The FASB on June 15, 2022, unanimously voted to drop its project on identifiable intangible assets and the subsequent accounting of goodwill, a surprising move that comes after two years of tentative decisions.
Board members said they were not convinced that the change they were pursuing on the subsequent accounting of goodwill would improve current rules, observing investors have said the information would bring marginal benefits.
“This would be a very significant change – I think you need a case for change, and as I see it, as this is stacking up it doesn’t,” Chair Richard Jones said.
Jones did not add a project to the board’s research agenda as some board members suggested, but agreed the board would continue to monitor the IASB’s project on goodwill disclosures.
The decision came as a huge surprise to market watchers as the last public remarks from the board signaled behind-the-scenes discussions were being held with the IASB, with no hint of that stopping. (See FASB, IASB Discussing Goodwill Accounting Rules Jointly Behind the Scenes, Convergence Imminent? in the June 13, 2022, edition of Accounting & Compliance Alert.)
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. Goodwill becomes impaired when its fair value declines below its carrying value.
The main contention for the board has been whether to move toward an impairment with amortization model or whether to retain the current impairment-only model.
In deliberations, the board had leaned toward requiring that entities apply an impairment with amortization model, where an entity would amortize goodwill over a 10-year default period that would be limited to a 25-year cap. Reassessing the amortization period would be prohibited. Goodwill would be tested for impairment only upon a triggering event. Companies would continue to test goodwill for impairment at the reporting unit level. Customer relationship intangible assets that are not separable would be subsumed into goodwill.
“I have a large question mark in my own mind in terms of a project today – do we have an improved model? I’m not sure and I in fact think perhaps not,” FASB member Fred Cannon said. “The next question I ask is ‘how is cost benefit shaping up on this?’ In terms of that I think we heard pretty consistently from users that they don’t believe overall the approach we’re taking is going to be meaningful improvement for them – so I don’t think there’s a big benefit there,” he said. “In terms of preparers, I think from a narrow standpoint yes, the impairment model is expensive and having an amortization will reduce that expense, it will not however eliminate it.”
75 years of Unresolved Debates
Unlike other standard-setting projects, the subsequent accounting of goodwill has been challenging for the board because the accounting profession does not hold clear views on the topic – debated since the 1940s.
“It’s been debated for 75 years – committee on accounting procedure during the battle of the bulge in December of 1944, last time I looked that was a long time ago, they had no idea what to do, so they said you could either have an impairment model, amortization, or day-one right off,” FASB member Gary Buesser said.
“You move to 1970, you have APB `16 and `17 either purchase or pooling – they had no idea what to do, they had put forward a really bad accounting standard,” said Buesser. “You move to 2001, the board with the best of intensions said ‘maybe if we push it down to the reporting unit level and the IASB at the cash generating unit level that would lead to more impairments’ but it hasn’t,” he said. “So the best intentions didn’t work. So to me we could debate a long time about ‘whether it’s an indefinite-lived asset’ but when you have investors repeatedly coming back to us saying ‘we will pro forma this out of our income statement,’ that to me is a resounding.”
Though voting to drop the project, board members said they did not think the current accounting of goodwill is a good reflection of goodwill as the impairment-only model means that goodwill stays on the balance sheet indefinitely without impairment, which does not reflect the economics. In addition, the current impairment model needs improvement, they said.
Much of the board’s tentative leanings on the project, however, had passed by narrow margins, with little enthusiasm to warrant making major changes, according to the discussions.
The project’s direction “does give me pause about ‘are we trading one set of challenges with a different set of challenges?’” FASB Vice Chair James Kroeker said. “In my mind I need to try and avoid what I would call standard-setting hubris in thinking my answer is better than all of the answers we’ve tried in the past.”
The project was added to the FASB’s technical agenda in October 2018. In 2019 the board an invitation-to-comment for public comment and subsequently held roundtables.
Seven Goodwill ASUs Issued Since 2010
Since 2010 the board issued seven accounting standards updates (ASUs) to try to remove the cost of the impairment model:
- ASU 2010-28, Intangibles—Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (a consensus of the FASB Emerging Issues Task Force);
- ASU 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment;
- ASU 2014-02, Intangibles—Goodwill and Other (Topic 350): Accounting for Goodwill (a consensus of the Private Company Council);
- ASU 2014-18, Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination (a consensus of the Private Company Council);
- ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment;
- ASU 2019-06, Intangibles—Goodwill and Other (Topic 350), Business Combinations (Topic 805), and Not-for-Profit Entities (Topic 958): Extending the Private Company Accounting Alternatives on Goodwill and Certain Identifiable Intangible Assets to Not-for-Profit Entities; and
- ASU 2021-03, Intangibles—Goodwill and Other (Topic 350): Accounting Alternative for Evaluating Triggering Events.
This article originally appeared in the June 16, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.
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