Public companies exhausted with tracking and testing goodwill on their balance sheets might one day get the ultimate simplification to their accounting woes. Just write it off.
The Financial Accounting Standards Board is weighing whether, after giving private companies a more straightforward method to write down goodwill on its balance sheet, the same or a similar simplification should be extended to public companies as well. Without arriving at any firm conclusions during a recent meeting, FASB directed its staff to do some additional research on two possible methods -- a one-step impairment test that would simplify the current two-step test and a direct write-off of goodwill that would spare companies any testing and measurement at all.
Goodwill is the residual asset that creeps onto balance sheets after the assets and liabilities acquired in a business combination have been separately valued and placed on the balance sheet. It represents the amount paid for a target company beyond the fair value of its individual assets and liabilities. Investors like to keep track of goodwill over time as an indicator of whether an acquisition holds its value after integrated into the company, or whether the company paid too much for the unit.
The board took no interest in approving or further considering the method permitted for private companies, which is to amortize or write down goodwill over a 10-year period, with a faster pattern permitted if some event or circumstance warrants it. Private companies also can decide if they want to impair goodwill at the parent company or entity level, or at a tier below, looking at impairments for each individual business unit that rolls up into the parent company's financial statements.
FASB staff will look into whether the current two-step quantitative test for goodwill impairment can be accomplished in a single step. Staff also will investigate whether the measurement of goodwill can be simplified by perhaps allowing public companies to measure impairments at the entity level rather than the reporting unit level. FASB Chairman Russ Golden pointed out the cost-benefit sacrifice of such an approach. “It's a tradeoff, if you go lower (into a lower reporting unit), you increase the cost, but increase the benefit,” he said. Measuring at a higher level leads to less cost for preparers, but less detail for investors, he said.
With respect to a direct write-off, the staff will look at whether a write-off should be recorded through net income, other comprehensive income, or equity, along with what disclosures might be appropriate. FASB member Tom Linsmeier says there's no conceptual basis in accounting theory to have an item on the balance sheet called goodwill, but he anticipates preparers will bristle at the direct write-off idea. “If we directly write off goodwill, most preparers will not like that because they will have to say they are overpaying (for an acquisition) and will have to take a charge to income or equity or someplace else,” he says. He worries companies will twist themselves in knots instead identifying other intangible assets that can be separately valued and placed on the balance sheet, which would only introduce further cost and complexity down the line to value and write those down.
FASB member Marc Siegel said the board also should wait for some results on some research the staff is performing with respect to intangible assets, and for a review being performed by the International Accounting Standards Board on the implementation of business combination standards, both of which might shed some light on how to approach goodwill.