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Investor Group Chides FASB for Anchoring Goodwill Debate on Private Company Rules

Thomson Reuters Tax & Accounting  

· 5 minute read

Thomson Reuters Tax & Accounting  

· 5 minute read

By Denise Lugo

A FASB July 2019 discussion paper on whether and how to change goodwill accounting rules for public companies hangs off of lower quality private company rules, and investors are now forced to defend why they would not work in the public market, the CFA Institute told the board in a 41-page letter.

The board had not properly contextualized the size of goodwill assets that would be impacted, or done a thorough cost analysis, before floating the idea of public companies’ amortizing (writing off) goodwill, an approach private companies use that was liberally sprinkled throughout the discussions paper, the investor group said in a January 13, 2020, letter to the FASB.

“The Goodwill Invitation to Comment has as its premise that the cost of performing the goodwill impairment test exceeds the benefit and that a change is needed,” Sandra Peters, senior head, global financial reporting policy at CFA institute, wrote. “The FASB has not, however, completed an empirical analysis of the cost of performing impairment tests—something that should be relatively straightforward as the costs are discrete and measurable.”

The New York-based CFA Institute is a global, not-for-profit professional association of nearly 171,400 investment analysts, advisers, portfolio managers, and other investment professionals in 165 countries.

Improve Disclosures First

Goodwill, an acquired intangible asset that can be worth billions of dollars, comes on balance sheets through mergers and acquisitions (M&A).

A private company accounting approach, one of several approaches the invitation to comment (ITC) asked companies to weigh in on, would enable companies to amortize (write off) goodwill figures over a period of 10 years .

For public companies, it would mean a write-off of $5.6 trillion of assets over a 10 year period, according to the CFA Institute letter. “Goodwill amounts to 6% of all public company assets and 8% of the assets of public companies with goodwill,” it states. Moreover, S&P 500 U.S. public companies would see profits reduced by $560 billion for 10 years.

The FASB, as a first step, should work jointly with the IASB to develop disclosures that are globally converged, “before any changes are made to the recognition or impairment of intangibles, including goodwill,” Peters suggested. “Investors are united in their interest in assessing the performance of the acquisitions that generate goodwill,” she said.

The 103rd Letter

The CFA Institute’s letter is the 103rd comment letter response the board received to date on ITC No. 2019-720Identifiable Intangible Assets and Subsequent Accounting for Goodwill, a type of discussion paper it issued last year that does not include the board’s formal standard-setting views. Pfizer, Inc., T-Mobile US Inc., Polaris Inc., Credit Suisse Group, Ford Motor Co., Bank of America Corp., among a slew of other companies, accounting firms, and trade organizations wrote in.

Goodwill is an accounting term used to refer to the value of nonphysical assets that are acquired through M&A. Examples of goodwill include brand names, noncompete agreements, patents or proprietary technology, among other items. Goodwill 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.

Accountants, analysts, investors, educators, and other practitioners have not been able to agree on the topic and therefore a massive debate has bubbled up throughout the profession.

The FASB issued the ITC to figure out, for example, whether the subsequent accounting for goodwill should be changed, and if so, how to do so cost effectively, according to the text of the document. The ITC would also clarify if the board needs to modify the recognition of intangible assets in a business combination so items such as noncompete agreements, or certain customer-related intangible assets are subsumed into goodwill.

Other issues it addresses: whether to add, change, or delete disclosures about goodwill and other intangible assets; to what extent lack of comparability between public, private, and not-for-profits in the reporting of goodwill and certain recognized intangible assets reduces the usefulness of financial reporting information.

The board plans to take up the topic during the first half of the year.

Impairment Test was Simplified

Over the past 10 years, the FASB has changed and simplified the accounting model for goodwill several times.

A qualitative test was introduced in 2011, and in 2014, a private company alternative was created to enable those companies to elect to spread out goodwill on a straight-line basis over a certain number of years.

The model was further simplified through the issuance in January 2017 of Accounting Standards Update (ASU) No. 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill ImpairmentASU No. 2017-04 eliminated Step 2 of the quantitative two-step test and allowed for early adoption for goodwill impairment tests performed after January 1, 2017.

Last year, the FASB extended the 2014 private company alternatives to nonprofits with the May 2019 issuance of ASU No. 2019-06Intangibles–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.


This article originally appeared in the January 22, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.

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