As many people know, in 2012, the Private Company Council (“PCC”) was formed to assist in creating alternatives in accounting for private companies. In November 2013, the Financial Accounting Standards Board (“FASB’) endorsed the proposal regarding an alternative approach for private companies for accounting for goodwill after a business combination. This accounting alternative was issued by FASB in January 2014 as “Accounting Standards Update (ASU) 2014-02, Intangibles—Goodwill and Other (Topic 350): Accounting for Goodwill”.
Prior to the alternative for subsequent measurement of goodwill, Generally Accepted Accounting Principles (“GAAP”) required goodwill to be recorded at the acquisition of a business, and tested for impairment annually (at a minimum). Testing goodwill for impairment can be timely and expensive as it may require valuations. Furthermore, many users of private company financial statements ignored the effects of goodwill when analyzing private company financial statements. While the traditional impairment approach is still required for all public companies, private companies now have the option to elect an alternative method in which goodwill would be amortized over a period of not more than 10 years. Private companies will still need to evaluate whether goodwill is impaired, however, under the accounting alternative, this will be considered upon an occurrence of a “triggering event” rather than as part of a required annual test.
While this does, in fact, simplify the accounting for private companies, each company should still evaluate if this is the best treatment for their particular situation. Some things that should be considered:
- If a company plans to go public in the future, it may want to consider continuing with the impairment test to avoid transitioning over in the future.
- Switching to the amortization method, will result in an additional expense hitting the company’s profit and loss statement annually. If the company has any financial covenants associated with debt agreements, it may want to consider the impact of this alternative.
If a company does choose to switch methods to amortize goodwill, as opposed to annual impairment testing, there are some key concepts to understand:
- You can amortize goodwill for up to 10 years. This is from the date that the Company determines to switch to this method, so the acquisition date has no impact on the remaining years. However, if a company demonstrates that another useful life is more appropriate, a life less than 10 years is accepted.
- Since this is an accounting policy election, goodwill generated in future business combinations must be amortized as well.
- Each company, regardless of the method chosen, should ensure proper disclosures include the method used to account for their goodwill.
- In the period of change, proper disclosures for a change in accounting principle will need to be disclosed.
This change is effective for annual periods beginning after December 15, 2014, or may be implemented earlier to any period in which the annual financial statements have not yet been made available for issuance.
By Brie C. Keckler, CPA