduction of the amortisation of goodwill.
  (Reasons)
  1. 1) Under the current impairment-only approach, impairment losses on goodwill are not recognized on a timely basis. As previously examined in the IASB Discussion Paper "Business Combinations?Disclosures, Goodwill and Impairment" (December 2020), the main reason is that the shield effect of the headroom makes it difficult to identify part of goodwill which should be impaired. By reintroducing amortisation, it will become possible to expense an appropriate amount of goodwill on a timely basis. (Resolution of the "too little, too late" issue)
  2. 2) As goodwill is a part of investment costs and is mainly composed of technological capabilities, know-how, customer base and human resources, its value depreciates due to technological innovation, market changes, retirement or transfer of personnel, etc. If part of goodwill lasts indefinitely, it should normally be recorded as an intangible asset with indeterminate useful life. (Depreciation of goodwill)
  3. 3) As goodwill is a cost incurred to acquire businesses, it should be allocated over the period when the benefits of the acquisition (such as revenue and cost reduction) are recognized. By amortising goodwill, net profit of a company after acquisition is more appropriatelyrecorded, leading to appropriate understanding of the results of the investment. (Appropriate understanding of investment results)
  4. 4) The "amortisation and impairment approach" enables business management which comprehensively takes into account profit, cost and future impairment risk while keeping in mind the recovery of the investment. This will impose certain discipline on management and contribute to sustainable growth of a company. (Securement of disciplined corporate management)
  5. 5) As the "amortisation and impairment approach" considers the necessity of impairment by comparing the book value of goodwill, which reflects aged depreciation of goodwill, with the recoverable value, more appropriate amount of impairment is recognized on a timely basis. (Timeliness of impairment recognition)
  6. 6) Amortisation reduces risk and probability of impairment. The "amortisation and impairment approach" is an approach with excellent cost-benefit. (Cost-benefit perspective)
  7. 7) There is the opinion that "for amortisation it is difficult to estimate the useful life of goodwill and the patterns in which goodwill diminishes," but the analysis and grounds are not sufficiently presented. It is possible to recognize the useful life of goodwill and the patterns in which goodwill diminishes, and the difficulty of the recognition is not so different from that of depreciation of tangible fixed assets. (Estimate of useful life and pattern)
• Regarding the straight-line amortisation of goodwill, Keidanren has consistently advocated for the reintroduction of amortisation. According to quantitative surveys conducted by the Accounting Standards Board of Japan (ASBJ) in 2016 and in 2020, the outstanding amount of goodwill has been on an increasing trend since the impairment-only approach was applied by international standards. Given this trend, resolving the "too little, too late" issue is an urgent issue, and we recognize that there is a growing need to reintroduce amortisation in order to expense an appropriate amount of goodwill on a timely basis.
• The reintroduction of straight-line amortisation will eliminate most of the concerns that companies do not recognize impairment losses on goodwill on a timely basis. In particular, the issue that impairment losses on goodwill are not recognized on a timely basis due to the shield effect of the headroom under the "impairment-only approach" will be largely resolved.

Question 17:

• We believe that fundamentally resolving the "too little, too late" issue through improvement of disclosure is extremely difficult. We are concerned that at many companies, requiring additional disclosure would impose additional workload. If additional disclosure requirements are set, the cost-benefit of the intended effect of the improvements from the disclosure requirements and the workload on the part of preparers and others should be thoroughly analyzed and examined.
• Most of the information concerning goodwill is commercially sensitive, and depending on the disclosed information, competitive disadvantage could emerge if this becomes reference information for competing companies. We have strong concerns that the expected effect might not be realized, leading to impairment of corporate value. As a result, because the information which can be disclosed without impairing corporate value is extremely limited, this will not be useful disclosure for investors, and setting disclosure requirements that impair corporate value is not desirable to investors. Consequently, we cannot agree with the opinion "IOSCO members think that commercial sensitivity should not prevent companies from disclosing information about management's objectives for an acquisition" (Paragraph 2.3.2, third item) in the IOSCO Public Consultation document.
• In addition, it is impossible to identify and verify items and amounts of the synergies of the combined business (including accurate understanding of whether those synergies came from business combinations or were achieved regardless of business combinations) empirically. Because it is difficult to objectively and clearly define each synergy and the information provided varies depending on the definition by each company, disclosure that is comparable among companies is extremely difficult. Because we also believe that it is difficult to audit the validity of the amounts, these are not appropriate as the notes to the financial statements. Also, the items that are expected to be improved by the use of external experts are extremely limited, and this will not lead to a fundamental resolution.

Question 18:

• Because the current disclosure requirements stipulated in IAS 36 are already at a substantial level within the scope that can be disclosed by preparers, there is almost no room for improving the "too little, too late" issue by expanding disclosure. From the perspective of balance between the workload of preparers and the expected effect of expanding disclosure as well, working to resolve the issue by expanding disclosure is not efficient.
• Disclosure regarding external experts is unnecessary. At an impairment test, auditors tend to uniformly ask company executives to appoint external experts in order to eliminate subjectivity. Considering the significant role that the external experts play in effectively supporting audit procedures, KAM is the best place to disclose engagement of external experts. Additionally, from the perspective of reducing workloads on preparers, it is necessary to limit the engagement of external experts to highly challenging impairment tests.

Question 19:

• When impairment tests are implemented, a lot of commercially sensitive information including various assumptions and monitoring metrics based on future business strategies are handled as input information. As stated in Question 17, information that can be disclosed without impairing corporate value is extremely limited, and the approach of resolving related issues by expanding disclosure of the impairment test is not efficient.