On December 20, the Financial Accounting Standards Board (FASB) proposed an accounting alternative that would enable private companies and not-for-profit entities to perform a triggering event evaluation for goodwill only at the annual reporting date, thereby skipping having to do so during interim periods. Here are the details.
Background
Goodwill is an accounting term used for a specific acquired intangible asset that’s recorded on the balance sheet in a merger or acquisition. It’s determined by deducting the fair market value of tangible assets, identifiable intangible assets and liabilities obtained in the purchase, from the cost to buy a business. As events or circumstances change, goodwill can become impaired (or decline in value).
Under current U.S. Generally Accepted Accounting Principles (GAAP), private companies must monitor and evaluate interim goodwill triggering events as they occur throughout the year. This involves the preparation of interim balance sheet and cash flow projections that may lose relevance at the annual reporting date when financial statements are issued.
Those companies find it costly and complex to have to perform the goodwill triggering event evaluation on an interim basis, because they issue GAAP-compliant financial statements only annually. The COVID-19 pandemic — which could be considered a triggering event — further complicates this issue.
Evaluation of interim triggering events
The proposed alternative would eliminate the interim triggering event evaluation and, instead, require only a year-end triggering event evaluation. The alternative would be applicable only to entities within the scope of the proposal and only for goodwill. It wouldn’t be applicable to other intangibles, fixed assets or any other assets.
FASB Chairman Richard Jones said, “It’s a narrow exception for a narrow set of entities, and I think the benefits definitely justify the costs for a narrow segment.”
It’s important to note that FASB member Harold Schroeder, the lone dissenter to the proposal, wanted the alternative to include a sunset provision. That provision would limit the alternative to the time period of the economic impact of the COVID-19 crisis.
Work in progress
The FASB issued its narrow-scope proposal on interim evaluations of triggering events with a 30-day comment period. If approved, the changes would take effect prospectively for fiscal years beginning after December 15, 2019. Earlier adoption also would be permitted.
Sidebar: More changes to goodwill reporting in the works
On December 16, 2020, the Financial Accounting Standards Board (FASB) tentatively said it would require public companies to amortize goodwill over a 10-year period on a straight-line basis only, without exception, as allowed currently for private companies. The change would be published in a separate proposal from the proposal on interim evaluations of triggering events for private companies and not-for-profits.
The FASB decided that a company would be allowed to deviate from the default 10-year amortization period if management could justify the reasons for doing so. The amortization period would need to be elected on a transactional basis.
“I’m thinking of an example like in the health care industry where one hospital acquires another hospital system, and they have buildings and equipment and all sorts of assets that they are acquiring that are much longer lived than 10 years,” said FASB member Christine Botosan. “They could easily provide a basis for a longer amortization period. So that’s why it would be appropriate for us to provide room for judgment when it comes to selecting the amortization period, but to reduce cost to provide a default where folks don’t want to go through that cost of trying to justify.”
The FASB decided not to pursue a so-called “evolving” model for the subsequent accounting for goodwill. An evolving model is one in which goodwill amortization may not immediately start but begin after some period after the business combination. Many financial statement preparers have said an evolving amortization approach could be complex, with operability concerns associated with the model.
The FASB’s decisions were made under the assumption that the existing impairment model and unit of account would not change. This is the first step in what will be in an exposure document that eventually will be issued for public comment. Discussions will resume on the topic during the first quarter of 2021.
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