3.1 Overview of the Goodwill Accounting Alternatives
ASC 350-20
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The Accounting Alternatives Subsections of this Subtopic
provide guidance for the following:
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An entity within the scope of paragraph 350-20-15-4 that elects the accounting alternative for amortizing goodwill. If elected, this accounting alternative allows an eligible entity to amortize goodwill and test that goodwill for impairment upon a triggering event.
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An entity within the scope of paragraph 350-20-15-4A that elects the accounting alternative for a goodwill impairment triggering event evaluation. If elected, this accounting alternative allows an eligible entity to evaluate goodwill impairment triggering events only as of the end of each reporting period.
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The accounting alternatives guidance can be found in the
following paragraphs:
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Scope and Scope Exceptions — paragraphs 350-20-15-4 through 15-6
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Subsequent Measurement — paragraphs 350-20-35-62 through 35-86
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Derecognition — paragraphs 350-20-40-8 through 40-9
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Other Presentation Matters — paragraphs 350-20-45-4 through 45-7
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Disclosure — paragraphs 350-20-50-3A through 50-7
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Implementation Guidance and Illustrations — paragraphs 350-20-55-26 through 55-29.
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An entity should continue to follow the applicable
requirements in Topic 350 for other accounting and reporting
matters related to goodwill that are not addressed in the
Accounting Alternatives Subsections of this Subtopic.
Two goodwill accounting alternatives are available to private companies and NFPs:
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An entity can elect a simplified goodwill accounting model, which most notably allows it to amortize goodwill (the “goodwill amortization alternative”).
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An entity can elect to evaluate goodwill impairment triggering events only as of the end of each reporting period (the “goodwill triggering event alternative”).
These alternatives are addressed in the accounting alternatives subsections of ASC
350-20. If a goodwill-related matter is not addressed in these subsections, an
entity should apply the general goodwill accounting guidance in ASC 350-20.
Section 1.2 describes the history of the
goodwill accounting alternatives in greater detail.
3.1.1 Considerations Before Adopting the Goodwill Accounting Alternatives
Before electing any of the accounting alternatives, a private entity should
consider whether it might become a PBE in the future (e.g., whether the entity
may file an IPO or may be required to have its financial statements included in
a registrant’s filing under SEC Regulation S-X, Rule 3-05). Neither the FASB nor
the SEC has provided relief or transition guidance for private companies that
have elected the private-company accounting alternatives and later become PBEs;
thus, private companies that might become PBEs should be cautious about electing
them. Private companies that do apply the accounting alternatives and later
become PBEs would need to retrospectively remove the effects of the accounting
alternatives in any financial statements filed with, or furnished to, the SEC.
The removal of such effects could become increasingly complex as more time
passes.
Therefore, private companies that may later become PBEs should consider the
potential future costs before electing any private-company alternatives.
Specifically, paragraph BC32 of ASU
2021-03 notes:
The Board acknowledges that reversing the accounting alternative would
pose a challenge if a private company adopting the alternative wished to
become a public business entity. To reverse the effects, an entity would
need to go back to the date of adoption of the accounting alternative
and evaluate (without hindsight) whether there were triggering events
during the reporting period, including interim reporting periods, that
would have resulted in a goodwill impairment and, if so, measure that
impairment. However, those burdens are likely no more significant than
would be the case for a private company that elected the alternative to
amortize goodwill that subsequently elected to go public. The Board
cautions entities that may eventually become public business entities to
consider the potential future costs before electing this or any other
alternative.