Goodwill – should it be amortized or not? That is one of the questions that the FASB has wrestled with over the last few years. It’s been over a decade since amortization was replaced in favor of a periodic two-step goodwill impairment assessment (SFAS 142, which then became ASC 350). Since that time, a qualitative assessment was introduced (commonly referred to as Step 0) and a private company exception was carved out to allow for straight-line amortization of goodwill for private businesses. Adoption of these provisions has varied greatly, with some entities preferring to stick to the regimen of a two-step impairment test and others quickly moving to qualitative assessments and amortization (where permitted).
Now, more changes to this system are in the works, as the FASB Board met last week and made a few tentative decisions regarding the accounting for goodwill impairment for public and private entities. The Board had previously decided to proceed under a phased approach, with Phase 1 to encompass the simplification of the existing impairment test and Phase 2 to address concerns about subsequent accounting for goodwill.
The Board’s discussion centered around comments received on its May 2016 proposed Accounting Standards Update, Intangibles—Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment. Highlights of the discussion are summarized below:
- Elimination of Step 2 – The Board affirmed its decision in the proposed Update to remove Step 2 of the current impairment test rather than allowing Step 2 as an option. This position was generally supported in comment letters to the FASB in reference to the proposed update.
- Clarified Technical Guidance – The Board decided to include guidance on the deferred tax effects of tax deductible goodwill on the impairment charge and also clarified that an entity should not allocate foreign currency translation adjustments from accumulated other comprehensive income to a reporting unit. The Board considered, but decided not to prescribe a valuation premise used in the determination of fair value for a reporting unit or to require additional disclosure regarding an entity’s use of the qualitative assessment.
- Reporting Units with Zero or Negative Carrying Amounts – The Board affirmed its decision to apply the same one-step impairment test to all reporting units, including those with zero or negative carrying amounts. Entities would be required to disclose the amount of goodwill allocated to reporting units with zero or negative carrying amounts, but no additional disclosure is necessary.
- Taxable Versus Nontaxable Transaction – The Board retained the fair value guidance on assuming a taxable versus nontaxable transaction in ASC 350, as modified in the proposed Update to reflect the change to a one-step impairment test.
- Transition and Effective Date – The effective date for this guidance is now aligned with that of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), which is for years beginning after December 15, 2019 for public companies. Private companies have an additional year to comply. Early adoption is allowed for all entities beginning January 1, 2017.
- Subsequent Accounting for Goodwill for Public Companies – The Board elected to suspend deliberations on Phase 2 of the project, which was intended to evaluate whether additional changes need to be made to the subsequent accounting for goodwill beyond any changes proposed by the May 2016 ASU. Instead, the Board will evaluate the effectiveness of Phase 1 changes and monitor the IASB’s projects on goodwill.
The decision to suspend deliberations on Phase 2 means that, for the time being, public companies must continue to follow a Step 0 (qualitative) or Step 1 (quantitative) goodwill impairment testing process. The option to amortize goodwill, as is available via the private company exception, is not on the table. But it would not be surprising if the Board takes up the issue again at a later date. Indeed, a review of the comment letters put forth by industry participants suggests that there are arguments to be made on both sides of the issue.
We will continue to monitor the activities of the FASB and the continued evolution of goodwill impairment testing. If you have questions regarding impairment testing and how the proposed new rules might affect your company, please contact a Mercer Capital professional to discuss your situation in confidence.
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