Goodwill impairment under ASC 350, a topic that has always been fairly “hot” among the accounting community, seems to be in almost every accounting headline you read lately! Why? Well, one reason is because goodwill impairment tests have been performed with an increasing frequency thanks to COVID-19, market volatility, and economic uncertainty. In fact, it was Mike’s number one accounting and reporting issue in this video talking about the Top 5 accounting issues from COVID-19 (warning: make sure you have the tissues handy! The video takes a bit of an emotional turn!). You’ll also see it mentioned front and center in this post by Christine about our top year-end financial reporting considerations!
As if that weren’t enough to drive it near the top of every accountant’s radar, there have also been a flurry of changes made in the accounting for goodwill under ASC 350 over the past few years. First, we had ASU 2011-08, which introduced the optional qualitative assessment. Then, there was ASU 2014-02, which permits non-public companies an accounting alternative to amortized goodwill on a straight-line basis over 10 years. You can read more about both of those here. And then there was ASU 2017-04, which is still not quite effective for all, which eliminates the old “step 2” of the impairment test, which requires an entity to compare the implied fair value of reporting unit goodwill with the carrying amount of that goodwill.
And that brings us to today’s topic, ASU 2021-03, yet another change being released by the FASB with the aim of making it easier to comply with U.S. GAAP amidst an increasingly complex economic landscape! Let’s take a look…
As Jenny points out in this blog post, the current requirements under ASC 350-20, Intangibles—Goodwill and Other—Goodwill, requires an entity to monitor and evaluate whether or not a triggering event has occurred throughout the reporting period. This triggering event analysis and the resulting goodwill impairment test, if any, are required to be performed when a triggering event occurs without the use of hindsight or known changes to facts and circumstances after the triggering event date.
Throughout. Not just when you perform your annual impairment test. Not just at the end of the year. Not just at the end of the quarter.
Oh, and if there is a triggering event, and if an entity determines that it is more likely than not that goodwill is impaired, it must test goodwill for impairment using the triggering event date as the measurement date!
This requirement to continuously monitor events and circumstances throughout the reporting period has become increasingly costly and complex, especially for private companies. This issue became even more apparent during the COVID-19 pandemic because of all of the uncertainty in the economic environment and continuously changing facts and circumstances. Additionally, in practice, many private entities perform this this analysis as part of their annual reporting process. Because it is being done at the end of the year, it may be difficult to determine if and when a triggering event occurred.
Why is this not a problem for public companies? Well, quite simply, it could be! However, most public entities have proper controls in place in their financial reporting process to ensure this analysis for triggering events is being performed throughout the reporting period.
On March 30, 2021, the FASB issued ASU 2021-03 to address this issue. The amendments provide private companies and not-for-profit entities (NFPs) with an accounting policy election to perform the goodwill impairment triggering event evaluation as of the end of the reporting period, whether the reporting period is an interim or annual period. What does that mean? Well, if an entity elects this alternative, they are not required to monitor for goodwill impairment triggering events during the reporting period but, instead, would only evaluate the facts and circumstances as of the end of each reporting period to determine whether a triggering event exists and, if so, whether it is more likely than not that goodwill is impaired.
A quick note for those that have not adopted the alternative to amortize goodwill: an entity that does not elect the accounting alternative for amortizing goodwill and that performs its annual impairment test as of a date other than the annual reporting date should perform a triggering event evaluation only as of the end of the reporting period.
Want some more good news? There are no additional disclosures as a result of electing this alternative! The entity would disclose that it had elected this alternative as part of its significant accounting policies, but otherwise, no new disclosures are required.
This accounting election applies to private companies and not-for-profit entities that choose to elect this accounting alternative. In other words, this election is eligible to be taken by ALL private companies and NFPs, even those that elected the other alternative to amortize goodwill!
The ASU is effective on a prospective basis for fiscal years beginning after December 15, 2019. Early application is permitted for interim and annual financial statements that have not yet been issued or made available for issuance as of March 30, 2021. Entities should apply the guidance as of the beginning of the interim or annual period for financial statements that have not yet been issued or made available for issuance in the year of adoption.
With this issuance of this new ASU, there are now several accounting elections for private companies and not-for-profits when it comes to accounting for goodwill and testing it for impairment under ASC 350-20:
- Accounting alternative for amortizing goodwill
- Accounting alternative for a goodwill impairment triggering event evaluation
Both of these alternatives greatly reduce the cost and complexity for private companies complying with the requirements of U.S. GAAP and eligible entities can choose one, both, or neither!
Want to learn more about this ASU and others that are effective in 2021? Make sure to sign up for our FREE CPE-event, ASUs Effective in 2021, happening on May 6, 2021. Only interested in impairment testing for Goodwill? We’ve got a course for that! Check it out on the Revolution today.
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