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FASB

Chalk Up All Inseparable Customer Relationships as Goodwill, FASB Says

Denise Lugo  Editor, Accounting and Compliance Alert

Denise Lugo  Editor, Accounting and Compliance Alert

The FASB on March 2, 2022, tentatively voted by 5 to 2 to require public companies to subsume all customer relationships that cannot be separated into goodwill – a change that inches toward what private companies can do now.

The rule would apply to both contractual and noncontractual customer relationships that are inseparable, a change from current rules. Today, contractual customer relationships are separated under GAAP.

Views on the topic differ, but research found that generally investors do not distinguish between goodwill and intangible assets, according to the discussions.

“I don’t want to combine assets with goodwill but what I would like to do is stop reporting separately from goodwill items that are in fact goodwill,” FASB Vice Chair James Kroeker said. “I don’t believe that noncontractual hoped-for future sales meets the definition of an asset,” he said. “And I think today it actually gets combined with – in many cases – both the contractual piece, the in-place contracts, and the hoped for future sales and I think it’s misleading to investors – they don’t understand what the item represents.”

Overall the decision could mean that the initial goodwill balance would be larger.

Doesn’t Sufficiently Differ

The discussions are part of the board’s ongoing efforts to revise the subsequent accounting for goodwill. Goodwill is the residual figure that is recorded on the balance sheet after subtracting the book value of a business from the higher price that was paid for it.

The board deliberated on whether an intangible asset acquired in a business combination is sufficiently different from goodwill to warrant a separate accounting. At the crux of the matter is whether the intangible asset is identifiable, which means whether it is of a contractual legal nature or is able to be separated from the entity.

Customer relationships are deemed to be very similar to goodwill, and some financial statement users do not distinguish those assets in their analysis, according to the discussions. If customer relationships and goodwill are amortized and displayed together, it would be easier for users to include or exclude the amortization as needed.

“On the scale of 1 to 100, this would be probably 1 in terms of info I need,” board member and analyst Gary Buesser said. “Let’s work on information disclosures that would be useful to users and this is a sideshow.”

Two Dissent

FASB Chair Richard Jones and board member Fred Cannon voted in agreement with staff against changing current rules.

“Stepping back, investors are looking for more information about intangibles and so it’s very difficult for me to support something where we’re taking away information albeit dubious information about intangibles without a broader look at intangibles, disclosures overall,” Cannon, an analyst, said. “So if we get to the point where we have what I would consider a strong disclosure package – would I object to this potentially being subsumed in goodwill?—probably not,” he said. “I think there are some people who find utility from it and so therefore I don’t want to give up on this until we get a fuller package.”

Other Issues Kept in Scope

The FASB also tentatively voted to keep the following types of goodwill within the scope of the subsequent accounting guidance in Subtopic 350-20, Intangibles—Goodwill and Other— Goodwill: goodwill from a reorganization such as a bankruptcy; subsidiary goodwill, including “pushdown” accounting; and goodwill arising from application of the equity method of accounting.

Next Steps

Deliberations are still early-staged and board decisions are tentative leanings and therefore can change at a later date, according to the discussions.

At a future meeting, the board will give leanings on presentation on the financial statement, consequential disclosures, transition matters, and miscellaneous issues.

 

This article originally appeared in the March 3, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.

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