30 Jun Goodwill and Intangible Assets

Canada Is Rethinking How Private Companies Report Goodwill and Intangible Assets

The Accounting Standards Board (“AcSB”) sets the accounting rules that Canadian private companies must follow when they are subject to an audit or a review engagement. The AcSB is currently working on an important update to how businesses report goodwill and intangible assets on their financial statements.

If your company’s financial statements are subject to an audit or a review engagement and you have purchased, or are planning to purchase a business, this may affect you. These topics are not always easy to understand, so let us break them down and explain why the changes matter.

What Are Goodwill and Intangible Assets?

When a company buys another business, it is not just acquiring physical assets like buildings and equipment, but also things you cannot touch, such as brand names, patents, or customer relationships. These are called intangible assets.

If the buyer pays more than the combined value of those tangible and intangible assets, the extra amount is called goodwill. For example, someone might pay more for a famous restaurant, not just for its equipment, but also because of the reputation that comes with it.

Why Is the AcSB Making Changes?

The current rules make it challenging, especially for small businesses, to report goodwill and intangible assets accurately. Valuing each intangible asset can be complex, costly, and time-consuming.

Many business owners and accountants have told the AcSB that the existing requirements are overly complicated and not very useful. The goal of the new project is to make the process easier and more practical, while still providing valuable information to the users of the financial statements.

What Might Change?

Here are the key changes the AcSB is considering:

• Simpler rules for business acquisitions. Instead of listing and determining the value of each intangible asset individually, companies might be allowed to record a single total amount as goodwill that includes the value of the intangible assets.
• Spreading out the cost of goodwill over time. Currently, accountants must test goodwill annually to see if it has lost value, which can be tricky and expensive. The AcSB may allow companies to gradually reduce goodwill each year, like how a car’s value is depreciated every year you own it. This is called amortization, but under the current rules, this is not allowed.
• Better explanations in financial reports. While the calculations may become simpler, the AcSB still expects companies to clearly explain how they valued the assets they acquired. This helps ensure that investors and lenders still receive the full picture.

Who Will This Help?

These changes are intended for private companies, not public corporations. The goal is to make accounting more affordable and realistic for smaller organizations.

If your company has ever bought another business, these changes could make some of the accounting easier. And if you are someone who reads financial statements, such as a banker or investor, you may also find them easier to understand.

What Happens Next?

The AcSB is still gathering feedback and ideas from accountants, business owners, and the public. They plan to release a draft version of the new rules, called an “exposure draft,” sometime in the next year. People will have a chance to provide feedback before anything becomes official.

While these changes are not in effect yet, they are on the way and could make a significant difference in how Canadian businesses manage complex accounting requirements.

If you would like help understanding how this might affect your business or need a plain-language explanation of your financial statements, contact Clearline CPA. We would be happy to help.