Goodwill is an acquired intangible asset which, if it decreases in value, can affect earnings. Currently, the Financial Accounting Standards Board (FASB) is considering whether to alter the subsequent public company accounting of goodwill and other acquired intangible assets, as well as soliciting related feedback. The International Accounting Standards Board (IASB) is also considering improving goodwill disclosures, but wants to keep the same reporting rules. The details are as follows.
Keys to goodwill accounting
Goodwill accounting occurs when a buyer attains an existing business entity. The goodwill amount is the purchase cost minus the tangible assets’ fair market value, the identifiable intangible assets and any liability that came with the purchase. The intangible asset may be items such as the target company’s customer loyalty or business reputation. Goodwill accounting allows investors to view an acquisition’s progress, as well as make better projections for the future. All this makes it of great interest to investors.
Under U.S. generally accepted accounting principles (GAAP), public companies reporting goodwill on their balance sheet can’t amortize it. Instead, they much test goodwill annually, at minimum, for impairment and write down the reported goodwill value when it occurs.
Testing should also take place when a “triggering event” risks lower the goodwill value. Triggering events may include key customer loss, unanticipated competition or negative cash flows. Business value loss may also occur during stock market crashes and related economic downturns.
Impairment write-downs may reduce goodwill carrying value on the balance sheet, as well as lowering profits reported on the income statement. Investors do not always take goodwill and impairment into consideration, however; they generally view these topics differently from accountants.
A simplified alternative for private companies
Thanks to Accounting Standards Update (ASU) No. 2014-02, Intangibles — Goodwill and Other (Topic 350): Accounting for Goodwill (a Consensus of the Private Company Council), private companies merging with or buying other companies found it easier to account for goodwill recording. Private entities were given the option to amortize acquired goodwill over a life of up to 10 years.
The test private businesses have to perform to determine whether the goodwill has lost value was also simplified in 2014. Rather than testing for impairment annually, they tested only upon a triggering event, when the company had evidence that the acquired business’ fair value was less than the carrying amount on the balance sheet.
The FASB is now seeking insights on whether goodwill accounting should be further revised and how, especially for public companies. The goal is to determine whether the benefits of revising the accounting rules would be worth the costs for companies applying the changes.
“Some have questioned whether the cost of an annual impairment test warrants the process every year,” said FASB member Marsha Hunt in a podcast. “And some have actually been disappointed that, when there have been impairments, the disclosures haven’t been as timely or as useful as they would like.”
Companies are asked to answer the following specific questions:
- Should the subsequent accounting for goodwill be changed, and, if so, how could the FASB do so cost effectively?
- Should the FASB modify the recognition of intangible assets in a business combination so that items, such as noncompete agreements or certain customer-related intangible assets, are subsumed into goodwill?
- Should disclosures about goodwill and other intangible assets be added, changed or deleted?
- To what extent does lack of comparability between public, private and not-for-profit entities in the reporting of goodwill and certain recognized intangible assets reduce the usefulness of financial reporting information?
In the U.S., the focus is a return on investment. Foreign investors, by comparison, generally consider stewardship ― whether they can trust management with their capital and that management is good at identifying targets, paying the right price and integrating the acquisition. They also look back at the original business combination objectives and whether those are being achieved.
The IASB plans to focus on disclosures that would reveal how an acquisition fared over time, rather than revise the accounting rules for goodwill. Later this year, the IASB plans to issue a discussion paper, among other things, that will request feedback on how an entity’s management monitors and measures its own internal reports, including whether the key business combinations objectives are being considered.
“The way to think about this is that it’s a business combination, not just goodwill or intangible assets,” explained IASB member Nick Anderson. “The things we are thinking of proposing include a quantitative assessment of the synergies, rather than just a qualitative description and data that’s often missing in our world,” he said.
Welcomed to comment
The FASB seeks comments by October 7th, to be found here: invitation-to-comment (ITC) No. 2019-720, Identifiable Intangible Assets and Subsequent Accounting for Goodwill. It also plans to hold a roundtable in the coming months at which stakeholders may discuss possible changes to goodwill and impairment accounting.
Before submitting your feedback on goodwill accounting for public companies to the FASB, contact a Weaver professional to learn more about how your earnings could be affected.
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