A private company/NFP entity may make an accounting policy election for the following accounting alternatives related to goodwill:
Only private companies/NFP entities are eligible to elect the accounting alternatives related to goodwill. Companies considering adoption should carefully review the definition of a public business entity. A company that meets the definition of a public business entity is not eligible to apply any of the PCC’s accounting alternatives in its financial statements. Additionally, employee benefit plans are not eligible to adopt the PCC’s accounting alternatives.
Excerpt from ASC Master Glossary
Public business entity: A public business entity is a business entity meeting any one of the criteria below. Neither a not-for profit entity nor an employee benefit plan is a business entity.
Presentation and disclosure guidance related to the goodwill accounting alternatives for private companies is included in FSP 8.10.2 and FSP 8.10.3.
If a private company/NFP entity elects the accounting alternative to amortize goodwill (“goodwill alternative”), the entity may amortize goodwill on a straight-line basis over ten years, or less than ten years if the company demonstrates that another useful life is more appropriate in accordance with ASC 350-20-35-63. The amortization guidance applies to existing goodwill, whether it resulted from a business combination or application of fresh-start reporting, at the adoption date as well as any new goodwill arising subsequent to adoption. Similarly, the accounting alternative to amortize goodwill also applies to equity method goodwill in accordance with ASC 350-20-35-81.
Question BCG 9-27
What factors should a private company consider before deciding whether it will adopt the goodwill alternative?
A company should carefully consider whether it currently meets the definition of a public business entity and whether it expects to meet that definition in the future. If a company that is private today later meets the definition of a public business entity (for example, due to a public offering of the company’s securities or as a result of being a “significant acquisition” of a registrant requiring audited financial statements under Article 3-05 of Regulation S-X), it will no longer be eligible to apply the goodwill alternative and will be required to retrospectively adjust its historical financial statements to apply the requirements of the existing goodwill accounting guidance.
In addition to determining whether a private company should adopt the goodwill alternative, it should also assess the impact a transition to the goodwill alternative will have on its key financial metrics, particularly those affecting its debt covenant compliance. While a company’s EBITDA will not likely be impacted by adoption of the goodwill alternative, other key measures of performance such as net income, operating income, net assets and retained earnings will be affected.
Key differences between entities that adopt the goodwill alternative guidance and those that do not are summarized in Figure BCG 9-6.
Figure BCG 9-6
Key differences between entities that adopt the goodwill alternative guidance and those that do not
Requires goodwill to be amortized on a straight-line basis over a period of ten years, or less in certain circumstances
Does not allow goodwill to be amortized Level of testingImpairment charge allocated to separate amortizable units of goodwill using either a pro rata allocation based on relative carrying amounts of goodwill or another reasonable and rational basis
Impairment charge allocated at the reporting unit level Disposal ofGoodwill attributed based on the relative fair value of the business disposed of to the portion of the reporting unit being retained
Based on the guidance in ASC 350-20-65-2, a private company/NFP entity can adopt the goodwill alternative for the first time prospectively as of the beginning of any fiscal year without assessing preferability (i.e., there is no defined effective date). Upon adoption, a company should assign a useful life to its existing amortizable units of goodwill as of the beginning of the period of adoption and begin amortizing the goodwill on a straight-line basis from the beginning of the period. Assigning a remaining useful life of ten years to all existing goodwill on the adoption date, unless a shorter useful life is more appropriate, is intended to simplify the accounting. It is not appropriate for the company to refer to the original acquisition date(s) of its acquired businesses and apply a “cumulative catch-up” of amortization from that date over a ten-year period as of the adoption date. In no circumstances is a company permitted to assign a useful life in excess of ten years to its goodwill.
A company should assign a useful life to new goodwill arising after initial adoption on an acquisition-by-acquisition basis, thus creating separate amortizable units of goodwill. A useful life of ten years can be assigned to a new amortizable unit of goodwill as a practical expedient. As with existing goodwill on the adoption date, a company has the option to assign a shorter useful life to a new amortizable unit of goodwill if it demonstrates that the goodwill has a shorter useful life. The determination of the useful life of goodwill should be made separately for each amortizable unit of goodwill.
