Calvetti Ferguson

Goodwill: The New Standards for Private Companies

April 8th, 2015: Goodwill: The New Standard for Private Companies by Erick Wegmann, Calvetti Ferguson Audit Partner

Accounting for goodwill is an important part of the financial statements for any company, both public and private. Yet for private companies, the benefits were out weighed by its cost and complexity. This resulted in a general disregard of goodwill and its impairments by users of financial statements.

In 2014, the Financial Accounting Standards Board (FASB) codified an alternative method of accounting for goodwill by private companies, developed by the Private Company Council (PCC). This alternative method allows private companies to amortize goodwill over 10 years or less if a shorter useful life is more appropriate in certain situations. If elected the private company would choose between testing goodwill for impairment at the entity or the reporting unit level. If the election is not made the private company will continue testing for goodwill impairment at the reporting unit. A private company would apply the accounting alternative to all new and existing goodwill.

If you choose the alternative method of accounting for goodwill then private companies have the option not to recognize any customer-related intangibles that are incapable of being sold separately along with noncompetition agreements. Instead the value of these intangibles would become part of goodwill.

A private company, as defined in the Accounting Standards Codification Master Glossary, is “an entity other than a public business entity, a not-for-profit entity, or an employee benefit plan within the scope of Topics 960 through 965 on plan accounting.”

Having to test for impairment at the reporting unit level has resulted in many practice issues for private companies over time because its original intent was for use by public companies. While impairment testing at the entity level would result in cost savings, the PCC gave private companies the option in order to provide more flexibility for those companies that find more meaningful results of impairment testing at the reporting unit level.

Currently U.S. Generally Accepted Accounting Principles (GAAP) requires impairment testing to be done annually. Under the alternative method, a private company will only have to test for impairment when a triggering event occurs. A triggering event, such as deterioration of economic conditions, brings about the question of whether the fair value of the entity (reporting unit) may have fallen below its carrying value. A company would look for the possibility of an occurrence at the end of each period.

If a triggering event has occurred, a company who has elected the alternative method must test its goodwill for impairment. A company would have the choice to perform a qualitative assessment or to go directly to step one of the impairment test, which is to compare the fair value with its carrying amount. Qualitative assessments consider if it is more likely than not that fair value of the entity (reporting unit) is less than the carry amount. From a cost-benefit stand point, it is very unlikely that a company would decide to perform a qualitative assessment based on the fact the company has just decided that a triggering event may have caused the fair value to be below its carry amount.

Under step one of the impairment test, if the fair value is greater than its carrying amount there is no impairment. If the fair value is less than its carrying amount the difference would be the amount of impairment and there would be no requirement to perform a costly hypothetical business combination currently required by GAAP.

If this alternative method of accounting for goodwill is elected, companies would be required to present the aggregated net amount of goodwill as a separate line item on its balance sheet. Notes to its financial statements would disclose gross carrying amount of goodwill and any relevant information concerning changes in goodwill.

This alternative method should be applied prospectively for annual periods beginning after December 15, 2014 and for interim periods beginning after December 15, 2015. While early adoption is permitted, companies should seek their stakeholders’ acceptance of financial statements that reflect its application before electing the alternative method.

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