38
2nd QUARTER 2014
I
n January 2014, the Financial Standards
Accounting Board (FASB) issued
Accounting Standards Update (ASU) No.
2014-02,
Intangibles – Goodwill and Other
(Topic 350): Accounting for Goodwill, a
consensus of the Private Company Council
. ASU
2014-02 may provide a valuable accounting
alternative for private companies, offering a
way for them to amortize goodwill. It also
permits a private company to apply a simplified
impairment model to this goodwill.
The new standard applies to years
beginning after December 15, 2014, but
companies can adopt the goodwill standard
early, including for any financial statements
not yet issued. This means that most
December 31 year-end private companies
are able to apply this alternative in their
2013 financial statements.
Details
ASU 2014-02 gives private companies
accounting options that would impact
financial reporting results, but could also
save some time and effort. As an overview,
this goodwill accounting alternative allows
private companies to amortize goodwill
on a straight-line basis over a period of 10
years, or less if the company demonstrates
that another useful life is more appropri-
ate. It also requires that goodwill be tested
for impairment when a “triggering event”
occurs, which indicates that the fair value
of a company (or a reporting unit) may
be below its carrying amount. Existing
accounting literature provides examples of
triggering events.
Both of these provisions are changes from
the current accounting literature, which
prohibits goodwill amortization and requires
an annual impairment test be done at the
reporting-unit level. If there is a triggering
event, then as in the existing literature, a
company may perform a qualitative
assessment of whether impairment exists,
and if so, perform a quantitative (or Step 1)
assessment, or skip the qualitative assess-
ment and go directly to the quantitative
assessment. This accounting alternative
eliminates the need to perform any Step 2
calculation, thus ending the need for a
potentially cumbersome and costly process.
Implications
Private companies need to first assert that
they do not meet FASB’s new definition of
a public business entity and consider the
many ramifications before deciding whether
to adopt this ASU. Then, if they decide to
adopt, they must evaluate the policy
decisions that need to be made inherent in
the ASU as discussed above.
Some of the key pros and cons to
consider include:
(1) The impact of amortizing goodwill on
any debt covenant requirements, bonus
plans, or any condition affected by net
income that will be impacted as a result of
goodwill amortization
(2) Expected level of future acquisitions,
as once the ASU is adopted, it becomes the
company’s policy going forward
(3) Specific time/cost savings of the
simplified impairment model; this includes
the test of goodwill for impairment upon
a triggering event, including tracking the
impairment to the respective entity (or unit),
the ability to elect to perform an impairment
evaluation at either the company (or
entity) level or reporting unit level, and the
elimination of the Step 2 calculation
(4) Deferred tax implications, if any
(5) Potential implications, should the
company go public in the future and need
to comply with accounting requirements for
public companies
While not suitable for every private
company with goodwill, ASU 2014-02 does
provide an accounting policy alternative that
many companies can use to simplify their
accounting requirements while continuing to
provide meaningful information to users of
their financial statements.
C
New Standard on Goodwill
Now private companies can amortize goodwill
NEAL GODT, CPA
Partner, EisnerAmper LLP
Neal Godt is an EisnerAmper LLP Audit Partner with over 30 years of experience serving public and private companies (including those backed by private equity). He heads the firm’s
manufacturing and distribution practice and provides due diligence, technical consultation, and internal control support. Neal is on the corporate advisory council of Homeless Solutions, Inc.
Learn more about the author
+
IT PERMITS A PRIVATE
COMPANY TO APPLY A
SIMPLIFIED IMPAIRMENT
MODEL TO GOODWILL
Photography: 123RF Stock Photo
