The Financial Accounting Standards Board is trying to sort out how to meet investor needs without breaking preparers’ backs with respect to the reporting of certain intangible assets, especially goodwill.
The regulator has issued an invitation to comment on how to account for certain identifiable intangible assets acquired in a business combination and the subsequent accounting for goodwill. The board is looking for some kind of accounting method that gives investors the information they need without undue cost or burden on the corporate accounting office.
Goodwill is an intangible asset that arises on corporate balance sheets as a result of business combinations. After all the assets and liabilities associated with an acquired business are added to the balance sheet, the additional amount paid to acquire the business is called goodwill.
Under accounting standards, companies are required to assess the value of goodwill to see if it is holding up over time. When it’s not, suggesting the acquired business is not living up to its expected performance, then it must be marked down. That testing and marking down under Generally Accepted Accounting Principles has undergone significant change and scrutiny over the past two decades in particular, although FASB traces tension over goodwill accounting back as far as 50 years.
Currently, accounting rules provide some optionality to private companies and not-for-profit organizations on how to address goodwill. That same optionality is not available to public companies. FASB has made some changes to the rules for public companies in an effort to simplify the accounting and reduce the burden, but feedback on the changes as companies have put them into practice has been mixed.
Some companies have told FASB, for example, that the added flexibility to perform qualitative assessments of goodwill require subjective judgments, which means extensive documentation. That has ultimately only added to the cost and complexity, some have said.
FASB is now asking companies to weigh in on three key areas, including whether changes should be made to the rules, whether and how to proceed with simplifications or improvements, and how optionality in accounting for intangible assets and goodwill is viewed. The board is looking for input on whether to add or change disclosures and where concerns may arise with respect to comparability and scope.
The board is accepting comments through Oct. 7, 2019, and it plans to hold a formal roundtable on the topic at a future date to be determined.