The Financial Accounting Standards Board (FASB) met virtually on Nov. 18, 2020, to discuss issues related to the cost and complexity that private companies and not-for-profit entities face when performing interim goodwill impairment evaluations based on triggering events. During the meeting, the FASB decided to add this topic to the technical agenda and began deliberations.
Several questions have come to light in recent months as a result of the COVID-19 pandemic. Under existing Generally Accepted Accounting Principles (GAAP), goodwill must be evaluated for impairment at least annually, or more frequently if a triggering event occurs. In many cases, the economic impact of the COVID-19 pandemic will be considered a triggering event, requiring entities to evaluate goodwill for impairment at an interim date under current U.S. GAAP. If an impairment occurred, it is recognized as of the interim date and cannot be reversed for subsequent increases in fair value even if the fair value has recovered by the time the entity prepares its annual financial statements. This has raised some questions about the decision usefulness of measuring goodwill impairment as of the date of the triggering event for private companies and not-for-profit entities who only annually report U.S. GAAP-compliant financial statements.
For private companies and not-for-profit entities who only report U.S. GAAP-compliant financial statements on an annual basis (i.e., do not report interim financial statements), concerns have also been expressed regarding the cost and complexity of complying with the interim goodwill evaluation requirements. These entities may not have conducted an interim impairment test as of the date of the triggering event. This in turn has raised questions regarding the use of hindsight when performing an interim impairment test (i.e., taking subsequent information or recoveries in fair value into consideration when performing the impairment test), which is not permitted under current GAAP.
During the meeting, the FASB discussed outreach with stakeholder groups, which illustrated the relevance of the issue, and debated several questions as outlined in the Board Meeting Handout.
What did the FASB decide to propose?
- An accounting alternative will be introduced that would allow certain entities to perform a goodwill triggering event evaluation only on the annual reporting date rather than require the evaluation be performed on the date on which the triggering event occurred.
- The guidance would be made available on an ongoing basis and not limited to a specified time period or the effects of the COVID-19 pandemic.
- Additional disclosures would not be required outside of current requirements in Accounting Standards Codification (ASC) Topic 235, Notes to Financial Statements, and Subtopic 350-20, Intangibles-Goodwill and Other.
What is the proposed scope of the alternative?
The scope of this alternative would be limited to private companies and not-for-profit entities as these entities are defined in the Accounting Standards Codification’s Master Glossary and be limited to entities reporting with GAAP-compliant financial statements on an annual basis only. This alternative would not be available to those reporting with GAAP-compliant financial statements on an interim basis. The scope would also be limited to goodwill tested for impairment in accordance with Subtopic 350-20, Intangibles-Goodwill and Other.
What are the proposed transition provisions?
Under the FASB’s decisions, the amendments would be applied prospectively and be effective for annual reporting periods beginning after Dec. 15, 2019. Early application would be permitted for financial statements that had not been issued or made available to be issued. Under current GAAP, entities are required to conduct a preferability assessment under Topic 250, Accounting Changes and Error Corrections. The FASB decided to propose allowing for a one-time election to adopt the proposed alternative prospectively without satisfying the preferability assessment criteria under Topic 250.
What is the timing?
A 30-day comment period will be provided for the proposed update, and FASB directed its staff to draft the proposed Accounting Standards Update (ASU) for vote by written ballot. The Exposure Draft for the proposed alternative is expected to be released for comment in the coming weeks.
Given the proximity of these deliberations and proposed amendments to calendar year end, which coincides with the date on which many private companies prepare their annual financial statements, the FASB is expected to move quickly.