Amortizing goodwill again under ASC ! Posted on Oct 22, by Jenny Lukac, CPA Tags: Accounting , In the news Oh goodwill; your definition is relatively straightforward, but your subsequent accounting rules continue to remain complex, subjective, and costly despite numerous accounting updates over the last several years. Public company guidance Currently, goodwill is not amortized. Private company guidance The Private Company Council PCC provided an alternative accounting treatment for private companies as it relates to goodwill, which went into effect in This alternative standard also simplified the impairment testing model for goodwill in three ways: Annual impairment testing is no longer required, as it is for public companies.
It is only assessed when a triggering event occurs. There is an option to test for impairment at the entity level or at the reporting unit level. Assessing impairment at an entity level can reduce the time and effort that was previously needed to document the required identification of reporting units.
Step 2 of the impairment test was eliminated just like the new public company impairment testing steps described above. Current project In July , the FASB provided an invitation to comment on whether the accounting for goodwill should be changed. Some of the questions included: On a cost-benefit basis, relative to the current impairment-only model, do you support or oppose goodwill amortization with impairment testing?
While there have been slight differences concerning initial valuation as GAAP on goodwill has evolved, the basic concept has remained the same: goodwill is the difference between the price paid for an acquired entity and the sum of the fair value of the identifiable net assets. The subsequent accounting for goodwill, however, continues to be a topic of significant debate, as evidenced by the recent ITC. ARB 24 essentially allowed the following approaches in the subsequent accounting for goodwill:.
While ARB 24 discouraged the practice of discretionary write-offs of goodwill, it did not prohibit such write-offs. While ARB 43 still allowed permanent retention of goodwill, this approach was not favored; instead, systematic amortization against income was the emphasized approach for subsequent goodwill accounting. APB Opinion 17 also required subsequent review of amortization. Under SFAS , there are two steps in the impairment test:. If the calculated implied fair value of goodwill is lower than its carrying amount, the company records an impairment loss for the difference.
In , it issued ASU , Intangibles—Goodwill and Other Topic : Testing Goodwill for Impairment, which provides for an option where a company can elect to assess impairment based on qualitative factors Step 0. The company is not required to perform the two-step impairment and calculate the fair value of the reporting unit, and thus incur the associated costs, unless it determines that it is more likely than not that its fair value is less than its carrying amount.
Similarly, to further reduce the cost and complexity of the good-will impairment test, in FASB issued ASU , Intangibles—Goodwill and Other Topic : Simplifying the Test for Goodwill Impairment, which eliminated Step 2 of the quantitative two-step impairment test, the calculation of implied goodwill. Specifically, ASU allows private companies the option to amortize goodwill over 10 years.
In summary, over the past eight years, in response to concerns over costs and benefits of the nonamortization approach, FASB has modified and relaxed the initial requirements of its nonamortization approach and allowed private companies the option of using amortization instead of impairment testing.
The pendulum seems to be swinging back towards amortization. The ITC is unequivocal in noting that FASB does not seek input on the conceptual basis for goodwill recognition or the immediate write-off of goodwill. Concerning subsequent accounting for goodwill, FASB notes there are two non—mutually exclusive approaches that may address the cost-benefit issue: amortize goodwill or simplify the goodwill impairment test.
Given the inherent limitations of the impairment test, the IASB Board considered a simpler alternative to be the reintroduction of the amortization model. Amortization would reduce some pressure from the impairment test and potentially simplify its execution.
Such a systematic reduction of the carrying amount of acquired goodwill would also address concerns of those stakeholders who believe that it tends to be overstated. Supporters of retaining the impairment-only approach assert the same arguments considered in IASB Board members supporting this approach continue to say that the purpose of the impairment test is appropriate — namely, to ensure that the carrying amount of acquired goodwill is recoverable from the cash flows of the cash-generating unit that it jointly helps to generate.
These supporters also note that if the impairment test is not applied appropriately, reintroducing amortization is not a solution for that problem. Instead, new or simplified disclosures, or simplifying the impairment model, may provide more insight into the carrying amount of goodwill or provide more useful information about the impairment test. The IASB Board is exploring whether companies can, at a reasonable cost, provide financial statement users with more useful information about the businesses they acquire.
In its preliminary views, it proposes to retain the impairment-only model. Although the two goodwill accounting models are not identical, they are both impairment-only. Therefore, perhaps not surprisingly, the FASB has received similar feedback from its constituents about the costs and benefits of the existing guidance on the subsequent accounting for goodwill and the recognition of identifiable intangible assets in business combinations.
For several years now the FASB has been looking into this area, aiming to simplify existing requirements. In the FASB introduced accounting alternatives 6 for private companies that allow them to subsume certain acquired intangible assets e. Goodwill can be amortized over 10 years or less, in which case the impairment test is simplified in addition to being trigger-based. In the FASB launched a project to simplify goodwill impairment testing for all companies, while maintaining its usefulness.
The FASB on October 28, , issued a narrowly drawn standard that aims to stem reporting differences that have bubbled …. Eastern time on Friday, June 18, …. By Denise Lugo The FASB on December 16, , tentatively said it would require public companies to amortize goodwill over a year period on a straight-line basis only, without exception. No to Evolving Model The board decided not to pursue an evolving model for the subsequent accounting for goodwill.
Discussions will resume on the topic during the first quarter next year. An Old Debate The question of whether goodwill is a wasting asset and should be amortized has been debated in accounting circles for decades.
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