The Financial Accounting Standards Board (FASB) on Monday announced a proposed standard update to provide an accounting alternative to the goodwill triggering event assessment for certain private companies and nonprofit organizations.
The proposal would apply to private companies and nonprofit entities that only report goodwill that subsequently is accounted for in accordance with Subtopic 350-20 (Intangibles—Goodwill and Other—Goodwill) on an annual basis. It would be effective on a prospective basis for annual reporting periods beginning after Dec. 15, 2019, and would not require any additional disclosures.
Under current GAAP, companies are required to monitor for and evaluate goodwill triggering events as they occur throughout the year. If the company concludes it is likely that goodwill is impaired (i.e., the fair value of the reporting unit is below carrying value), then the entity must perform an impairment test. This analysis is required to be conducted on the date the triggering event occurs.
Stakeholders questioned the value of this requirement when some companies only issue GAAP-compliant financial statements on an annual basis, according to FASB. “They noted the cost and complexity of preparing interim balance sheets and projecting cash flows that, according to those stakeholders, may not be relevant at the annual reporting date when financial statements are issued,” FASB continued. Stakeholders also mentioned the economic uncertainty caused by COVID-19 on a short-term basis as reason for additional complexity.
The proposed standard update would allow private companies and nonprofits that only report goodwill on an annual basis the alternative to perform a goodwill triggering event assessment on the annual reporting date only.
“An entity that elects this alternative would not be required to monitor for goodwill impairment triggering events in interim periods but would instead evaluate the facts and circumstances as of year-end to determine whether it is more likely than not that goodwill is impaired,” FASB explained. “An entity that does not elect the accounting alternative for amortizing goodwill and that performs its annual impairment test at a date other than the annual reporting date would perform a triggering event evaluation only between the annual goodwill impairment tests and only as of the annual reporting date.”
“The Board believes that the proposed amendments may provide more relevant information for users because the triggering event evaluation would reflect the facts and circumstances present at the end of the annual reporting period for which those users receive financial statements,” FASB added.
Comments on the proposal are due by Jan. 20, 2021.