The FASB on Dec. 21, 2020, issued a proposal to allow private companies and not-for-profits to evaluate whether an event caused goodwill to become impaired only as of the annual reporting date, rather than scrambling to do so at interim periods.
The change would simplify and provide a less costly option for resource-strapped companies that only report GAAP compliant financial statements on an annual basis, the board said.
Under the proposal, companies and organizations would not be required to monitor for goodwill impairment triggering events during interim periods, but would instead evaluate the facts and circumstances that exit as of year-end to determine whether it’s more likely than not that goodwill is impaired.
Goodwill is an accounting term used to refer to the value of certain nonphysical assets that are acquired in mergers and acquisitions (M&A). It 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. Goodwill becomes impaired if its fair value declines below its carrying value.
Under current guidance, a company is required to monitor for and evaluate goodwill impairment triggering events throughout the fiscal year. When a triggering event occurs, the company is required to perform an analysis of whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. If the company concludes that it is more likely than not that goodwill is impaired, then it must perform a quantitative goodwill impairment test. The triggering event analysis and that resulting goodwill impairment test, if any, does not require it to be performed on the day that a triggering event occurs without the use of any hindsight or changes to facts and circumstances after that triggering event date.
The board said it is seeking comments by Jan. 20, 2021, on the guidance, published under Proposed Accounting Standards Update (ASU) No. 2020-1100, Intangibles—Goodwill and Other (Topic 350) Accounting Alternative for Evaluating Triggering Events.
FASB member Harold Schroeder, who provides an investor’s view during board discussions, dissented on the proposal.
The scope of the proposal would be limited to goodwill that is tested for impairment in accordance with Subtopic 350-20, Intangibles—Goodwill and Other—Goodwill, a text of the document states. No additional disclosures would be required.
If finalized, the changes would be effective on a prospective basis for annual reporting periods beginning after Dec. 15, 2019. Early adoption would be permitted for financial statements that have not yet been issued or made available for issuance.
The proposal also includes an unconditional one-time option for entities to adopt the alternative prospectively after its effective date without assessing preferability under Topic 250, Accounting Changes and Error Corrections.
The rules were developed after private companies expressed concern about the cost and complexity of evaluating triggering events then potentially measuring a goodwill impairment at an interim date when they may only report annual financial statements. This became more apparent during the pandemic because of the uncertainty in the economic environment and the significant changes in facts and circumstances quarter-over-quarter, but it is an issue that existed prior.
Private companies have to perform this analysis as part of their financial reporting process, and have said it could be difficult for them to determine if there was a triggering event during the year and the day that triggering event occurred without having hindsight included in the analysis.
The board also heard that performing a goodwill impairment evaluation on the day that a triggering event occurs may not always provide the most meaningful information to users of certain private company financial statements and not-for-profit entities.
Specifically, if a private company that only reports financial information on an annual basis determines that it has a potential goodwill impairment triggering event on an interim date but the facts and circumstances that led to the potential triggering event have changed by the end of the annual reporting period, an interim impairment may not provide meaningful information to users of financial statements.
Schroeder said he supports the scope and objective of the proposal but thinks it should be provided on “a temporary basis and allow the separate goodwill project currently on the Board’s technical agenda to seek much broader improvements to subsequent accounting for goodwill and intangible assets for all entities.”
The proposal would not require disclosures about triggering events that occurred during the year, information that would “provide a more complete financial picture and could avoid the masking of events that might highlight operating weaknesses,” he said.
Moreover, the potential for diminished comparability with other private entities is another concern, Schroeder said among other concerns. “This will occur because a private entity that reports quarterly (and is excluded from the proposed Update’s scope) is more likely—for an otherwise same fact pattern—to report an impairment than would an entity within its scope,” he said. “Adding disclosures by entities within this proposed Update’s scope about the existence of interim triggering events could partially mitigate that concern.”
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