On March 30, the Financial Accounting Standards Board (FASB) published an updated accounting standard on events that trigger an impairment test under U.S. Generally Accepted Accounting Principles (GAAP). This simplified alternative may provide relief to private companies and not-for-profit entities that have been adversely affected by the COVID-19 pandemic. Here’s what you should know.
Clarifications for certain organizations
Under GAAP, goodwill appears on a company’s balance sheet only when it’s been acquired in an M&A transaction. It represents what’s left over after the purchase price has been allocated to the fair value of identifiable tangible and intangible assets acquired and liabilities assumed. When goodwill declines in value, it’s considered “impaired.” Impairment charges can lower a company’s earnings.
Private companies and not-for-profits that report goodwill on their balance sheets have been given various simplified financial reporting alternatives over the years. One such alternative allows these entities to amortize goodwill generally over a 10-year period, rather than capitalize it and test annually for impairment. However, entities that elect this alternative still must test goodwill for impairment when a triggering event happens.
Examples of triggering events include the loss of a key customer, unanticipated competition and negative cash flows from operations. Impairment also may occur if, after an acquisition has been completed, there’s a stock market or economic downturn — such as the market and economic downturn caused by COVID-19 — that causes the parent company or the acquired business to lose value.
Accounting Standards Update No. 2021-03, Intangibles — Goodwill and Other (Topic 350): Accounting Alternative for Evaluating Triggering Events, provides an accounting alternative that allows private companies and not-for-profit organizations to perform a goodwill triggering event assessment as of the end of the reporting period only, whether the reporting period is an interim or annual period. It eliminates the requirement for entities that elect this alternative to perform this assessment during the reporting period.
The changes go into effect on a prospective basis for fiscal years beginning after December 15, 2019. Private companies and not-for-profits can adopt the changes early for interim and annual financial statements that haven’t yet been issued or made available for issuance as of March 30, 2021. But they aren’t allowed to adopt the changes retroactively for interim financial statements already issued in the year of adoption.
The updated guidance on evaluating triggering events will help reduce financial reporting complexity for private companies and not-for-profits in the midst of the pandemic — and for other triggering events that happen in the future. Contact your financial advisor for more information.