By Denise Lugo
The FASB on December 16, 2020, tentatively said it would require public companies to amortize goodwill over a 10-year period on a straight-line basis only, without exception.
The board said that for an amortization period a company’s management can deviate from the default period if management could justify the reasons for doing so. The amortization period would need to be elected on a transactional basis.
The decisions were made under the assumption that the existing impairment model and unit of account would not change, and pending other changes, according to the discussions.
“I do think that it would be possible for a manager to provide a basis for deviating for 10 years,” FASB member Christine Botosan said. “I’m thinking of an example like in the healthcare industry where one hospital acquires another hospital system and they have buildings and equipment and all sorts of assets that they are acquiring that are much longer lived than 10 years, and I think they could easily provide a basis for a longer amortization period, so that’s why it would be appropriate for us to provide room for judgment when it comes to selecting the amortization period but to reduce cost to provide a default where folks don’t want to go through that cost of trying to justify,” she said.
Goodwill is an accounting term used to refer to the value of nonphysical assets that are acquired in mergers and acquisitions (M&A). It is determined by deducting the fair market value of tangible assets, identifiable intangible assets and liabilities obtained in the purchase, from the cost to buy a business. Goodwill becomes impaired if its fair value declines below its carrying value.
The board’s decisions are the first step in what will be in an exposure document the board is developing for public comment.
In general, board discussions were focused on deciding which amortization method and period to consider for an impairment-with-amortization model for the subsequent accounting for goodwill. Staff members also presented research and analysis related to evolving models in which the accounting method for goodwill changes over time.
No to Evolving Model
The board decided not to pursue an evolving model for the subsequent accounting for goodwill. An evolving model is one in which goodwill amortization may not immediately start but begin after some period of time after the business combination. Many financial statement preparers have said an evolving amortization approach could be complex with operability concerns associated with the model, a staff member told the board.
For future discussions, the board asked staff members to do more research on factors and criteria for management’s deviation from a default period – and how that default might interact with a cap.
Discussions will resume on the topic during the first quarter next year.
An Old Debate
The question of whether goodwill is a wasting asset and should be amortized has been debated in accounting circles for decades. Prior to the issuance of FASB Statement (FAS) No. 141, goodwill was in fact amortized, often on a straight-line basis over periods up to 40 years. But after FAS 141 was issued goodwill was no longer amortized until the FASB permitted a policy election to amortize goodwill for private companies under Accounting Standards Update (ASU) No. 2014-02, Intangibles—Goodwill and Other (Topic 350): Accounting for Goodwill (A Consensus of the Private Company Council).
The board’s tentative decision to reintroduce amortization of goodwill will get some pushback as some will be against it, citing that extensive deliberations went into FAS 141 and IFRS 3, Business Combinations, and that there are no new facts that would support reopening those past deliberations, accountants said.
Others, however, believe the current model does not faithfully represent how goodwill is consumed – i.e., the current model of writing off goodwill when impaired does not reflect how goodwill loses value over time and is prone to unintentional or sometimes intentional misstatements.
This article originally appeared in the December 18, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.
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