The FASB on February 10, 2021, voted 6 to 1 to finalize its December 2020 proposal on private companies’ assessment of events that may trigger a goodwill impairment test but said it would extend the terms of the rules so that a broader number of private companies and not-for-profits can make use of the changes. FASB member Harold Schroeder, an investor voice on the board, reiterated his earlier dissent.
The board’s decision will expand the proposal to allow private companies and not-for-profit (NFP) entities to perform the goodwill impairment triggering event assessment at the reporting date any time they report financial information, including interim reports. The proposal had limited the goodwill triggering event evaluation to companies that only file GAAP-compliant statements on an annual basis.
“You can delay the assessment of the goodwill impairment triggering event until the first reporting date after that triggering event, whether that be at your quarter end if you are meeting the parameters for saying you’re providing interim reporting,” FASB member Christine Botosan said about the scope change. “If you don’t provide interim reporting, then that would happen at the end of the year.”
The rules will be applicable to fiscal periods after December 15, 2019.
Board members who voted to move ahead with the proposal in general said it would provide cost relief and simplifications for resource-strapped private companies and nonprofits that need it most. The proposal would align with current practice and improve the quality of financial information provided, they also said.
“I don’t think having a private company try to go through an impairment indicated on [for example] August 16 would necessarily be the highest quality financial reporting, particularly if they’ve never closed their books on a date like that before,” FASB Chair Richard Jones said. “I actually think this not only codifies current practice, but I actually think it improves financial reporting by improving the quality of financial information that’s provided.”
Jones observed that an impairment trigger for goodwill assessment is a matter of judgment and evaluating whether the severity and duration of an event was an impairment trigger or not does require judgment.
The board affirmed its proposed decisions to provide the rules only for private companies and nonprofits, and to limit them to goodwill subsequently accounted for under Topic 350-20, Intangibles–Goodwill and Other. Also affirmed was the decision not to require incremental disclosures.
Proposal Scoped too Narrowly
The board’s decision would finalize and expand the scope of Proposed Accounting Standards Update (ASU) No. 2020-1100, Intangibles—Goodwill and Other (Topic 350): Accounting Alternative for Evaluating Triggering Events. The proposal generated 25 comment letters, mostly from accounting firms.
A number of respondents to the proposal said they did not support the scope and requested that the board clarify what types of interim financial information would prevent a company from being eligible to apply the alternative.
Some companies said the scope was overly narrow and would result in a very limited number of entities being able to benefit from the proposed alternative.
Moreover, several respondents supported expanding the scope to include entities that report on an interim basis and suggested requiring a goodwill triggering event assessment as of the reporting date only, whether that be monthly, quarterly, or annually, and so forth.
Other Board Members’ Views
Several board members said they were surprised by the feedback about the scope of the changes as some of the FASB’s advisers had in the past said private companies do not typically issue interim statements.
“I’m surprised by the feedback that said how narrow a group would be eligible based on annual. I think some of the input we received from the examples that TIC or others walked us through were examples where entities weren’t doing interim reporting,” FASB Vice Chair James Kroeker said. “So I think that the comment letter feedback said it’s very unusual that an entity doesn’t do some form of interim or quarterly or monthly reporting. So I was a little surprised by that piece of the feedback, it seems to conflict with some of the advice we’ve had on other issues and I think the advice we got in connection with this issue at its outset – doesn’t mean it’s still not a good issue,” he said.
Similarly, FASB member Susan Cosper said she was also surprised by the feedback “given the dialogues that we’ve had over the years with the Private Company Council on this notion that most private companies don’t issue interim statements.” Overall, Cosper said the rules would be helpful to companies, pointing to earlier feedback from private company users in 2014.
FASB member Marsha Hunt agreed with finalizing the proposal with the scope changes, in general stating that expanding the scope was responsive to the comments the board received from the comment letters.
Gary Buesser, another investor voice on the board, voted in favor of extending the scope, stating it was a difficult issue about quarterly reporting. “One trepidation I do have when you do it this way is that you’re penalizing companies who provide more disclosure, i.e. quarterly versus those that only report on an annual basis.”
Schroeder, the lone dissent, reiterated his views from the proposal that the topic should be tackled holistically with the board’s broader goodwill project, adding the proposed revisions should be done as a short-term fix. He said the forthcoming standard will give analysts a narrow view of a company and “the costs when factoring in the lost information do not justify the project.”
This article originally appeared in the February 11, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.
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