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Not-for-profit organizations active in M&A get simpler option for reporting goodwill

Donors and other users of not-for-profits’ financial reports may get more comparable information about how certain types of acquired intangible assets fared in the long run following a merger and acquisition (M&A) because of new accounting options just made available to not-for-profits.

The Financial Accounting Standards Board (FASB) on May 30, 2019, issued an accounting standard that enables not-for-profits to use the easier, less costly methods available to private companies for reporting goodwill, an acquired intangible asset that comes on balance sheets through M&A.

“It provides an alternative to organizations that may make it a little easier to deal with goodwill on these transactions,” Lee Klumpp, national assurance partner at BDO Institute for Nonprofit Excellence, said.

“But if there’s a triggering event, they have to recognize an impairment and they would have to do a valuation to determine impairment,” said Klumpp, who is based in the company’s Greater Washington area. “They would incur costs to do that,” he said.

The new provisions allow entities to opt out of doing an annual goodwill impairment test and to write-off goodwill over a 10-year period on a straight-line basis—a simpler, less costly method used by private companies. Goodwill, an accounting term, is 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.

The rules also allow entities to subsume certain customer-related intangible assets and all noncompete agreements into goodwill. If that election is made, goodwill must be amortized, according to the main tenets of the guidance, which was issued as Accounting Standards Update (ASU) No. 2019-06, Intangibles—Goodwill and Other (Topic 350), Business Combinations (Topic 805), and Not-For-Profit Entities (Topic 958): Extending the Private Company Accounting Alternatives on Goodwill and Certain Identifiable Intangible Assets to Not-for-profit Entities.

Examples of goodwill include patents or proprietary technologies, trade names, workforce and noncompete agreements. Goodwill becomes impaired if its fair value declines below its carrying value. Events that can “trigger” an impairment test include a decline in economic conditions, increased competition, loss of key personnel and regulatory action.

The guidance makes provisions for triggering events, requiring not-for-profits to test for impairment in such circumstances. Entities also have the option to elect to test for impairment at the entity level.

The rules, which apply to all not-for-profits, might be meaningful to some not-for-profit hospitals and healthcare facilities because it comes at a time when nontraditional players such as, Inc., Walmart Inc. and Apple Inc., have entered the healthcare arena, potentially driving M&A activity among not-for-profit healthcare entities. (See Nonprofit Hospitals to Get Simpler Option for Reporting Some Intangible Assets in the April 15, 2019, edition of Accounting & Compliance Alert.)

For more information on this topic, or to learn how Baker Tilly accounting and assurance specialists can help, contact our team.

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