1.2 History of the Goodwill Impairment Model and Related Standard-Setting Activity

ASC 350-20 provides guidance on accounting for goodwill after its initial recognition. Under that guidance, goodwill is tested for impairment at least annually (unless the entity has elected the goodwill accounting alternative to amortize goodwill), or more often if events or circumstances indicate that it might be impaired. The current goodwill accounting model has evolved significantly from the model that the FASB originally introduced in 2001. The FASB has issued numerous ASUs on this topic, which were generally intended to simplify or reduce the cost and complexity of performing goodwill impairment testing. The timeline below depicts standard-setting activity related to the subsequent accounting for goodwill.

	1970	APB issues Opinion 17, which requires amortization of goodwill over not more than 40 years (see Section 1.2.1).
	2001	FASB issues Statement 142 (later codified into ASC 350-20), which eliminates goodwill amortization and requires that goodwill be tested for impairment annually, or between annual tests if an impairment indicator exists, by using a two-step test (see Section 1.2.2).
	2011	FASB issues ASU 2011-08, which introduces the optional qualitative assessment (“step 0”) (see Section 1.2.3).
	2014	FASB issues ASU 2014-02, which introduces the first of the goodwill accounting alternatives for private companies. ASU 2014-02 (1) gives private companies the option of amortizing goodwill over 10 years or less; (2) gives such companies the option of testing goodwill for impairment, when necessary, at the entity level or reporting unit level; and (3) eliminates step 2 of the goodwill impairment test, if performed (see Section 1.2.4).
	2017	FASB issues ASU 2017-04, which eliminates step 2 from the goodwill impairment test for entities that apply the general goodwill model (see Section 1.2.5).
	2018	FASB adds project to its agenda to consider simplifying accounting for goodwill by reintroducing amortization for all entities (see Section 1.2.6).
	2019	FASB issues ASU 2019-06, which extends to NFPs the goodwill accounting alternative available to private companies (see Section 1.2.7).
	2021	FASB issues ASU 2021-03, which introduces the second goodwill accounting alternative and provides private companies and NFPs with the option of only assessing, as of the end of each interim or annual reporting period, whether a goodwill impairment triggering event exists (see Section 1.2.8).
	2022	FASB votes to remove goodwill project from its agenda. The existing general goodwill model is thereby retained (see Section 1.2.9).

The sections below present a brief history of the goodwill impairment model, including the ASUs that amended the original model.

1.2.1 Amortization of Goodwill

In August 1970, the APB, which preceded the FASB, issued Opinion 17. Under Opinion 17, goodwill and intangible assets that were recognized in a business combination were “amortized by systematic charges to income over the period estimated to be benefited,” not to exceed 40 years. Further, goodwill and all other intangible assets were presumed to be wasting assets under Opinion 17 (i.e., finite-lived); therefore, an entity amortized the amounts assigned to these assets in determining net income.

1.2.2 Introduction of the Two-Step Goodwill Impairment Test

The guidance in Opinion 17 remained in effect for over 30 years. However, during that time, analysts and other users of financial statements indicated to the FASB that they did not find goodwill amortization expense particularly useful information in analyzing investments. In addition, they indicated that better information about intangible assets was needed because such assets were an increasingly important economic resource for many entities. Therefore, in June 2001, the FASB issued Statement 142 to address those concerns.

Under the guidance in FASB Statement 142 (later codified in ASC 350-20), goodwill and other intangible assets with indefinite useful lives are no longer amortized; rather, such assets are tested for impairment at least annually, and more often if events or circumstances indicate they might be impaired. Only intangible assets with finite useful lives are amortized. Statement 142 also introduced the (1) concept of the reporting unit, which continues to be the unit of accounting for goodwill, and (2) the two-step goodwill impairment test. In the first step of the goodwill impairment test, an entity identifies potential impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the reporting unit’s fair value exceeds its carrying amount, the goodwill assigned to the reporting unit is not impaired and the entity therefore does not need to perform the second step of the impairment test. However, if the reporting unit’s carrying amount exceeds its fair value, the entity is required to perform the second step of the goodwill impairment test to measure the amount of impairment loss, if any.

In the second step of the goodwill impairment test, the entity compared the implied fair value of the reporting unit’s goodwill with its carrying amount. If the carrying amount exceeded the implied fair value , an impairment loss was recognized in an amount equal to that excess. The implied fair value of goodwill was determined in the same manner as the amount of goodwill recognized in a business combination. That is, the entity allocated the fair value of a reporting unit to all the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination on the testing date.

1.2.3 Introduction of the Optional Qualitative Assessment (“Step 0”)

Preparers of financial statements expressed concerns to the FASB about the cost and complexity of performing the two-step goodwill impairment test. In an effort to reduce cost and complexity and simplify goodwill impairment testing, the FASB amended the guidance in ASC 350 by issuing ASU 2011-08 in September 2011. The ASU’s amendments introduced an optional qualitative assessment (or “step 0”) that permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether a quantitative goodwill impairment test is necessary. Therefore, an entity that elects to perform a qualitative assessment is not required to calculate the fair value of a reporting unit unless it determines, on the basis of this assessment, that it is more likely than not that its fair value is less than its carrying amount.

