What is the Debate Surrounding Goodwill Accounting?
I also wrote recently about the issue that "goodwill amortization might become unnecessary."
The Nikkei newspaper has frequently covered goodwill amortization, drawing significant attention. The series of articles titled "Thoughts on Goodwill" (July 3rd–5th) summarizes the key points of the debate in an easy-to-understand manner. Based on those articles, I have created a "summary of the summary."
Ballooning "Goodwill"—Driven by Active Corporate Acquisitions
When a company acquires another, if the acquisition price exceeds the target company's net assets, the difference is recorded as "goodwill." This represents the value of "invisible assets" such as brands, technology, and know-how.invisible asset valuesignifies this.
According to a survey by the Nihon Keizai Shimbun, as of the end of March 2025, approximately 600 companies listed on the Tokyo Stock Exchange Prime Market have recorded a total of44 trillion yenin goodwill, which has roughly doubled over the past 10 years.
SoftBank Group, in particular, has recorded over 5 trillion yen on its own, illustrating a structure where goodwill increases as corporate M&A activity becomes more active.
How "Goodwill" is Handled Differs by Accounting Standard
There is a significant difference in the accounting treatment of goodwill between Japanese standards and International Financial Reporting Standards (IFRS).
Under international standards, there is also a risk that if goodwill impairment occurs when business earnings decline, it will result in a "double punch," negatively impacting earnings.
In Japan, there is currently a debate about introducing a choice-based system that would "allow companies to choose between periodic amortization and non-amortization." This is expected to further revitalize M&A for startups.
What is "Core Goodwill"? — The Nature of Assets Seen Through Components
Under IFRS, "goodwill" is considered to be decomposable into the following six components:
Difference between the book value of assets, etc., and the actual price
... The gap between the price recorded in the target company's books and the actual market value.Assets not recorded on the balance sheet
... Intangible assets that should have been valued, such as intellectual property, that were not recorded.Rights arising from a going concern (premise of a continuing enterprise)
... Interests such as brands and business relationships that can be enjoyed as long as the company continues.Synergy
... Economic benefits such as cost reductions or sales increases obtained through the acquisition.Expenditures higher than expected in stock swaps, etc.
... The portion of the acquisition that is overpriced due to adjustments in stock swap ratios, etc.Overpaying in bids, etc.
... The premium paid resulting from competitive bidding, etc.
Of these, "3" and "4" are consideredcore goodwilland are thought to be directly linked to a company's intrinsic value and competitive advantage. Because these are essential intangible assets, there is a view that theyshould not be amortized uniformly.
The Reality of Impairment Testing — The Practical Burden Faced by IFRS Companies
Under IFRS, instead of amortizing goodwill, there is an obligation to perform an annual "impairment test." This is a process of quantitatively evaluating whether the value of goodwill has declined, and it follows the steps below:
Forecast future cash flows (CF)
Set a discount rate (WACC)
Compare value in use (present value) with book value
Determine the necessity of impairment
This task is time-consuming and labor-intensive, and it also increases audit fees. In fact, there are cases where companies that adopted IFRS saw their audit costs increase by more than 20%.
Furthermore, goodwill impairment has issues such as losses being covered when business segments are large, making it difficult for impairment to occur, leading to criticism that it is "too little, too late."
Summary
Goodwill accounting is not just a financial rule; it is a theme that ripples across the entire economy, affecting Japanese companies' M&A strategies, startup growth, and the inflow of overseas investment money, so this debate will likely continue. A more balanced system design will be required, considering both the practical burden on companies and the quality of information disclosure for investors.
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