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Small Business Advisory Committee Backs Simplified Approach to Goodwill Accounting

Private companies are allowed to use a simplified approach to the accounting for goodwill. Members of the FASB’s Small Business Advisory Committee said they would like the accounting board to extend some of these breaks to public companies.

Representatives from small businesses, auditors, and investors told the FASB on November 30, 2017, that they supported further changes to the accounting for acquired goodwill, an area of U.S. GAAP that has long challenged financial professionals.

“Whether we amortize it back or write it off, I would be all for that because it’s just a useless number,” said FASB Small Business Advisory Committee (SBAC) member Shannon Greene, CEO of Tandy Leather Factory Inc., a leather distributor in Fort Worth, Texas. “Anything you can do to clean up that balance sheet that’s got silly numbers on it — why not?

When one business buys another at a price greater than the acquired company’s book value, the premium is recorded on the buyer’s balance sheet as “goodwill.” Goodwill is an intangible asset, and it generally includes the reputation of the acquired company or its competitive advantage in the market.Topic 350, Intangibles — Goodwill and Other , requires public companies to test for declines in the value of goodwill at least once a year. When the value declines, companies must take an impairment charge that often signals to the market that the buyer overpaid for the acquisition and that the newly acquired assets will not contribute to earnings growth in the near term.

The impairment test, however, has long been subject to criticism — and the FASB has attempted to tinker with it over the years to make it easier to follow. Companies say it is a complex, time-consuming exercise that usually requires costly valuation experts to weigh in. Investors also complain about a lag between the impairment occurring and the charge being recognized in company financial statements.

William Waller, portfolio manager at M3 Funds LLC in Salt Lake City, said he did not include goodwill in his investment analysis.

“We really exclude goodwill from every calculation, and so goodwill just adds an extra layer in our analysis we basically have to take it out,” Waller said.

The existence of an impairment, however, can be a noteworthy signal to investors, said David Gonzales, accounting analyst at Moody’s Investors Service Inc. in New York. That said, the signal would still be there if public companies were allowed, like private companies, to amortize declines in the value of goodwill, he said.

“We don’t see any reason why we would have an amortization for private companies but not public companies because it provides the same information,” Gonzales said.

The FASB does not plan to take action in the near future to change the accounting for goodwill, although the topic of subsequent accounting for goodwill and identifiable intangible assets in a business combination is on the board’s long-term research agenda. The FASB, which has made several changes in recent years to goodwill accounting, also wants to know whether public companies should be allowed to make use of a break the board extended to private companies in 2014 with Accounting Standards Update (ASU) No. 2014-02, Intangibles—Goodwill and Other (Topic 350): Accounting for Goodwill — a Consensus of the Private Company Council. The amended guidance 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.

The FASB’s most recent change to goodwill accounting was published in January with ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which requires a one-step process to test goodwill for drops in value instead of U.S. GAAP’s two-step process.

U.S. GAAP requires businesses to determine whether an impairment exists and then assign a value to the decline. The second step is to determine the goodwill’s implied fair value and compare it to the amount reported on the balance sheet. In computing the implied fair value, a business must determine the fair value at the impairment testing date of its assets and liabilities following the procedure that would be required in a purchase price allocation for an acquired business.

Companies have complained for years that the second step is overly complex. Further, they told the FASB that investors are more interested in the existence of a goodwill impairment as opposed to the dollar figure attached to it.

FASB Chairman Russell Golden said the accounting board plans to keep goodwill on its research agenda but would not commit to what direction the board may take.

“I personally can’t answer without knowing what intangibles investors want recorded in a business combination,” Golden said.

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