A key component of business combination accounting is the recognition and measurement of identifiable intangible assets and goodwill, at their fair values.
In January 2014, the Financial Accounting Standards Board (FASB) issued an update which provides companies an alternative that simplifies accounting for goodwill.
What does this mean?
Private companies that elect this standard are able to write off goodwill and apply a simplified goodwill impairment test.
Adoption of this alternative is optional, and only private companies are eligible to elect it.
If I elect this policy, what do I need to know?
- Goodwill is reduced on a straight-line basis over a period of 10 years, or less, in certain circumstances. It applies to existing goodwill and any goodwill that arises following adoption.
- Testing for impairment is done at the entity or reporting unit level, depending on policy election.
- Impairment testing only occurs at a triggering event. The types of triggering events have not changed.
- Measurement of impairment is single step. It compares the fair value of the entity to its carrying amount.
- Impairment is allocated to separate amortizable units of goodwill, either using a pro rata approach or another reasonable basis.
This alternative could save your private company time and money. But before you make the decision, ask yourself the following questions:
- Do we currently meet the definition of a public business entity?
- Is it likely that we’ll meet that definition in the future?
- What impacts could these account elections have on our financial statements?
- How will this affect our stakeholders?
Have questions about accounting for goodwill? Let’s talk!