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FASB

‘Squishy’ Intangible Asset ‘Goodwill’ Needs More Research, FASB Signals

Denise Lugo  Editor, Accounting and Compliance Alert

Denise Lugo  Editor, Accounting and Compliance Alert

The FASB did not make any definitive decisions on April 7, 2021, about the subsequent accounting of goodwill, an acquired intangible asset on balance sheets that can signal overpayment of an acquisition. Staff members were instead instructed to do more outreach that gets to the nut of information investors find useful.

The board, in ongoing discussions to develop a proposal for public comment, said they did not yet have a predisposition for subsuming or separating assets from goodwill – issues it needs to zero in on to advance the topic. It is important to first determine what investors find relevant and how it affects and shapes their decisions, according to the discussions.

Staff accountants were therefore asked to study a list that was developed for intangible assets to determine whether those assets should be separately established in a business combination.

“That doesn’t mean we stop our progress on goodwill amortization,” FASB Chair Richard Jones said. “It is a path we consider. At the end of the day, there’s lots of different variables here that will affect an overall model and that we will have to obviously reconsider these interim steps as part of that overall model,” he said.

Goodwill is an accounting term for the 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. It can be worth billions of dollars and impact profit if it substantially declines in value (becomes impaired).

A “Squishy” Intangible Asset

The FASB at a prior December 2020 meeting decided to require public companies to amortize goodwill over a 10-year period on a straight-line basis only, without exception. For an amortization period, a company’s management can deviate from the default period if management could justify the reasons for doing so. The amortization period would need to be elected on a transactional basis. The decisions were made under the assumption that the existing impairment model and unit of account would not change, and pending other changes.

Board discussions on April 7 focused on potential factors that companies may consider when estimating the useful life of goodwill if they choose to deviate from a 10-year default amortization period.

FASB staff said they reviewed factors for estimating the useful life of goodwill in the following category types: regulatory and contractual; underlying assets and liabilities; and synergies and forward-looking estimates.

The board suggested that staff should next explore whether it is possible to come up with more objective factors related to the amortization period for goodwill when estimating its useful life. Once the board gets those results, it will decide on whether a cap on the period was also needed, the discussions indicated.

“I was uncomfortable with the staff recommendation to not provide any factors, but just to provide a principle. I’m very concerned that that will result in entities finding it almost impossible to deviate from the default because of concerns about the auditability of their justification for why they’re deviating from that 10-year period,” FASB member Christine Botosan said. “…but if we’re going to just either provide a principle with no guidance on how to come up with a useful life other than the default period, or if we’re going to include a lot of factors that are very squishy in nature, like the competitive environment and the assessment of the competitive environment, I think then we do need a cap and I thought the 25 year period that the staff was recommending seems reasonable, so I would like us to do a little more work here,” she said.

Similarly, FASB Vice Chair James Kroeker said it would be difficult for accountants to reach an agreement just by looking at the factors.

“I think we could say there’s a default period and here are some more objective factors. I would kind of start with similar ones — payback period, useful life of, maybe tangible assets in a particular industry. Let’s say you bought a group of shopping malls that didn’t have to be an asset acquisition, maybe the useful life will go in the depreciation period under PP&E,” Kroeker said. “I think something that’s a little bit more objective, and even the return period I’m not sure that’s the economic life of goodwill, I think it’s something to anchor to,” he said. “If you think about it, the longer the return period—so we see the investment with a very low margin, you’re going to end up with a four-year goodwill life but one that returns the investment very quickly you might end up with a three-year goodwill life or a five-year goodwill life, I’m not sure that’s the economic life of goodwill, it’s just an amortization period for the most squishy intangible on the balance sheet.”

Discussions Ongoing

The goodwill project was added to the FASB’s agenda in 2018.

In 2019, FASB staff published an invitation-to-comment (ITC) No. 2019-720Identifiable Intangible Assets and Subsequent Accounting for Goodwill, to obtain formal input on public company reporting on the subsequent accounting for goodwill, the accounting for certain identifiable intangible assets, and the scope of the project on those topics.

The board is using the ITC to guide its current discussions, which will result in an exposure document for public comment.

 

This article originally appeared in the April 8, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.

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