A company may revise the remaining useful life of each of its amortizable units of goodwill upon the occurrence of an event or change in circumstance that could indicate a different remaining useful life is more appropriate. The cumulative amortization period of any single amortizable unit of goodwill cannot exceed ten years. Therefore, if an individual amortizable unit of goodwill is initially assigned a useful life of ten years, it may be appropriate in certain circumstances to subsequently shorten the life, but in no circumstances should the useful life be extended beyond a total life of ten years. If the estimated remaining useful life of an amortizable unit of goodwill is adjusted, the change would be treated as a change in accounting estimate, and thus applied on a prospective basis from the date the useful life is adjusted in accordance with ASC 350-20-35-64.
The goodwill alternative simplifies many aspects of the goodwill impairment model for private companies/NFP entities by changing the level at which the impairment assessment is performed, when the test is performed, and how an impairment charge is calculated. The goodwill alternative does not change the order in which goodwill is assessed for impairment. The order of impairment testing is described in PPE 5.2.2 and PPE 5.3.2.
Goodwill may be assessed for impairment at the entity-wide level or at the reporting unit level. The level at which to test goodwill for impairment is a policy election that is required to be made on the date the goodwill alternative is adopted.
The impairment assessment is a trigger-based assessment, whereby a company is only required to test goodwill for impairment if an event occurs or circumstances change that indicate that the fair value of the entity may be below its carrying amount or the fair value of a reporting unit may be below its carrying amount depending on the level at which the test is performed based on the accounting policy adopted. A company is not required to assess goodwill for impairment on an annual basis under the accounting alternative.
The goodwill alternative does not change the examples of events and circumstances, identified in BCG 9.6, that indicate that the fair value of the entity (or reporting unit) may be below its carrying amount. However, those examples are not meant to be all-inclusive. As part of its analysis of potential triggering events, a company should consider other factors that could impact the fair value of the entity (or reporting unit), the extent to which each of the identified adverse events or circumstances impact the entity’s (or reporting unit’s) fair value, the presence of any positive or mitigating factors that impact fair value, and, if applicable, the results of any recent fair value calculations in accordance with ASC 350-20-35-68.
Based on the occurrence of an event or a change in circumstances, a company is permitted to first assess qualitative factors to determine whether it is more likely than not that the fair value of the entity (or the reporting unit) is less than its carrying amount, including goodwill. The qualitative assessment, commonly referred to as “step zero,” applied in the goodwill alternative is the same as the qualitative assessment discussed in BCG 9.6. An entity is also permitted to bypass the qualitative assessment and proceed directly to the quantitative test. If a company elects to bypass the qualitative assessment, or, after performing the qualitative assessment concludes that it is more likely than not that the fair value of the entity (or reporting unit) is less than its carrying amount, it should proceed to the quantitative impairment test.
A company should compare the fair value of the entity (or reporting unit) to its carrying amount, which includes goodwill. If the fair value exceeds the carrying value, no impairment loss exists. If the fair value is less than the carrying amount, a goodwill impairment loss is recognized. In accordance with ASC 350-20-35-78, once a goodwill impairment loss is recognized, the adjusted carrying amount of goodwill will be its new accounting basis, which will be amortized over the remaining useful life of goodwill. Subsequent reversal of a previously recognized goodwill impairment loss is prohibited.
Consistent with the goodwill impairment guidance for public business entities, when determining the fair value of the entity (or reporting unit), a company will need to determine whether the entity (or reporting unit) would be bought or sold in a taxable or nontaxable transaction. However, when performing the quantitative goodwill impairment test, a company should include its deferred income taxes in the carrying amount of the entity (or reporting unit), regardless of how the fair value of the entity (or reporting unit) is determined (i.e., whether the entity (reporting unit) would be bought or sold in a taxable or nontaxable transaction) in accordance with ASC 350-20-35-76.
A goodwill impairment loss is measured as the amount by which the carrying amount of the entity (or reporting unit) exceeds its fair value. However, the impairment loss cannot exceed the entity’s (or reporting unit’s) carrying amount of goodwill in accordance with ASC 350-20-35-73.
