Chapter 3 — Goodwill Accounting Alternatives for Private Companies and NFPs

3.9 Goodwill Triggering Event Alternative

ASC 350-20

Accounting Alternative for a Goodwill Impairment Triggering Event Evaluation

35-83 The following guidance for goodwill applies to entities within the scope of paragraph 350-20-15-4A that elect the accounting alternative for a goodwill impairment triggering event evaluation.

35-84 An entity may elect to perform its goodwill impairment triggering event evaluation only as of the end of each reporting period, whether the reporting period is an interim or annual period. That is, the entity would not evaluate goodwill impairment triggering events and measure any related impairment during the reporting period. An entity electing the accounting alternative shall assess whether events or circumstances have occurred that would require an entity to test goodwill for impairment as follows:

For an entity that has elected the accounting alternative for amortizing goodwill, the entity’s evaluation of a triggering event, as described in paragraph 350-20-35-66, shall be performed only as of each reporting date.
For an entity that has not elected the accounting alternative for amortizing goodwill:
1. If the entity performs its annual goodwill impairment test as of the end of the reporting period, the entity shall not evaluate its goodwill for impairment during the reporting period as described in paragraph 350-20-35-30.
2. If the entity performs its annual goodwill impairment test on a date other than the end of the reporting period (in accordance with paragraph 350-20-35-28), the entity’s evaluation of impairment between annual goodwill impairment tests (as described in paragraph 350-20-35-30) shall be performed only as of the end of a reporting period.

35-85 An entity electing this accounting alternative shall apply it only to goodwill evaluated in accordance with this Subtopic. This accounting alternative does not change the following:

The requirement to assess other assets for impairment (for example, long-lived assets and indefinite-lived intangibles) under existing guidance. If the impairment test related to other assets would have resulted in a goodwill impairment triggering event, an entity electing this accounting alternative should consider the results of an impairment test related to other assets in connection with its goodwill impairment test only as of its annual goodwill impairment testing date and the reporting date, whether that date is an interim or annual reporting date, as applicable.
The requirements to test the remaining goodwill for impairment if only a portion of goodwill is allocated to a business or nonprofit activity to be disposed of in accordance with paragraph 350-20-40-7.

35-86 An entity shall not apply this guidance retroactively to interim periods for which annual financial statements have already been issued.

ASC 350-20-35-84 gives private companies and NFPs the option of only assessing 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, such entities would only need to perform the goodwill impairment triggering event evaluation as of the end of an interim or annual reporting period, as applicable.

Entities that elect the goodwill impairment triggering event alternative are not required to adopt, or precluded from adopting, the alternative for amortizing goodwill (and vice versa). As a result, if an entity has not elected to amortize goodwill and performs its annual goodwill impairment test on a date other than the end of the reporting period, the entity must still monitor goodwill for impairment-triggering events as of each reporting date between annual tests to determine whether it must perform an additional goodwill impairment test.

Connecting the Dots

The goodwill triggering event alternative applies only to monitoring goodwill for impairment triggering events; it does not change existing requirements for private companies and NFPs to monitor other assets (e.g., long-lived assets and indefinite-lived intangible assets) for triggering events, and perform any required impairment tests, during the reporting period.

The goodwill triggering event alternative became effective for private companies and NFPs for fiscal years beginning after December 15, 2019, with early adoption permitted for interim and annual financial statements that had not yet been issued or made available for issuance as of March 30, 2021.

Entities must apply the goodwill triggering event alternative prospectively. Further, they have an unconditional one-time option of adopting this alternative prospectively after the ASU’s effective date without assessing preferability under ASC 250. However, any subsequent change in accounting policy after the initial election of the alternative will necessitate a preferability assessment.

3.9.1 Interim Financial Reporting and Reporting Date

Under ASC 350-20-35-84, “[a]n entity may elect to perform its goodwill impairment triggering event evaluation only as of the end of each reporting period, whether the reporting period is an interim or annual period.” ASC 350-20 does not define the term “reporting period.” It also does not clarify what amount of interim financial information would require an entity to assess for goodwill triggering events on an interim basis. Paragraphs BC28 and BC29 of ASU 2021-03 discuss this issue:

The Board acknowledges that many entities provide users of their financial statements (for example, lenders, regulators, and investors) with some level of financial information more frequently than annually that indicates that it complies with the recognition and measurement principles of GAAP. . . .

The Board decided not to further define what constitutes GAAP-compliant financial information. The Board concluded that entities should already be applying the provisions of Subtopic 350-20 anytime they report in compliance with GAAP; therefore, the amendments in this Update merely shift the timing of when to perform the goodwill impairment triggering event evaluation to the end of the reporting period. Therefore, guidance on when to apply the accounting alternative, or the range of financial information that constitutes GAAP-compliant financial information, is not within the scope of this Update. However, the Board does not expect the provisions of this Update to change an entity’s understanding of when it reports financial information.

As indicated above, the Board declined to provide further guidance. As a result, it can be challenging to determine whether an entity that elects the goodwill triggering event alternative must assess for triggering events on an interim basis.

Some entities prepare interim financial statements in accordance with GAAP, including relevant footnote disclosures in accordance with ASC 270-10. We believe that in that case, the entity would be required to assess goodwill impairment triggering events as of each interim reporting date.

However, other entities prepare only limited financial information on an interim basis (e.g., providing a balance sheet and income statement to a lender that supports quarterly debt covenant calculations). In evaluating what constitutes a reporting period and GAAP-compliant financial information, entities should consider all financial information reported to external users (e.g., lenders, regulators, investors, and other third parties), including whether such information is purported to be presented in accordance with U.S. GAAP. If it is, the entity may be considered to be reporting on an interim basis, in which case goodwill impairment triggers would need to be assessed as of the end of each quarter.

3.9.2 Example Illustrating the Goodwill Triggering Event Alternative

The example below, reproduced from ASC 350-20-55-27 through 55-29, illustrates application of the goodwill triggering event alternative.

ASC 350-20

Example 1: Illustration of the Accounting Alternative for a Goodwill Impairment Triggering Event Evaluation

55-27 This Example illustrates the effect of the accounting alternative for a goodwill impairment triggering event evaluation on the impairment conclusion for an entity within the scope of paragraph 350-20-15-4A. This Example is not indicative of every outcome that may occur because facts and circumstances surrounding triggering events are unique to each entity.

55-28 Entity A adopted the accounting alternative for a goodwill impairment triggering event evaluation and performs a goodwill impairment triggering event evaluation only as of the end of each reporting period. Entity A also adopted the accounting alternative for amortizing goodwill in accordance with paragraph 350-20-05-5 and elected to perform an impairment test for goodwill at the entity level upon the occurrence of a triggering event only. During the second quarter, Entity A lost a significant customer. However, Entity A was able to replace that customer late in the third quarter of the same year, and the entity’s operations returned to previously forecasted levels by the annual reporting date.

55-29 If Entity A reports only annually, then it would evaluate the facts and circumstances as of the annual reporting date and may conclude that no triggering event exists; therefore, no further goodwill impairment testing would be necessary. Alternatively, if Entity A reports on both a quarterly basis and an annual basis, then it would evaluate the facts and circumstances as of the end of each quarter and may conclude that the loss of the significant customer represents a goodwill impairment triggering event requiring additional impairment testing as of the end of the second quarter.

Confidential and Proprietary — for Use Solely by Authorized Personnel

This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.