FASB Issues New Standards to Simplify Private Company Accounting for Goodwill

Michael J. Rewkiewicz — Assurance and Advisory Services

In January 2014, the Financial Accounting Standards Board (FASB) issued a new standard allowing private companies a simplified alternative to existing accounting principles for goodwill. The new standard is one of the first in a series of new standards aimed at simplifying accounting and disclosure requirements for private companies.

According to the FASB, private companies may elect to adopt the new standard or are also permitted to continue following existing GAAP guidelines. Public companies and not-for-profit entities are not permitted to apply the new standard. In making this decision, we recommend companies consider the needs and expectations of their financial statement users and potential acquirers. The new standard is effective for fiscal years beginning after December 15, 2014, but early adoption is permitted and private companies may want to consider adopting the standards for fiscal year 2013.

Amortization vs. Impairment Testing

Under existing accounting standards, goodwill is not amortized but is instead tested for impairment at the reporting unit level both annually and whenever an event occurs that might cause an impairment of the asset. The alternative accounting method for goodwill permits private companies to elect to amortize goodwill on a straight-line basis over the expected useful life, not to exceed 10 years.

Private companies that elect to amortize goodwill would no longer be required to perform annual goodwill impairment tests. In many cases, companies will prefer this option because the impairment test requires a valuation of the reporting unit on an annual basis which is often costly or time consuming.

An impairment test of goodwill would still be required if an event occurs or circumstances change that indicate that the fair value of the entity may be below its carrying amount; by definition a triggering event. Upon the occurrence of a triggering event, the required impairment test would be performed under a simplified approach by companies that adopt the alternative accounting method. The two-step goodwill impairment test required in other circumstances is replaced with a one-step test. In the one-step test, the company estimates the fair value of the entity and compares the fair value with its carrying amount including goodwill. A goodwill impairment charge is recognized for the excess of the carrying amount of the entity over its fair value. The hypothetical purchase price allocation required in the two-step goodwill impairment test is not necessary in the one-step test.

A private company that elects to adopt the new standard will do so prospectively and start amortizing existing goodwill over its remaining life as of the beginning of the period of adoption. To understand more about how this new accounting option might benefit your company, financial statement users and potential acquirers, please contact Michael Rewkiewicz.