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More Research Planned for Project to Modify Goodwill Impairment Test

February 13, 2014

In January, the FASB made it easier for private companies to account for the goodwill acquired when they buy other businesses.The accounting board now wants to determine how to simplify goodwill accounting for public companies and not-for-profit groups, but early discussions indicate that board members are uncomfortable with letting these entities use the same accounting as private companies.

The FASB wants to simplify the goodwill impairment test public companies perform after buying other businesses.

The accounting board, however, decided on February 12, 2014, to do more research with investors and preparers to determine the best route to simplification.

The move was part of the standard-setter’s exploration of whether Accounting Standards Update (ASU) No. 2014-02,Intangibles—Goodwill and Other (Topic 350), Accounting for Goodwill, a consensus of the Private Company Council,which was published in January and applies only to privately held businesses, should be extended to public companies and not-for-profit organizations.

Preliminary discussions indicated that the FASB isn’t comfortable letting anyone besides private companies apply ASU No. 2014-02.

“This is a really difficult issue,” FASB member Lawrence Smith said. “We’re talking about how to account for an asset that we don’t even know what the heck it is. By its very nature it’s a plug; it’s just the difference between the amount you paid versus the fair value of the net assets you acquired that can be identified…There are a number of us at this table that kind of tongue in cheek, over the past couple of years, have said, ‘Gee, why don’t we write this off directly?’The question is whether we were serious.”

Businesses that acquire 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.

ASU No. 2014-02 allows private companies to amortize the 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 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.

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

The private company simplification was 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 only to have the results ignored by lenders and creditors.

In an effort to minimize differences between accounting for private and public companies, the FASB in November decided to explore whether to also make the goodwill impairment test simpler for other businesses and organizations.

At the February 12 meeting, the board’s research staff presented four choices: use of the simpler accounting for private companies, the amortization of goodwill over a certain number of years, the direct write-off of goodwill, or simplifying the impairment test.

Most FASB members wanted to simplify the impairment test, but they didn’t want to give public companies the option to amortize goodwill.