By Huw Jones
LONDON (Reuters) - Tougher accounting rules may be needed that force companies to write down goodwill faster and stop "overly optimistic" calculations, a global securities watchdog said on Thursday.
Goodwill refers to the premium a company has paid for another company, above the net value of its assets. It has to be reviewed at least annually and written down if need be.
"We emphasize that the issue of 'too little, too late' goodwill impairment and the issue of insufficient disclosure on goodwill impairment tests are priority issues in financial reporting," the International Organization of Securities Commissions (IOSCO) said in a public consultation paper.
Too little, too late refers to companies suddenly slashing goodwill when major profitability issues emerge.
"Many IOSCO members are concerned that management’s estimation of value in use may be overly optimistic in some circumstances. Many IOSCO members considered that this is challenging from an enforcement perspective," IOSCO said.
IOSCO is an umbrella group for securities regulators from the United States, Canada, Latin America, Europe and Asia.
Since the financial crisis, total goodwill of S&P 500 companies in the United States has more than doubled from $1.6 trillion in 2008 to $3.7 trillion in 2021, IOSCO said. For a total of 1,477 listed companies in the European Union, it has increased by almost half to 1.6 trillion euros ($1.75 trillion) since 2013.
Accounting for goodwill has long been a divisive issue.
The International Accounting Standards Board, whose accounting rules are mandatory in the EU and Britain, is reviewing its goodwill rule, though last year its U.S. counterpart, FASB, decided to put aside its own review.
Both boards have rejected going back to the previous system of amortisation, or writing down goodwill over time, and the IASB will focus on less radical tweaks.
IOSCO said the IASB could also consider if a company should disclose the facts and circumstances with respect to how close it was to impairing goodwill following its regular test in a bid to give investors more information.
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