FASB decides to table Goodwill project

On June 15, the Financial Accounting Standards Board (FASB) unanimously voted to drop its project on the subsequent accounting of goodwill and other identifiable intangible assets — for now. This surprising move came after several years of research and tentative decisions. In the meantime, the FASB plans to keep an eye on changes to the disclosure model that the International Accounting Standards Board is considering.?

What is goodwill?

Internally generated goodwill isn’t reported on a company’s balance sheet, but goodwill may be reported as a result of a business combination. It’s?typically associated with the?premium?the buyer of a business or asset pays over its fair value. Goodwill is an intangible asset that may be linked to such things as a target company’s customer loyalty or business reputation.?

The value of goodwill is determined by deducting the fair value of tangible assets, identifiable intangible assets and liabilities obtained in the purchase from the cost of buying a business. Investors may be interested in tracking goodwill because it enables them to see how an acquisition fares in the long run.

Under U.S. Generally Accepted Accounting Principles (GAAP),?public?companies that report goodwill on their balance sheets can’t amortize it. Instead, they must test goodwill at least annually for impairment. When impairment occurs, the company must write down the reported value of goodwill.?

Testing should also happen for?all?entities whenever a “triggering event” occurs that could lower the value of goodwill. Examples of triggering events include the loss of a key customer, unanticipated competition or negative cash flows from operations. Impairment may also occur if, after an acquisition has been completed, an economic downturn causes the parent company or the acquired business to lose value.

Impairment write-downs reduce the carrying value of goodwill on the balance sheet. As a result, they also lower profits reported on the income statement.?

How do the rules differ for private companies?

Impairment testing can be complicated, especially when a company’s stock isn’t actively traded in the public markets. So, the FASB has granted private companies some practical expedients to simplify the subsequent accounting of goodwill and other intangibles. Specifically,?Accounting Standards Update (ASU) No. 2014-02 gave private companies the option to amortize acquired goodwill over a useful life of up to 10 years.?

The test private businesses have to perform to determine whether goodwill has lost value was also simplified in 2014. Instead of automatically testing for impairment every year, private companies are required to test only when there’s a triggering event. This indicates the company has evidence that the fair value of the acquired business is less than the carrying amount on the balance sheet.

What changes have been considered?

In October 2018, the FASB added a project on the subsequent accounting of goodwill to its technical agenda. In 2019, the FASB issued an invitation for public comment and subsequently held roundtable discussions.?

In deliberations, the FASB had previously leaned toward requiring that?all?entities apply an impairment-with-amortization model. This is where an entity would amortize goodwill over a 10-year default period that would be limited to a 25-year cap. Under the proposed changes, reassessing the amortization period would be prohibited, and goodwill would be tested for impairment only upon a triggering event. However, companies would continue to test goodwill for impairment at the reporting unit level. In addition, customer-relationship intangible assets that aren’t separable would be subsumed into goodwill.

These changes, if approved, would have put huge write-downs on corporate balance sheets. So, companies understandably pushed back on the models that required amortization.

Why was the project abandoned?

During a June meeting, FASB members indicated that the current impairment-only model needs improvement and doesn’t necessarily reflect the economics of M&A transactions. However, after reviewing feedback from stakeholders, they weren’t convinced that the changes the FASB had pursued on the subsequent accounting of goodwill would improve the current rules. Moreover, much of the FASB’s tentative leanings on the project had passed by narrow margins, with little enthusiasm to warrant making major changes.

FASB Vice Chair James Kroeker said the project’s direction gave him pause to consider, “Are we trading one set of challenges with a different set of challenges?” This topic has been debated for more than 75 years, so it might not be an easy matter to fix.?

Wait and see

The FASB’s decision to drop its goodwill project means it won’t be seeking any additional stakeholder feedback, but it will consider international developments on the matter. FASB Chair Richard Jones recently confirmed that the FASB will continue to monitor the International Accounting Standards Board’s project on goodwill disclosures, which had been temporarily delayed during the pandemic. Contact DLA for assistance in accounting for impairments.