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Private Companies Get Simplified Accounting for Goodwill

January 22, 2014

The FASB amended U.S. GAAP to make it easier for private companies merging with or buying other companies to account for the goodwill recorded with the deals. The amendment is the accounting board’s response to years of complaints that private companies spend significant time and effort on annual impairment tests to produce information their lenders and creditors don’t need or want.

The FASB on January 16, 2014, published Accounting Standards Update (ASU) No. 2014-02, Intangibles—Goodwill and Other (Topic 350), Accounting for Goodwill, a consensus of the Private Company Council, to make it easier for private companies merging with or buying other companies to account for the goodwill recorded with the deals.

The two-pronged update allows private companies to amortize the goodwill for up to 10 years. It then 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 would test when there is a “triggering event,” meaning the company has evidence that the fair value of the acquired business is less than the carrying amount on the balance sheet.

The update is a response to years of complaints from private companies and their auditors that they spend a lot of time and money performing mandatory annual goodwill impairment tests when their lenders and creditors ignore this information when deciding whether to extend credit or grant a loan.

“It’s a significant win for private companies because it’s going to make it less likely that a private company would have to record an impairment for goodwill,” said Fred Kostecki, chairman of the assurance services practice for Rubin Brown LLP. “And it would also make a potential impairment much easier to calculate and less costly to calculate.”

With the change, private companies can amortize goodwill over a period of up to 10 years, and the carrying amount of the goodwill will decrease and eventually be depleted, thus eliminating the need for an impairment test altogether.

“It’s also going to give you the option to measure any potential impairment at the entity level,” Kostecki said. “So if you have a reporting unit not doing well financially, but at the entity level, financial results are positive, this would result in a much less likely impairment.”

A company assumes goodwill when the price of an acquired business is greater than the target’s book value. U.S. GAAP requires goodwill be tested for impairment at least annually, or more frequently if certain conditions exist. Current U.S. GAAP also does not allow goodwill to be amortized over time.

The standard—which only will apply to private companies—will be effective for annual periods beginning after December 15, 2014, and interim periods beginning after December 15, 2015. Early adoption is permitted.

The update stems from the amendments in July’s Proposed ASU No. PCC-13-01B, Intangibles—Goodwill and Other (Topic 350): Accounting for Goodwill, a proposal of the Private Company Council.

The update was forwarded to the FASB from its Private Company Council (PCC), which advises the standard-setter on private company concerns.

“The amortization method is expected to result in significant cost savings for many private companies that carry goodwill on their balance sheets,” said PCC member Thomas Groskopf, director at Barnes Denning in Cincinnati, in a webcast announcing the update. “This is because the amendment will reduce the likelihood for impairments, and private companies will generally test for impairments less frequently. It will not result in loss of decision-useful information.”

The FASB also on January 16 published an amendment to U.S. GAAP to simplify the accounting for private companies entering into simple interest rate swaps to help secure fixed-rate loans. (See Break Simplifies Hedge Accounting for Certain Private Company Transactions in this issue of Accounting & Compliance Alert.)