Private companies and not-for-profit (NFP) entities now have a less costly and complex accounting alternative for performing the goodwill impairment triggering event evaluation. The COVID-19 pandemic, which could be considered a triggering event, brought this issue to the forefront.
The change gives private companies and NFP entities (including conduit bond obligors) an accounting alternative to performing the required goodwill impairment triggering event evaluation (Subtopic 350-20) as of the end of the reporting period, whether the reporting period is an interim or annual period, since most of these entities issue financial statements only annually.
On February 10, the Financial Accounting Standards Board (FASB) finalized its Dec. 21, 2020, proposed Accounting Standards Update (ASU) 2021-03 Intangibles – Goodwill and Other (Topic 350): Accounting Alternative for Evaluating Triggering Events, to allow a timing alternative for the evaluation of triggering events and potentially measuring a goodwill impairment at an interim date.
What it means
An entity that elects this alternative is not required to monitor goodwill impairment triggering events at an interim date, but instead should evaluate the facts and circumstances as of the end of each reporting period to determine whether a triggering event exists and, if so, whether it is more likely than not that goodwill is impaired.
An entity that does not elect the accounting alternative for amortizing goodwill and performs its annual impairment test as of a date other than the annual reporting date should perform a triggering event evaluation only as of the end of the reporting period.
Private companies and NFPs can elect the alternative, regardless of whether they have elected to apply the accounting alternative for amortizing goodwill. However, if an entity has not elected the alternative for amortizing goodwill and performs its annual goodwill impairment test on a date other than the end of the reporting period (e.g. September 30 for a year ending December 31), it will be required to monitor goodwill for impairment triggering events as of each reporting date between annual tests to determine whether it must perform an additional goodwill impairment test. These entities may want to evaluate making a voluntary accounting change under ASC 250, Accounting Changes and Error Corrections.
If a private or NFP entity elects to apply ASU 2021-03, it is still required to follow existing guidance for assessing:
- Other assets (such as long-lived assets and indefinite lived intangibles) for impairment by evaluating triggering events throughout the reporting period and testing for impairment using the triggering event date as the measurement date, and
- If goodwill was allocated based on relative fair value between portions of a reporting unit disposed of and retained, any portion of goodwill retained as of the disposal date.
Entities that elect ASU 2021-03 are required to disclose their election of the accounting alternative as a significant accounting policy in the notes to their financial statements.
Private companies interested in electing the alternative should carefully consider the potential accounting consequences if they subsequently meet the definition of a public business entity (by going public or being acquired by a public company, including a Special Purpose Acquisition Company – “SPAC”). A private company that elects the alternative and later becomes a public business entity, is required to reverse the accounting alternative to the date of adoption and evaluate whether a goodwill impairment test would have been triggered as of an earlier date. The company would then need to perform goodwill impairment tests as of those interim dates without using hindsight (excluding the occurrence of events or changes in circumstances since those interim dates). This requirement would also be the case for a private company that elected the alternative to amortize goodwill under ASC 2014-02 and subsequently becomes a public business entity. Private companies should consider the potential future costs before electing this or any other accounting alternatives.
Effective date and transition
ASU 2021-03 is effective on a prospective basis for fiscal years beginning after December 15, 2019. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance as of March 30, 2021. An entity should not retroactively adopt the amendments for interim financial statements already issued in the year of adoption. The transition requirements include an unconditional one-time option for entities to adopt ASU 2021-03 prospectively after its effective date without assessing preferability under ASC 250.
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