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Goodwill Impairment Test Simplification May Have to Wait

March 31, 2014

The FASB wants to simplify the test public companies use to test goodwill for a drop in value, but the board isn’t ready to take action yet. Instead, board members are waiting for the results of a study the IASB is conducting on its business combinations standard before making changes to U.S. GAAP.

Simplifying the test companies use to assess the drop in value of acquired goodwill may have to wait until the IASB takes action on business combination accounting, the FASB indicated on March 26, 2014.

The FASB and the international accounting standard-setter are substantially converged on accounting for business combinations, and the U.S. board does not want to stray too far from that alignment, FASB members said at their weekly meeting.

The IASB is conducting what it calls a post-implementation review of IFRS 3, Business Combinations, and it’s expected to wrap up its work by late May. Depending on the review’s findings, the international board may then make changes.

“It’ll only take a few months; I don’t know why we need a quick decision on this now without even waiting to hear what IASB is considering,” FASB member Marc Siegel said.

The discussion was part of the FASB’s effort to examine whether recently approved accounting simplifications for private companies can be extended to public companies and not-for-profit organizations.

The FASB in January published Accounting Standards Update (ASU) No. 2014-02, Intangibles—Goodwill and Other (Topic 350), Accounting for Goodwill, a consensus of the Private Company Council, which allows private companies to amortize goodwill for up to 10 years. It also simplifies the test the businesses have to perform to determine whether the goodwill has lost value. Instead of automatically testing for impairment every year, private companies only test when there is a “triggering event,” that suggests that the fair value of the acquired business is less than the carrying amount on the balance sheet.

When a private company has to test for impairment, the amendment eliminates the application of a hypothetical purchase price allocation to determine the amount of the impairment.

Businesses that purchase or merge with other companies typically recognize the part of the purchase cost above the seller’s book value as goodwill. U.S. GAAP for public companies does not allow the amortization of goodwill, although goodwill is tested at least once a year for a drop in value.

After simplifying the impairment test for private companies, the FASB considered also simplifying the test for public companies and not-for-profit groups.

In February, the board narrowed the options down to two: a direct write-off of goodwill and a simplified impairment test.

For the March 26 meeting, the research staff presented four options: allowing public companies to adopt the same break approved for private companies; amortizing goodwill over its expected useful life, with impairment tests required when there are “triggering” events; directly writing off goodwill; or a simplified impairment test without amortization.

A majority of the FASB rejected extension of the private company break to public companies. FASB Vice Chairman James Kroeker, who said he believed goodwill was not really an asset and that U.S. GAAP was overly complicated in this area, advocated writing off goodwill.

A majority of the board, however, leaned toward the last option—simplifying the impairment test but not allowing goodwill to be amortized.

The FASB’s research staff recommended placing several parameters around this idea, including a requirement to test goodwill for impairment at the reporting unit level and a requirement to test goodwill for impairment annually on the same date or more frequently if there is a “triggering” event, meaning the company has clear evidence that its goodwill has dropped in value.

The staff also recommended an optional qualitative screen to test goodwill for impairment. If the company determines that it is more likely than not that goodwill is impaired, the company must perform a quantitative test in which the fair value of the reporting unit is compared with the carrying value of the reporting unit. Any excess of the carrying value over the fair value is recognized as goodwill impairment in the income statement.

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