Private companies will now have an alternative method for amortizing goodwill over a period of 10 years or less as a result of a recently issued Accounting Standards Update (ASU) from the Private Company Council (PCC), part of the Financial Accounting Standards Board (FASB). The update is intended to reduce the cost and complexity of complying with current U.S. GAAP goodwill accounting guidance for privately-held companies.
ASU No. 2014-02 Intangibles – Goodwill and Other (Topic 35): Accounting for Goodwill, a consensus of the PCC, is effective for annual periods beginning after December 15, 2014, with early adoption permitted. The application of this alternative should be applied prospectively to goodwill existing as of the beginning of the period of adoption and to new goodwill recognized after the beginning of the annual period of adoption.
The Impact of Accounting for Goodwill (ASU No. 2014-02)
Significant resources of the private company can be saved as valuations may not be required where they were before. While some benefits of adopting the new standard can be realized, private companies should consult with their CPA advisor or engagement team to weigh the benefits against other factors, including:
- The impact of the amortization of goodwill on the income statement. Previously, there would be no effect to the income statement if no impairment was indicated.
- The limited effect of amortization to the company if financial covenants related to debt agreements exclude amortization.
A Detailed Look at Accounting for Goodwill (ASU No. 2014-02)
An entity adopting this alternative should amortize goodwill on a straight-line basis over 10 years or less than 10 years if the entity demonstrates that another useful life is more appropriate; Further, an entity that elects the accounting alternative is required to make an accounting policy election to test goodwill for impairment at either the entity level or the reporting unit level.
Goodwill should be tested for impairment when a triggering event occurs that indicates that the fair value of an entity (or a reporting unit) may be below its carrying amount. When a triggering event occurs, the entity has the option to first assess qualitative factors to determine whether the quantitative impairment test is necessary. If that qualitative assessment indicates that is more likely than not that goodwill is impaired, the entity must perform the quantitative test to compare the entity’s fair value with its carrying amount, including goodwill (or fair value of the reporting unit with the carrying amount, including goodwill, of the reporting unit). If the qualitative assessment indicates that it is not likely that goodwill is impaired, no further testing is necessary.