The FASB on March 30, 2021, issued a narrow accounting alternative that enables private companies and not-for-profit organizations to avoid using tricky analysis to figure out whether an event caused goodwill to become impaired.
The rules enable companies and organizations to make a “goodwill triggering event assessment” as of the end of the financial period when they are publishing financials.
Absent this change, these entities would have to find the precise date or dates on which to test for goodwill impairment, which would be difficult.
The rules can be immediately applied.
The changes are aimed at reducing complexity and costs for private companies and nonprofits, many of which had to evaluate a triggering event at an interim date when they only issue GAAP-compliant financial statements annually.
“It’s often hard to know precisely when a triggering event occurred during an accounting period,” Scott Ehrlich, president of Mind the GAAP, LLC, said. “This ASU provides a practical solution that allows private companies and not-for-profits to assess for goodwill impairment at the end of a reporting period.”
Under GAAP, goodwill must be tested for impairment when a triggering event occurs that indicates that it is more likely than not that the fair value of the reporting unit is below its carrying value. Companies and organizations are required to monitor for and evaluate goodwill triggering events when they occur throughout the year.
Goodwill is an accounting term used for an acquired intangible asset that is reported on the balance sheet in acquisitions. Goodwill becomes impaired if its fair value declines below its carrying value.
Typically a goodwill impairment stems from a fundamental change in the business or overall economy, Ehrlich said. “These changes usually don’t happen on a single day, and the factors leading to impairment rarely reverse themselves by the end of a reporting period,” he said. “The ASU makes it easier for private companies and not-for-profit entities to comply with GAAP, yet should still provide relevant and timely information to financial statement users.”
The rules were issued as Accounting Standards Update (ASU) No. 2021-03, Intangibles—Goodwill and Other (Topic 350): Accounting Alternative for Evaluating Triggering Events. The guidance is limited to goodwill that is tested for impairment in accordance with Subtopic 350-20, Intangibles—Goodwill and Other—Goodwill.
Apply it Prospectively
ASU No. 2021-03 is effective on a prospective basis for fiscal years beginning after December 15, 2019. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance as of March 30, 2021.
Companies and organizations should not retroactively adopt the changes for interim financial statements already issued in the year of adoption, the document states.
An unconditional one-time option is included for companies to adopt the alternative prospectively after its effective date. No additional disclosures would be required.
An Alternative, Not a Practical Expedient
The FASB in its “basis for conclusions” said the new rules are an accounting alternative rather than a practical expedient because the accounting result of applying the amendments does not achieve the same or similar reporting objective of applying existing GAAP.
The Private Company Decision-Making Framework (PCDMF) allows the board to create accounting alternatives for private companies when information is not relevant to financial statement users or when it is relevant but overly costly or complex for preparers to provide.
The board determined that “relief from monitoring for triggering events at a date other than the reporting date and, therefore, from performing goodwill impairment testing during the reporting period, will significantly reduce cost for entities because the impairment testing process between reporting dates may require that entities develop interim balance sheets and cash flow forecasts.”
Outreach revealed “users of private company financial information are generally lenders that focus on liquidity and tangible net worth as opposed to noncash charges such as goodwill impairment,” the board said. “Therefore, the timing of when the goodwill impairment triggering event evaluation is performed, as long as it is completed as of the reporting date, may be irrelevant for users of entities within the scope of the alternative.”
This article originally appeared in the March31, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.
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