Staff members at the Securities and Exchange Commission are easing up on their expectation of preferability letters when companies decide to change the date of their annual goodwill impairment testing.
At a recent national accounting conference, Carlton Tartar, associate chief accountant at the SEC, said the staff has held for more than a decade that a change in the date for the annual goodwill impairment test would be regarded as a change in accounting principle, which is an indicator that the company should get a letter from from its audit firm agreeing that the new date is preferable. The only exception would be cases where goodwill is not material to the reporting entity.
But that was in 2002, when the accounting standards for business combination and goodwill impairment testing brought significant new uses of fair value measurement into financial statements. “The staff notes that since these standards were originally issued, registrants, auditors, and regulators have developed more experience in applying fair-value-based measurement to business combinations in particular as well as the financial statements as a whole,” said Tartar.
In addition, accounting standards require goodwill impairment testing on the same date each year, but do not require the same consistency of testing date for impairment of indefinite-lived intangible assets. Tartar suggested the testing date requirement might be a good topic for the Financial Accounting Standards Board to consider as part of its initiative to simplify accounting standards.
“The staff has observed that some registrants may view a change in goodwill impairment testing date to not represent a material change to a method of applying an accounting principle, even if goodwill is material to the financial statements,” said Tartar. Companies typically regard their internal controls and requirements to assess goodwill impairment upon certain triggering events as reasons to not view the testing date as having a material effect on financial statements.
Acknowledging the judgment that goes into making such a determination, staff members will no longer request a preferability letter to be obtained and filed, Tartar said, as long as the change is prominently disclosed. “The staff also reserves the right to ask questions based on the registrant’s specific facts and circumstances, which may include situations where it appears that a registrant’s goodwill impairment testing date is frequently changed,” he said.