The Financial Accounting Standards Board (FASB) updated its accounting standard for events that trigger an impairment test under U.S. Generally Accepted Accounting Principles (GAAP) on March 30. For private companies and not-for-profit entities adversely affected by the COVID-19 pandemic, this new, simplified alternative may provide relief. Here are a few things to know.
Options for simplified goodwill reporting
Goodwill represents what’s left over after the purchase price of a transaction has been allocated to the fair value of identifiable tangible and intangible assets acquired and liabilities assumed—and under U.S. GAAP, it only appears on a company’s balance sheet when it’s been acquired in an M&A transaction. Goodwill that declines in value is considered “impaired,” and impairment charges might lower a company’s earnings.
Various simplified financial reporting alternatives have been given over the years for private companies and not-for-profits that report goodwill on their balance sheets. One of these alternatives allows entities to amortize goodwill generally over a 10-year period instead of capitalizing it and testing annually for impairment—but entities using this alternative still need to test goodwill for impairment when a triggering event happens.
Triggers for impairment testing
The loss of a key customer, unanticipated competition, and negative cash flows from operations can all serve as triggering events. Impairment also may occur if a stock market or economic downturn—such as that caused by COVID-19—occurs after an acquisition is completed and causes the parent company or the acquired business to lose value.
A new accounting alternative for goodwill triggering events is provided in Accounting Standards Update No. 2021-03, Intangibles—Goodwill and Other (Topic 350): Accounting Alternative for Evaluating Triggering Events. For entities that elect it, this alternative eliminates the requirement to perform a goodwill triggering event assessment during the reporting period. Instead, it allows private companies and not-for-profit organizations to perform the assessment as of the end of the reporting period, regardless of whether the reporting period is an interim or annual period.
These changes go into effect for fiscal years beginning after December 15, 2019, on a prospective basis—and entities can adopt the changes early for interim and annual financial statements if these statements haven’t been issued or made available for issuance as of March 30, 2021. However, private companies and not-for-profits won’t be allowed to adopt the changes retroactively for interim financial statements that were already issued in the year of adoption.
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The new accounting standard for evaluating triggering events can reduce the complexity of financial reporting in the midst of the pandemic—or other triggering events. Contact us today for more information.