1.2.4 Goodwill Accounting Alternative for Private Companies

Unfortunately, the introduction of the qualitative assessment did little to allay concerns about costs and complexity, and the FASB continued to receive feedback that the benefits of the goodwill impairment testing model did not justify the related costs. Specifically, users of private-company financial statements indicated that the goodwill impairment test provided limited decision-useful information because most of these users generally disregard goodwill and goodwill impairment losses in their analysis of a private company’s financial condition and operating performance. Private-company stakeholders acknowledged that the optional qualitative assessment had reduced the cost of testing goodwill for impairment, but many of those stakeholders stated that such cost reductions had not been significant.

Accordingly, the FASB issued ASU 2014-02 in January 2014 to give non-PBEs (i.e., private companies) an accounting alternative related to subsequently measuring goodwill. Under ASU 2014-02, private companies have the option of amortizing goodwill over a useful life of 10 years or less and are no longer required to test goodwill for impairment annually. The alternative also simplifies impairment testing. Specifically, if a triggering event occurs, (1) private companies are allowed to perform the impairment test at the entity level rather than the reporting-unit level and (2) step 2 of the goodwill impairment test was eliminated in circumstances in which a test must be performed.

1.2.5 Elimination of Step 2 From the Goodwill Impairment Model for All Entities

While the FASB provided private companies with an alternative that simplified the accounting for goodwill, the Board continued to receive feedback that many PBEs and NFPs also had concerns about the cost and complexity of performing the annual goodwill impairment test.

To address these concerns, the FASB issued ASU 2017-04 in January 2017, which eliminated step 2 of the goodwill impairment test for all entities, not just those that had not elected to amortize goodwill. ASU 2017-04 instead required that if “the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.”

1.2.6 Addition of Goodwill Project to FASB’s Agenda

In October 2018, the FASB added to its technical agenda a broad project related to revisiting the subsequent accounting for goodwill and the accounting for certain identifiable intangible assets for all entities. In July 2019, the FASB issued an invitation to comment on this topic, which noted that the Board was considering whether to change the subsequent accounting for goodwill for cost-benefit reasons. In December 2020, while deliberating the responses, the FASB tentatively decided to reintroduce amortization of goodwill on a straight-line basis over a 10-year default period or over an estimated period of up to 25 years.

1.2.7 Extension of the Goodwill Accounting Alternative to NFPs

When it released ASU 2014-02, the Board was aware that the issues the ASU addressed were not limited to private companies but decided not to extend the goodwill accounting alternative to PBEs or not-for-profit entities (NFPs) at that time. The Board received feedback from stakeholders of NFPs questioning the relevance of an impairment-only approach to goodwill as well as input that the benefits of the current accounting for goodwill and identifiable intangible assets acquired in an acquisition by an NFP do not justify the related costs. Accordingly, in May 2019, the FASB issued ASU 2019-06, which extended the goodwill accounting alternative in ASU 2014-02 to all NFPs (both public and private) and gave them the option of electing the same goodwill accounting alternative that was available to private companies.

1.2.8 Option for Private Companies and NFPs to Monitor for Goodwill Triggering Events Only at End of Reporting Period

Under ASC 350-20, an entity must monitor goodwill for triggering events throughout the reporting period. If it is more likely than not that goodwill is impaired, the entity must then test goodwill for impairment when a triggering event occurs. Certain stakeholders expressed concern about the cost and complexity of private companies evaluating triggering events and potentially measuring a goodwill impairment during the reporting period, rather than completing the analysis as of the end of the reporting period, whether the reporting period is an interim or annual period. Those stakeholders explained that this issue had become more apparent during the COVID-19 pandemic because of the uncertainty in the economic environment and the significant changes in facts and circumstances from one quarter to the next. In addition, those stakeholders stated that some private companies may perform this analysis as part of their annual financial reporting process, so it may be difficult for them to determine whether a triggering event occurred during the reporting period as well as the event’s date of occurrence.

In response to this issue, the FASB issued ASU 2021-03 in March 2021. This ASU gives private companies and NFPs the option of assessing, only as of the end of each reporting period, whether a goodwill impairment triggering event exists and, if so, whether it is more likely than not that goodwill is impaired. Therefore, private companies and NFPs that adopt this alternative would only need to perform the goodwill impairment triggering event evaluation as of the end of an interim or annual reporting period, as applicable.

Connecting the Dots

The option in ASU 2021-03 applies only to monitoring goodwill for impairment triggering events; it does not change existing requirements for private companies and NFPs with respect to monitoring other assets (e.g., long-lived assets and indefinite-lived intangible assets) for triggering events, and performing any required impairment tests, during the reporting period.

1.2.9 Removal of Goodwill Project From FASB’s Agenda

After four years of deliberations, in June 2022, the FASB unanimously voted to drop the goodwill project from its agenda. Board members said that they were not convinced the changes they were pursuing regarding the subsequent accounting for goodwill would improve the current guidance; these Board members observed that, according to investors, the information would bring marginal benefits. As a result, entities continue to apply current GAAP and test goodwill for impairment under existing guidance.

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