After months of research and discussion of goodwill amortization with its outside advisory panels, the Financial Accounting Standards Board (FASB) plans to formally vote in October on adding the issue to its standard-setting agenda, FASB staff members said on Sept. 14, 2018.
The discussion may not be as simple as letting public companies and not-for-profit organizations adopt wholesale the more flexible accounting the FASB offered to private companies in 2014 via Accounting Standards Update (ASU) No. 2014-02, Intangibles—Goodwill and Other (Topic 350): Accounting for Goodwill — a Consensus of the Private Company Council, FASB project manager Joy Sy said.
Speaking at a meeting of the FASB’s Not-for-Profit Advisory Committee (NAC), Sy said that although public companies like the idea of simplifying the accounting for goodwill and many support amortizing the intangible asset, the FASB’s research staff has heard mixed views on whether public companies should simply follow the private company option.
“While public business entities are accepting of switching over to an amortization method for goodwill impairments for the reasons of supporting the objective of further reducing costs and complexities, they are not supportive of an amortization that’s fixed at 10 years or less than that,” Sy said. In addition, they do not support testing goodwill for impairment at the entity level. They would prefer to test it at the reporting unit level.
The FASB has been researching for at least a year different ways to simplify goodwill accounting, one of the more contentious areas in U.S. generally accepted accounting principles (GAAP). The board is exploring whether companies should test for impairment upon a so-called triggering event or a change in the level at which businesses test for impairment. The amortization of goodwill was eliminated from U.S. GAAP in 2001 with the publication of Statements of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, (FASB Accounting Standard Codification (ASC) 350, Intangibles — Goodwill and Other). Now the board is considering whether amortization should be reintroduced to U.S. GAAP as an option.
When one business buys another at a price that is more than the purchased business’s market value, the buyer records the premium on its balance sheet as goodwill, which generally includes the reputation of the purchased business or its competitive advantage in the market. ASC 350 requires public companies to test for declines in the value of the goodwill at least once a year. When the value declines, companies must record a goodwill impairment. An impairment often signals to the market that the business overpaid for a merger or acquisition, or that the purchased business has declined in value.
The test to quantify this impairment has long been a sore subject for accountants. Businesses call it a complex, time-consuming exercise that requires the assistance of costly outside valuation professionals. Investors complain about the lag between when the impairment occurs and when the charge shows up in company financial statements.
ASU No. 2014-02 permits a private company to amortize goodwill over a maximum of 10 years. It also permits a private company to apply a simplified impairment model to goodwill.
In addition to exploring whether this alternative could be applied to public companies, the FASB has to decide how to handle not-for-profit organizations.
NAC member Kimberly McKay, managing partner at an international firm, said the not-for-profit health care industry is in an unprecedented period of consolidation. Hospitals are dealing with real-world goodwill accounting questions on a daily basis, and not-for-profit organizations should be able to amortize as an accounting alternative without waiting for public companies to go first.
“I don’t see a reason to wait for public business entities because it’s so relevant to what we’re doing right now,” McKay said.
She said, however, that the diversity of the not-for-profit sector — it encompasses everything from museums to colleges to hospitals — and the diversity of the acquisitions within it will affect how different not-for-profit organizations react to such a change.
“It depends on what you bought and where you see the lifespan of it,” she said. “What I’m hearing is they want flexibility.”
The private company alternative as written may provide too little time for the amortization of goodwill, said NAC member Mary Connick, senior vice president at Dignity Health, a San Francisco operator of health care facilities.
“In some cases, those 10 years may be too short — that’s the problem,” Connick said.
John Kroll, associate vice president for finance at the University of Chicago, said whatever decision the FASB made for not-for-profit organizations should align with the board’s decisions for public companies.
“What benefit is there for a split between the cadence of treatment of goodwill for public business entities and not-for-profits?” Kroll said. “I would encourage being done together and not for profits not taking the lead.”
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