Accounting for goodwill for public business entities and not-for-profit entities
At its meeting this week, the FASB made no decisions, but its discussions indicated a lack of support for an accounting model for public business entities (PBEs) that involves amortization of goodwill. The Board chose not to make decisions because it is awaiting the results of the IASB’s postimplementation review of IFRS 3, Business Combinations, and the outcome of the Private Company Council's (PCC's) recently issued proposal on accounting for intangible assets acquired in a business combination.1
At its meeting in November 2013, the FASB added to its agenda a project on subsequent measurement of goodwill for PBEs and not-for-profit entities (NFPs) and asked the staff to analyze each of the following views on the subsequent measurement of goodwill:
- View A — PCC model.2
- View B — Amortize goodwill over its expected useful life (not to exceed a specified number of years); retain impairment tests.
- View C — Direct write-off.
- View D — Simplified impairment test without amortization.
In addition to discussing these views at this week’s meeting, the Board directed its staff to further analyze and research the following accounting alternatives for PBEs:
- Direct write-off of goodwill at initial recognition or transition with the charge reflected in net income or equity with additional disclosures for each acquisition. Under this alternative, there would be no subsequent accounting considerations for goodwill.
- Simplified goodwill impairment test. Such a model would most likely eliminate step 2 of the goodwill impairment test in ASC 3503 and potentially simplify the unit of account (i.e., raise the unit of account to a level above reporting unit).
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Editor’s Note: ASC 350-20-35-8A requires entities to perform step 2 of the goodwill impairment test if the carrying amount of a reporting unit is zero or negative and if qualitative factors indicate that goodwill is more likely than not impaired. If the Board ultimately decides to eliminate step 2 of the goodwill impairment test, it remains to be seen how entities with negative carrying amounts would apply the simplified goodwill impairment test. |
The Board also decided to defer making any decisions on the following:
- Whether NFPs should have the option to use the PCC’s alternative or be required to apply the guidance for PBEs.
- Goodwill associated with equity method investments.
The FASB will consider the results of the staff’s analysis at a future meeting.
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1 The PCC’s proposed accounting alternative would require entities to recognize only intangible assets that meet the contractual-legal criterion and that arise from noncancelable contractual terms or other legal rights. However, the PCC has directed the FASB staff to research potential alternatives in which entities would only recognize intangibles that can be sold or licensed.
2 Permits the amortization of goodwill and eliminates the requirement to test goodwill for impairment annually. If a triggering event occurs, this alternative will simplify impairment testing by allowing entities to perform (1) the impairment test at the entity level rather than the reporting-unit level and (2) a less extensive analysis to measure impairment.
3 FASB Accounting Standards Codification Topic 350, Intangibles — Goodwill and Other.
