New guidelines for goodwill accounting

Current accounting standards for goodwill are seen as complex because they require regular impairment testing and do not permit goodwill amortization. Goodwill impairment – when goodwill has become or is considered to be of lower value than at the time of purchase – became a public issue during the accounting scandals in 2002.
Many companies had artificially inflated their balance sheets by reporting excessive goodwill value. This tactic can work during strong bull markets, but the accounting scandals led to legislation that required corporations to report their goodwill assets at realistic levels.
Currently, impairment testing must be performed at least annually or more frequently if certain conditions exist, and companies have limited flexibility in how the tests are performed. They can: (a) perform a qualitative assessment (often known as step zero) to determine if it is more likely than not that a reporting unit’s fair value is less than its carrying value, or (b) go straight to step one of a quantitative two-step impairment test.
In step one, the carrying value of the reporting unit is compared with its fair value. If the carrying amount exceeds the fair value, step two must be performed. In step two, the amount of the goodwill impairment is determined by comparing the carrying value of the goodwill with its implied value. When performed at the reporting unit level, the implied fair value is based on a hypothetical application of the acquisition method that is performed after measuring the fair value of the identifiable assets and liabilities – essentially performing a hypothetical-purchase accounting calculation.
Critics of the current accounting standards say the standards provide limited benefits to users of private-company financial statements, and they are costly to apply because they call for subjective judgments and measurements that often require the hiring of third-party experts, such as valuation specialists to assess fair value. In January 2014 the Financial Accounting Standards Board (FASB) released Accounting Standard Update 2014-02 Intangibles-Goodwill and Other (Topic 350): Accounting for Goodwill (ASU 2014-02).
ASU 2014-02 is the first standard issued by the FASB upon endorsement of a consensus of the Private Company Council (PCC) that is specifically designed to meet the needs of private companies by providing an alternative within U.S. Generally Accepted Accounting Principles.
ASU 2014-02 permits a private company to elect to amortize goodwill and requires impairment testing only upon occurrence of a triggering event as opposed to annual testing. Highlights of the alternative accounting treatment are as follows:
• A company that elects the accounting alternative should amortize goodwill on a straight-line basis over a period of 10 years or a shorter period if the company can demonstrate that another useful life is more appropriate. In a change from the original proposal, private companies are permitted to use a 10-year period as a default without assessing whether or not a different useful life is more appropriate.
• Goodwill should still be tested for impairment, but only when a triggering event occurs. When a triggering event occurs, private companies will continue to have the option to perform a step zero qualitative test. If a quantitative test is required, a one-step impairment test is performed by calculating the difference between the carrying amount of the entity or reporting unit and its fair value. Step two of the impairment test is not performed.
A company would need to make a policy election at the time it elects the alternative treatment to perform the impairment testing at either the companywide level or the reporting-unit level. This could provide relief for companies that have multiple divisions with goodwill attributed to different divisions. The goodwill impairment amount would represent the excess of the company’s or unit’s carrying amount over its fair value.
ASU 2014-02 is effective for annual periods beginning after December 15, 2014 and for interim periods within annual periods beginning after December 15, 2015. Early adoption is permitted for any period for which a company’s annual financial statements have not yet been made available for issuance. Private companies that elect this alternative must apply the alternative on a prospective basis and begin amortizing existing goodwill as of the beginning of the period of adoption.
The current accounting standards continue to apply to public business entities, employee-benefit plans and nonprofit entities.
While each company’s situation is unique, here are some general steps that companies may find helpful now:
Private companies should consider whether they qualify for the alternative approach and, if so, whether and when they wish to adopt the accounting alternative in their financial statements.
All companies that use private-company financial statements should understand the key provisions for any new alternative accounting treatments, so they can analyze the financial statements effectively. This includes lenders, suppliers to private companies, and public companies that may need to include private-company financial information in their SEC filings. •


Patrick Quinn is a CPA and shareholder in the accounting and auditing group at CBIZ Tofias & Mayer Hoffman McCann.

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