In mid-January, 2014, the FASB (Financial Accounting Standards Board) issued an ASU (Accounting Standards Update) to U.S. GAAP (Generally Accepted Accounting Principles) that provide private companies with alternatives related to accounting for goodwill. The goal is to create simplification in accounting and a reduction in application cost for private companies.

Intangibles-Goodwill and Other relates to the subsequent measurement of goodwill. Goodwill is the amount paid in excess of the fair market value of the underlying assets or equity, classified as an intangible asset on the balance sheet. If elected as a US GAAP alternative, private companies would no longer be required to test goodwill of a reporting unit at least annually for impairment. Instead:

  • Goodwill existing at the beginning of the period of adoption and new goodwill recognized should be amortized on a straight-line basis over 10 years (or less if another shorter useful life is appropriate).
  • Entities must elect an accounting policy to either test goodwill at the entity or reporting unit level. Currently, only the reporting unit level is allowed.
  • Goodwill should be tested for impairment when a triggering event occurs that indicates the fair value of the entity or reporting unit may be below its carrying amount. Currently, the impairment test is at least annually.
  • Upon a triggering event, the entity may first assess qualitative factors to determine whether a quantitative impairment test is necessary.
  • An impairment loss is measured as the difference between the fair value of the entity or reporting unit and the carrying amount of the entity or reporting unit, including goodwill. Currently, the impairment loss is calculated using a hypothetical application of the acquisition method, which is typically a costly exercise.

The effective date of this ASU is basically for 2014 calendar year ends and beyond. However, earlier application is permitted including 2013 year ends that have not been made available for issuance. Look for my upcoming ASU Update relating to Derivatives and Hedging.