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FASB

No Easy Way to Revise Presentation Rules for Amortized Goodwill, Rulemakers Signal

Denise Lugo  Editor, Accounting and Compliance Alert

Denise Lugo  Editor, Accounting and Compliance Alert

The FASB on May 4, 2022, was split down the middle in tough discussions about how to present goodwill in financial reports, concluding that a clearer path would unfold in later deliberations.

“This would be an area where I would say the preliminary view is ‘undecided,’ just to be very clear,” Chair Richard Jones said at the conclusion of the meeting.

The discussions stem from the board’s tentative prior decisions to amortize goodwill, raising questions about how to present – at times – billions of dollars that are spread out over periods. The topic is tricky because diverse views are held in the accounting profession on goodwill amortization and therefore how to present those figures is important, according to the discussions.

“We’ve heard very mixed views from investors on their preference related to goodwill amortization,” FASB Vice Chair James Kroeker observed. “Some would say amortization is a useful thing, others say they would ignore it, many say they’re going to treat it differentially in their analysis even if they’re interested in it,” he said.

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. Depending on the figure, goodwill can impact a company’s profits if it becomes impaired – meaning its fair value declines below its carrying value.

Goodwill figures can help investors keep track of how an acquisition fared in the long run.

How and Where to Present Goodwill?

Current guidance on intangible assets state that amortization expense and impairment losses should be presented within income from continuing operations as deemed appropriate for each entity. Additionally, today’s rules require goodwill impairment to be presented as a separate line item in the income statement within continuing operations unless a goodwill impairment loss is associated with a discontinued operation, according to a board meeting paper.

The board addressed two main presentation issues: how to provide revisions that would consistently present goodwill amortization charges; and, determining where goodwill amortization expense should be presented.

Research overall reveal that investors prefer consistency in the presentation of goodwill impairment and amortization, FASB staff told the board. “Those that support the consistent presentation of amortization and impairment note that impairment is at least in part a consequence of insufficient amortization therefore any impairment charge may be viewed as a true up of the amortization estimate and having different displays could be confusing,” staff said.

Board members’ views fell under two camps – or both: 1) grouping goodwill impairment and goodwill amortization charges in the same line item to consistently present the charges; and/or, 2) presenting goodwill impairment and goodwill amortization charges as separate line items in the same location.

Jones and board member Susan Cosper favored view one; Kroeker and board member Marsha Hunt said their could live with either view; and board members Christine Botosan, Gary Buesser, and Fred Cannon, concretely favored the second approach.

“Amortization and impairment are two different economic events that occur with different frequency but they’re related to the same item but therefore they should be disclosed separately but in the same location,” Cannon said. “And I think users need the information to adjust earnings as they see fit and understand the difference between normal amortization, periodic, and the occasional but important impairments that do occur,” he said.

In relation to where to present goodwill amortization expense, the board was also similarly split between: 1) presenting goodwill amortization as a separate income statement component after income from continuing operations on a net-of-tax basis; and 2) presenting goodwill amortization within income from continuing operations (or similar captions) as a separate pretax line item.

“I think it’s a relevance issue if you go below the line or OCI you’re really telling the market that you think this piece of information is less relevant than every other expense in the income statement,” FASB member Gary Buesser, who favored the latter approach, said. “And I think that’s a very mixed message to be sending to the market.”

Next Steps

FASB staff will do further outreach on the topic, according to the discussions.

At a future meeting the board will discuss disclosures, transition, and miscellaneous “sweep” issues.

Decisions on goodwill revisions to date are tentative board leanings. Once a full proposal is mapped out, the board will provide concrete votes about what will definitively be issued for public comment.

 

This article originally appeared in the May 6, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.

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