FASB Approves New Rules for Goodwill Triggering Events

In February, the Financial Accounting Standards Board (FASB) voted 6 to 1 to finalize its December 2020 proposal on the assessment of events that may trigger a goodwill impairment test. However, the scope of the guidance has been expanded to cover a broader number of private companies and not-for-profits in the final rules.

Triggering Events

Goodwill is an accounting term used for a specific acquired intangible asset that’s recorded on the balance sheet in a merger or acquisition. It’s determined by deducting the fair market value of tangible assets, identifiable intangible assets and liabilities obtained in the purchase, from the cost to buy a business. As events or circumstances change, goodwill can become impaired (or decline in value).

Under current U.S. Generally Accepted Accounting Principles (GAAP), companies must monitor and evaluate interim goodwill triggering events as they occur throughout the year. This involves the preparation of interim balance sheet and cash flow projections that may lose relevance at the annual reporting date when financial statements are issued.

Public companies and not-for-profit entities find it costly and complex to perform the goodwill triggering event evaluation on an interim basis, because they issue GAAP-compliant financial statements only annually. The COVID-19 pandemic — which could be considered a triggering event — brought this issue to the forefront.

Need for Change

The updated guidance, which applies to fiscal periods after December 15, 2019, allows private companies and not-for-profits to perform the goodwill impairment triggering event assessment at the reporting date any time they report financial information, including interim reports. The original proposal had limited the goodwill triggering event evaluation to companies that only file GAAP-compliant statements on an annual basis.

“You can delay the assessment of the goodwill impairment triggering event until the first reporting date after that triggering event, whether that be at your quarter end if you are meeting the parameters for saying you’re providing interim reporting,” said FASB member Christine Botosan. “If you don’t provide interim reporting, then that would happen at the end of the year.”

The FASB members who voted for the change said it would provide cost relief and simplifications for resource-strapped private companies and not-for-profits that need it most. “I don’t think having a private company try to go through an impairment indicated on [for example] August 16 would necessarily be the highest quality financial reporting, particularly if they’ve never closed their books on a date like that before,” said FASB Chair Richard Jones. He observed that an impairment trigger for goodwill assessment, including the severity and duration of an event, is a matter of judgment.

The updated guidance is limited to goodwill subsequently accounted for under Accounting Standards Codification Topic 350-20, Intangibles — Goodwill and Other. It doesn’t apply to long-lived assets or other identifiable intangible assets.

Feedback on the Proposal

During its 30-day comment period, Proposed Accounting Standards Update 2020-1100, Intangibles — Goodwill and Other (Topic 350): Accounting Alternative for Evaluating Triggering Events, generated 25 comment letters, mostly from accounting firms. Many respondents felt that the scope was overly narrow and would limit the entities that could benefit from the proposed alternative.

Several respondents supported expanding the scope to include entities that report on an interim basis. They suggested requiring a goodwill triggering event assessment as of the reporting date only, whether that be monthly, quarterly or annually.

Lively Debate

FASB member Marsha Hunt agreed with finalizing the proposal with the scope changes. She claimed that expanding the scope was responsive to feedback in the comment letters.

FASB member Susan Cosper also voted in favor of expanding the scope. But she was surprised by the feedback “given the dialogues that we’ve had over the years with the Private Company Council on this notion that most private companies don’t issue interim statements.” Cosper said the rules would be helpful to companies, pointing to earlier feedback from private company users in 2014.

Another FASB member, Gary Buesser, who voted in favor of extending the scope, was worried that, by limiting the scope of the changes, the FASB would penalize companies that provide more frequent reporting (for example, companies that issue quarterly financial statements versus those that report only on an annual basis).

Harold Schroeder, the lone dissenting member, believes that the topic should be tackled holistically with the FASB’s broader goodwill project. He added that the proposed revisions should be done only as a short-term fix during the COVID-19 pandemic. He said the forthcoming standard will give analysts a narrow view of a company and “the costs when factoring in the lost information do not justify the project.”

2020 and Beyond

The pandemic has presented financial hardships for U.S. companies, both public and private. Public companies are expected to report approximately $143 billion in goodwill impairment for 2020, roughly double the amount reported for 2019 ($71 billion), according to a recent survey by global advisory firm Duff & Phelps.

Private companies have fewer resources to evaluate impairment, especially when a triggering event happens in the middle of the reporting period. The updated guidance will help private businesses and not-for-profits get a handle on goodwill impairment for 2020 and simplify this issue for any future triggering events.