By John Haslbauer
Accounting Standards Update (ASU) 2014-02, Accounting for Goodwill, was recently issued by the Financial Accounting Standards Board. The ASU provides a simplified amortization alternative for private companies that can be used in accounting for goodwill. The alternative can only be used by private companies; it is not permitted for public business entities (those companies filing financial statements with the Securities and Exchange Commission or those whose financial statements are included in another entity”™s SEC filing) or by not-for-profit entities or employee benefit plans.
The option allows private companies to amortize goodwill on a straight-line basis over a period of 10 years, or a shorter period if the reporting entity can demonstrate that a shorter useful life is deemed appropriate. Prior to the issuance of the ASU, amortization was not permitted under U.S. generally accepted accounting principles.
Testing for impairment
An entity that elects this alternative must also elect whether to test goodwill for impairment at the entity level or the reporting unit level. Under this alternative, goodwill is tested for impairment upon the occurrence of a triggering event indicating that the fair value of the entity (or reporting unit) might be less than its carrying value. Accordingly, entities electing this accounting alternative will not always need to test goodwill for impairment on an annual basis.
If a triggering event occurs, private companies still have the option to first assess qualitative factors to determine whether quantitative impairment testing is needed. If quantitative impairment testing is needed, a one-step impairment test is provided so that the amount of any impairment is measured as the difference between the carrying amount of the entity or reporting unit, as applicable, and its fair value so that use of the hypothetical purchase price approach is no longer required. This simplified test should reduce the time and effort involved in impairment testing for private companies.
Choosing to use
If this accounting alternative is elected, it must be applied prospectively and is effective for annual periods beginning after Dec. 15, 2014, with early implementation permitted. Private companies electing this alternative should begin amortizing existing goodwill as of the beginning of the reporting period where the accounting alternative is adopted. A private company with a 2013 calendar or earlier year-end is permitted to elect the goodwill alternative, provided its financial statements have not yet been made available for issuance.
Financial disclosure
A private company electing this accounting alternative is required to present in its financial statements certain line items, including aggregate net amount of goodwill on the balance sheet; amortization and aggregate amount of goodwill impairment within continuing operations on the income statement; amortization and goodwill impairment related to discontinued operations, if applicable. This accounting alternative provides disclosure guidance in the following three areas: annual financial statements; periods in which there are additions to goodwill,; and periods in which a goodwill impairment is recognized.
Decision considerations
In deciding whether or not your private company should elect this accounting option for goodwill amortization, consideration, among other matters, should be given to the company”™s future plans. Prior to making such a decision, an entity should ensure that its investors, lenders and others will agree to accept financial statements that reflect the application of electing goodwill amortization.
John Haslbauer is a partner of O”™Connor Davies L.L.P. and has more than 25 years of experience in public accounting. He can be reached at jhaslbauer@odpkf.com or (212) 867-8000.
