FASB to consider goodwill amortization for public companies

The Financial Accounting Standards Board (FASB) is currently researching an approach that would allow public companies to amortize goodwill. Here are the details of this ongoing project.

Reporting goodwill

Goodwill is an acquired intangible asset that comes on the balance sheet through a business combination. The book value of goodwill is determined by deducting from the cost to buy a business the fair market value of tangible assets, identifiable intangible assets and liabilities obtained in the purchase.

Under current U.S. Generally Accepted Accounting Principles (GAAP), companies must test goodwill at least annually for impairment. Goodwill also must be tested whenever a “triggering event” occurs that could lower the value of goodwill.

Many companies are expected to report impairment losses in 2020 due to the COVID-19 crisis. When impairment occurs, the company must write down the reported value of goodwill on the balance sheet. Impairment is also reported as a loss on the income statement.

In lieu of annual impairment testing, private companies have the option to amortize acquired goodwill over a useful life of up to 10 years. This practical expedient was issued in 2014. Now, to help simplify U.S. GAAP and reduce financial reporting costs, the FASB is considering whether to give public companies a similar option. Some FASB members also believe that amortization better reflects what happens to goodwill in a business combination.

“Acquired goodwill itself does not last forever; it may be replaced with internally generated goodwill or other things. But I think there are compelling reasons to take the goodwill and consider whether — again from an economic standpoint as well as a cost-benefit standpoint — amortization makes sense,” said FASB Vice Chairman James Kroeker during a July 15 meeting.

Assessing amortization techniques

Does 10-year, straight-line amortization — the alternative method currently allowed for private companies under U.S. GAAP — also make sense for public companies? This accounting technique would enable public companies to expense billions of dollars of tricky intangible assets over a finite period. Though most FASB members seemed to favor a default period and a straight-line method, more analysis about the different approaches is needed before the FASB can provide clear guidance on this issue.

Overall, FASB members felt that impairment testing had already been simplified as much as possible. So, rather than make additional changes to the impairment testing model, work on the topic will focus on the subsequent accounting for goodwill, including the required disclosures regarding the performance of an acquisition.

Seeking global convergence

Ideally, the FASB would like to converge U.S. GAAP with International Financial Reporting Standards (IFRS) in this area. The FASB has been working with the International Accounting Standards Board (IASB) and other standard setters that are pursuing the topic. The IASB is currently researching goodwill amortization, though their timing is behind the FASB’s.

Last year, the FASB issued Invitation-to-Comment (ITC) No. 2019-720, Identifiable Intangible Assets and Subsequent Accounting for Goodwill, and the comment period ended on October 7, 2019. The IASB has also published a discussion paper on the topic, but the comment period has been delayed until year end amid the COVID-19 pandemic.

FASB research hasn’t elicited any conceptually new information on the topic, but it has gleaned some new ideas about models that would align the timing of impairment testing for goodwill with any synergies related to acquired goodwill. Research also shows that financial statement users have diverse views about the utility of goodwill information, though most believe that goodwill impairment information becomes relatively less useful over time.

No easy answers

The FASB would like to start developing an exposure draft for public comment that would lead to the issuance of an updated standard under U.S. GAAP. But the topic has been debated for more than 75 years, so it might not be an easy matter to fix. FASB member Gary Buesser pointed out that since 1944 standard-setters “have opined on this and have not come to a consistent answer.”