Potential Changes to the Accounting for Goodwill

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The Financial Accounting Standards Board (FASB) has recently requested input from public companies on the topic of accounting for intangible assets and goodwill. Input is needed on the best accounting method for goodwill that is informational and useful to the investors while not being overly burdensome for the accountants.

What is goodwill?

Goodwill is an intangible asset that shows up on corporate balance sheets as a result of business combinations. Once the associated assets and liabilities of the acquired company have been assumed by and added to the books of the acquiring company, any additional amount paid is recorded as goodwill on the acquiring company’s balance sheet. Goodwill is recorded on the balance sheet as a long-term or non-current asset.

Annual goodwill testing

Public companies are required to perform impairment tests on the recorded goodwill on an annual basis to ensure that the fair value of goodwill is still accurate. Impairment testing will determine if the carrying value of the goodwill is greater than the fair value and if a loss should be recorded as a deduction from earnings on the income statement. The value of goodwill can decrease due to a variety of factors including deterioration of economic conditions, change in government or regulatory policies, increased market competition, bankruptcy, senior management change or decrease in share price. Impairment testing consists of assessing the goodwill’s qualitative factors, identifying the potential impairment and calculating the impairment loss. If a loss is calculated, the company is required to record it as a complete write-off on the income statement. The annual valuation process required as part of the impairment testing can be both costly and complex for a company. Outside valuation experts are often necessary for calculating fair value. Companies are also unable to escape the annual costs for testing once the business combination has occurred.

Potential changes

FASB is considering changing from annual impairment testing for goodwill to amortization of goodwill using the straight-line method with useful lives set by FASB or determined by management, most likely using a weighted average useful life of the assets acquired. Initial up-front costs could be significant but much of the work could be completed in-house instead of requiring external valuations routinely. Because certain impairment information may not provide enough benefit to justify the cost of calculating it, FASB is interested in the opinion of users as to what would be the most beneficial for those preparing the statements and for those depending on the statements for investment purposes. Another alternative to annual impairment testing would be mandatory testing if there has been a change in circumstances at the company that could trigger major changes in valuation. Overall, it appears there is not a clear-cut method that would be the most efficient and effective for all involved which further supports the need for FASB to confer with many professionals before changing the accounting method for goodwill.