The Financial Accounting Standards Board approved a tweak to the goodwill rules for private businesses and not-for-profits, giving them more flexibility on when to do impairment assessments of triggering events.
FASB voted to approve the goodwill triggering event alternative during a virtual board meeting last week, giving privately held companies and nonprofit organizations the ability to put off doing an impairment assessment until they have to prepare an annual report, instead of needing to monitor and measure such events throughout the year. Entities won’t be required to provide incremental disclosures as a result of the final amendments that are coming out from FASB.
The move comes at a time when FASB has been providing extra flexibility during the COVID-19 pandemic to both private and public companies, as well as nonprofits. It has been delaying effective dates for a year or more to give them more time to deal with not only the pandemic, but also the constant succession of accounting standards they have needed to implement at their organizations. At the same time, FASB has been continuing work on a larger goodwill impairment project that has been the subject of debate among its stakeholders.
“There are two separate goodwill projects going on at FASB,” said Charles Soranno, managing director at the consulting firm Protiviti. “One is the private tweaks, if you will, and one is the public companies stuff as well. The rule for the private companies is they’re allowing private companies to do their goodwill assessments at the annual reporting date, effectively when the financial statements are issued, rather than an interim period. Why is that? Predominantly because of some of the turbulence of COVID and all the volatility in the current market, especially in 2020 and some in 2021. They want the private companies to have the best possible lens to review their impairment calculations.”
An entity will be allowed to apply a one-time transition election to adopt the amendments prospectively after its effective date without applying the guidance on preferability, according to the tentative board decisions from the Feb. 10 meeting posted by FASB. “The amendments will be available on an ongoing basis and will not be limited to a specified time period,” said the board. “The scope of the proposed amendments included private companies or not-for-profit entities if they only report goodwill (or report accounts that would be affected by a goodwill impairment such as retained earnings and net income) on an annual basis.”
However, companies can continue to perform the assessments in their interim reports as well as annual reports. “The board decided to expand the scope of the accounting alternative to allow private companies and not-for-profit entities to perform the goodwill impairment triggering event assessment at the reporting date any time that they report financial information, including interim reports,” said FASB.
The board members asked the staff to draft a final Accounting Standards Update that they can vote upon by written ballot.
FASB has traditionally given private companies and nonprofits more leeway by allowing them an extra year or two to implement major accounting standards. However, the pandemic caused FASB to provide even more flexibility on effective dates for both public and private companies, as well as nonprofits, and it pushed back the effective dates even more for standards like leases, credit losses and hedging.
“If you think back to private accounting versus public reporting, pre-COVID, new accounting pronouncements typically would have a one-year delay,” said Soranno. “For revenue recognition, originally there would be a public company effective date and one year later for private companies, similar to the lease accounting standard. What happened during the pandemic was the effective date for private companies was extended, so there’s a greater gap in effective dates, primarily due to the pandemic and resource allocations between private entities and public entities.”
At a meeting last September of FASB’s Private Company Council, some members asked for more latitude on the goodwill triggering event assessment requirements as well. The PCC may be doing more education to help companies perform such assessments.
“The PCC believes that educational outreach will help companies understand the full messaging behind the guidance for goodwill impairment testing,” wrote Beth Reo, an assurance partner at Cohen Co., in a report on last September’s Private Company Council meeting. “When addressing this issue, companies must make a distinction between judgment and hindsight. For example, a goodwill impairment test may have been triggered in March or April — when fears about COVID-19 peaked — if management seriously contemplated winding down operations. Though the conditions may not seem as dire in hindsight, management needs to look at impairment through the lens of what was known at the moment, not what’s known today.”
The bigger, long-term project for FASB involves goodwill amortization rules for public companies. The impact there would be more far-reaching.
“This is somewhat of a sea change,” said Soranno. “When you think about how goodwill has been handled in the public markets and the public domain for as long as I can remember, years and years ago, I believe, goodwill was amortized over 40 years. In the recent past and probably the last 25 years, goodwill was just reviewed for impairment annually, or more frequently as required, and that’s the rule for public companies. What has been proposed — and it’s still in the proposal stage — is public entities’ goodwill would be amortized on a straight-line basis over a 10-year period, unless the entity can prove out that a period is more appropriate based on the facts and circumstances of the business acquisition. For example, if a large hospital system buys a regional hospital system and there’s some goodwill attached to that, which would be likely, one would argue that goodwill amortization for a hospital system is probably short of the benefit period, and then the goodwill amortization period that would be fully documented would exceed 10 years in that circumstance.”
The changes, if approved by FASB, could bring the rules for publicly traded companies closer to those currently in place for private-held businesses.
“It’s not law yet,” said Soranno. “It’s something that’s being considered, but it could potentially align public reporting to private reporting because there is optionality in private accounting currently where goodwill can be amortized over a 10-year period as an election. If this goes through, public [companies] would be required to amortize goodwill on a straight-line basis, effectively over 10 years, plus or minus if there’s some justification for it being either higher than 10 or lower than 10.”
There are both pros and cons to the possible amortization change in the accounting rules. “In terms of the pros, if you dictate to private companies that you must amortize goodwill on a 10-year basis and you dictate to the public entities that you must amortize goodwill effectively on a 10-year basis, effectively there’s congruency in the public versus private accounting, which helps companies transitioning from private to public ownership, either through an IPO or a SPAC,” said Soranno. “Some of the cons are that you want to make the accounting for private companies simpler. Their resources are typically less. The costs of compliance are higher if you add complexity to the private companies.”
There are also drawbacks for publicly traded companies. “Some of the cons on the public side of amortizing goodwill is people might argue that a 10-year amortization period for goodwill is arbitrary and capricious,” said Soranno. “How did you really come up with a 10-year amortization period? Goodwill is effectively intangible assets that have no quantifiable value. That falls to goodwill in a business acquisition. It remains to be seen what happens there. I think this might take a longer timeline.”
He believes it would be surprising to see an ASU from FASB by the end of this year. “I think this is going to be a slow roll,” said Soranno.
FASB is expected to issue an ASU soon, however, on the tweak in the triggering event rules for private companies, but that too could have an impact on companies that go public.
“Companies’ transitioning to public ownership is a significant endeavor,” said Soranno. “Many things need to be done — earning per share, segment disclosure, more robust disclosures, MDA, risk factors — all those things that don’t need to be provided in private company reporting have to be provided in public reporting. When you go back to private standards allowing companies to do impairment analysis at the end of a reporting period, and then that company is in the process of going public, they have to revert to the public company standard, which requires assessing triggering events during an interim period, without hindsight, as if they knew the facts and circumstances of the business environment at the time it happened. Reverting to a public standard as you go through the IPO process will be a challenge for some companies if the private tweak goes through.”