The Financial Accounting Standards Board (FASB) on Dec. 20, 2018, released a proposal that would allow a not-for-profit hospital buying a for-profit medical practice to amortize the goodwill it reports on its balance sheet after the acquisition.
Comments on Proposed Accounting Standards Update (ASU) No. 2018-320, Intangibles — Goodwill and Other (Topic 350), Business Combinations (Topic 805), and Not-for-Profit Entities (Topic 958) Extending the Private Company Accounting Alternatives on Goodwill and Certain Identifiable Intangible Assets to Not-for-Profit Entities, are due by Feb. 18, 2019.
The plan extends to not-for-profit organizations the same accounting break the FASB offered private companies in 2014 with ASU No. 2014-02, Intangibles—Goodwill and Other (Topic 350), Accounting for Goodwill, a consensus of the Private Company Council, as well as ASU No. 2014-18, Business Combinations (Topic 805)—Accounting for Identifiable Intangible Assets in a Business Combination, a consensus of the Private Company Council.
The package of options would apply only to a limited number of scenarios in the not-for-profit sector, the FASB has said, but would still offer relief to organizations that merge with or buy other groups, typically in the healthcare industry.
“This proposed standard simply extends the scope of the two private company alternatives to not-for-profits, which will enable them to recognize fewer items as separate intangible assets in acquisitions and to account for goodwill in a more cost-effective manner,” FASB Chairman Russell Golden said in a statement.
ASU No. 2014-02, crafted by the FASB’s Private Company Council (PCC), allows private companies to amortize goodwill on a straight-line basis over a maximum of 10 years. For private companies that elect to amortize goodwill, they only have to test for impairment upon a so-called triggering event — a decline in the broad economy, for example, or management problems within the company itself — rather than annually, as required of public companies. In addition, the impairment test can be performed either at the entity level or at the reporting unit level. The Dec. 20, 2018 proposal would allow not-for-profit groups the same accounting break.
ASU No. 2014-18, also backed by the PCC, allows private companies the option to subsume certain customer-related intangible assets and all non-compete agreements into goodwill. Similarly, the Dec. 20, 2018, exposure draft extends this accounting option to not-for-profit groups.
The FASB’s proposal is one step in the board’s broader effort to examine the subsequent accounting for goodwill and the accounting for identifiable intangible assets, areas that have vexed accountants for years. The FASB expects to publish at some point in 2019 an early-stage document called an invitation to comment to solicit feedback on how to improve the complex topics.
“Thus, it is possible that entities electing these alternatives could be subject to future changes to the subsequent accounting for goodwill,” the FASB said in the Dec. 20, 2018, proposal.
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.”
Goodwill generally includes the reputation of the purchased business or its competitive advantage in the market. The value of this intangible asset can decline, however. FASB Accounting Standards Codification (ASC) 350, Intangibles — Goodwill and Other, requires public companies to test for drops in goodwill value at least once a year. When its value declines, businesses must record an impairment. An impairment often signals to the market that the business overpaid for a merger or acquisition.
The test to quantify this impairment has long been a sore subject for accountants. Businesses call it a complex, time-consuming exercise. Investors and securities analysts also often complain about the lag between when the impairment occurs and when the charge shows up in company financial statements.
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