Question BCG 9-28
A company elects to continue to assess goodwill for impairment at the reporting unit level and measures an impairment loss in one reporting unit that exceeds the carrying amount of that reporting unit’s goodwill. Should the company attribute the excess amount to the goodwill in its other reporting units?
No. For a company that assesses for impairment at the reporting unit level, the measurement of any impairment loss is limited to the carrying amount of goodwill in that reporting unit. Therefore, if the calculated impairment loss for any single reporting unit is greater than the carrying amount of the reporting unit’s goodwill, the company should not attribute the remaining difference to its other reporting units. Separately, the company should assess its long-lived assets for impairment before assessing goodwill for impairment.
Example BCG 9-24 demonstrates measurement of an impairment loss under the goodwill alternative. EXAMPLE BCG 9-24Company A has elected to assess its goodwill for impairment at the entity-wide level. During 20x1, Company A experiences a decline in its consolidated earnings and operating cash flows, and on June 30, 20x1, concludes that it is more likely than not that the fair value of the entity has fallen below its carrying amount. Before assessing its goodwill for impairment, Company A assessed its long-lived assets and determined there were no impairments. On June 30, 20X1, the carrying amount of Company A’s consolidated net assets is $950, which includes goodwill of $200.
How would Company A measure and record an impairment loss? AnalysisCompany A is required to assess its goodwill for impairment on June 30, 20x1, the date it has determined that the fair value of the entity may be below its carrying amount. On that date, Company A should determine the fair value of the consolidated entity using the same measurement principles described in ASC 350-20-35-22 through ASC 350-20-35-27 (i.e., the guidance for determining the fair value of a reporting unit). Company A concludes that its fair value is $800. Therefore, Company A’s carrying amount exceeds its fair value by $150. Company A should recognize a goodwill impairment loss of $150, thus reducing the carrying amount of its goodwill to $50.
Alternatively, if the carrying amount of Company A’s goodwill was $100 on June 30, 20x1, the impairment loss would be limited to $100 because the total impairment loss cannot exceed the carrying amount of goodwill.
ASC 350-20-35-73 requires a private company/NFP entity following the goodwill alternative accounting to consider the income tax effect from any tax-deductible goodwill on the carrying amount of the entity (or the reporting unit), if applicable, in accordance with ASC 350-20-35-8B when measuring the goodwill impairment loss. See BCG 9.9.6.
Question BCG 9-29
How should a company with a negative carrying amount at the entity (or reporting unit) level measure a goodwill impairment loss?
The goodwill alternative does not specifically address how a company should test goodwill for impairment when the goodwill resides within a reporting unit with a negative carrying amount or when the goodwill is being tested for impairment at the entity-wide level and the entity has a negative carrying amount. For areas not addressed in the goodwill alternative, an entity should continue to follow the applicable requirements of the existing goodwill accounting and reporting model in accordance with ASC 350-20-05-6. See BCG 9.8.2 for the accounting for reporting units with zero or negative carrying amounts.
A company should allocate a goodwill impairment loss to individual amortizable units of goodwill of the entity if it tests for goodwill impairment at the entity-wide level, or to amortizable units of goodwill within the impaired reporting unit if it tests for goodwill impairment at the reporting unit level. Therefore, the level at which a company assesses its goodwill for impairment will determine how a goodwill impairment charge is allocated to the separate amortizable units of goodwill. A company is permitted to allocate the impairment loss on a pro rata basis using the relative carrying amounts of its separate amortizable units of goodwill. While a company may allocate the impairment loss using another reasonable and rational basis, entities generally should use the pro rata allocation method unless there is clear evidence supporting a specific identification of the impairment loss to one or more amortizable units of goodwill.
After the goodwill impairment charge is allocated to individual amortizable units of goodwill, the adjusted carrying amounts of the individual units should be amortized over their respective remaining useful lives in accordance with ASC 350-20-35-78.
Example BCG 9-25 demonstrates the allocation of a goodwill impairment loss to amortizable units of goodwill.
EXAMPLE BCG 9-25Company A assesses goodwill for impairment at the entity-wide level. Upon a triggering event in 20x3, Company A performs the goodwill impairment test and determines that it has a goodwill impairment loss of $100 that it needs to allocate to its three amortizable units of goodwill.