5.2 Presentation and Disclosure Requirements for Entities That Apply the General Goodwill Accounting Model
Sections 5.2.1
through 5.2.10 address the presentation and disclosure requirements
for entities that apply the general goodwill accounting model (i.e., those that have
not adopted the goodwill accounting alternatives available to private companies and
NFPs).
5.2.1 Balance Sheet Presentation
ASC 350-20
45-1 The
aggregate amount of goodwill shall be presented as a
separate line item in the statement of financial
position.
Under ASC 350-20-45-1, goodwill should be presented separately from other intangible assets on the balance sheet and net of any impairment losses. Paragraph B176 of the Background Information and Basis for Conclusions of FASB Statement 142 describes the Board’s rationale for this requirement as
follows:
[G]oodwill is unique among assets and that different users of
financial statements may assess it differently in their analyses. The Board
therefore concluded that goodwill differed sufficiently from other assets
and other intangible assets to justify being displayed separately in the
statement of financial position.
5.2.2 Income Statement Presentation
ASC 350-20
45-2 The
aggregate amount of goodwill impairment losses shall be
presented as a separate line item in the income statement
before the subtotal income from continuing operations (or
similar caption) unless a goodwill impairment loss is
associated with a discontinued operation.
45-3 A goodwill
impairment loss associated with a discontinued operation
shall be included (on a net-of-tax basis) within the results
of discontinued operations. For guidance on reporting
discontinued operations, see Subtopic 205-20.
ASC 350-20-45-2 requires that entities present the “aggregate amount
of goodwill impairment losses . . . as a separate line item in the income statement
before the subtotal income from continuing operations (or similar caption) unless a
goodwill impairment loss is associated with a discontinued operation.” The
presentation of goodwill impairment losses on a pretax basis as a component of
continuing operations, as described in ASC 350-20-45-2, was intended to be
consistent with the presentation of impairment charges for other intangible assets.
In addition, as discussed in Section 5.4, public entities must disclose certain information
individually about each goodwill impairment loss recognized.
By contrast, ASC 350-20-45-3 indicates that, if the goodwill impairment loss is
related to a discontinued operation, the loss must “be included (on a net-of-tax
basis) within the results of discontinued operations.” For more information, see ASC
205-20 and Deloitte’s Roadmap Impairments and
Disposals of Long-Lived Assets and Discontinued
Operations.
5.2.3 Disclosure of a Goodwill Rollforward
ASC 350-20
50-1 The
changes in the carrying amount of goodwill during the period
shall be disclosed, showing separately (see Example 3
[paragraph 350-20-55-24]):
- The gross amount and accumulated impairment losses at the beginning of the period
- Additional goodwill recognized during the period, except goodwill included in a disposal group that, on acquisition, meets the criteria to be classified as held for sale in accordance with paragraph 360-10-45-9
- Adjustments resulting from the subsequent recognition of deferred tax assets during the period in accordance with paragraphs 805-740-25-2 through 25-4 and 805-740-45-2
- Goodwill included in a disposal group classified as held for sale in accordance with paragraph 360-10-45-9 and goodwill derecognized during the period without having previously been reported in a disposal group classified as held for sale
- Impairment losses recognized during the period in accordance with this Subtopic
- Net exchange differences arising during the period in accordance with Topic 830
- Any other changes in the carrying amounts during the period
- The gross amount and accumulated impairment losses at the end of the period.
Entities that report segment information in accordance with
Topic 280 shall provide the above information about goodwill
in total and for each reportable segment and shall disclose
any significant changes in the allocation of goodwill by
reportable segment. If any portion of goodwill has not yet
been allocated to a reporting unit at the date the financial
statements are issued, that unallocated amount and the
reasons for not allocating that amount shall be
disclosed.
ASC 350-20-50-1 requires that entities disclose a rollforward, in total and by
reportable segment (if the entity discloses segment information under ASC 280), of
the carrying amount of goodwill at the beginning of the reporting period to the
carrying amount at the end of the reporting period. An entity that constitutes a
single reportable segment should provide this rollforward for the entity as a whole.
Further, ASC 350-20-50-1 states that “if any portion of goodwill has not yet been
allocated to a reporting unit at the date the financial statements are issued, that
unallocated amount and the reasons for not allocating that amount shall be
disclosed.”
While all entities must disclose the information in ASC 350-20-50-1, an entity is not
required to include goodwill in its measure of segment assets in accordance with ASC
280 unless goodwill amounts are included in the segment assets reviewed by the CODM
or the CODM receives such information. See Section
2.7.4 of this Roadmap as well as Deloitte’s Roadmap Segment Reporting for more information.
SEC Considerations
Although the disclosures in ASC 350-20-50 are required for “each period for which a statement of financial position is presented,” the pre-amended disclosure requirement of paragraph 45 of FASB Statement 142
(codified in ASC 350-20-50-1) was previously discussed at the June 2003 AICPA
SEC Regulations Committee joint meeting with the SEC staff. The staff noted
that it generally did not expect registrants to include such disclosures in
their interim financial statements because it believes that “such financial
statements are condensed rather than full financial statements.”
Accordingly, we believe that entities would only be required to include the
disclosures in ASC 350-20-50-1 in their annual financial statements.
5.2.4 Disclosures for Entities That Have One or More Reporting Units With a Zero or Negative Carrying Amount
ASC 350-20
50-1A Entities that have one or
more reporting units with zero or negative carrying amounts
of net assets shall disclose those reporting units with
allocated goodwill and the amount of goodwill allocated to
each and in which reportable segment the reporting unit is
included.
As discussed in Section 2.2, the amount of goodwill impairment loss is calculated as
the excess of a reporting unit’s carrying amount over its fair value. As a result, a
reporting unit with a zero or negative carrying amount would generally not recognize
an impairment loss, since the fair value of a reporting unit would not be expected
to be less than zero. Therefore, under ASC 350-20-50-1A, “[e]ntities that have one
or more reporting units with zero or negative carrying amounts of net assets shall
disclose those reporting units with allocated goodwill and the amount of goodwill
allocated to each and in which reportable segment the reporting unit is included.”
Paragraph BC45 of ASU 2017-04 explains that “this disclosure should provide useful
information to users of financial statements because these reporting units may not
record an impairment charge under the one-step impairment test.” Paragraph BC46 goes
on to say that “[t]he Board decided that the disclosure of the existence of these
reporting units would be sufficient to alert users of potential goodwill
issues.”
5.2.5 Disclosures About Goodwill Impairment Losses
ASC 350-20
50-2 For each goodwill impairment
loss recognized, all of the following information shall be
disclosed in the notes to the financial statements that
include the period in which the impairment loss is
recognized:
- A description of the facts and circumstances leading to the impairment
- The amount of the impairment loss and the method of determining the fair value of the associated reporting unit (whether based on quoted market prices, prices of comparable businesses or nonprofit activities, a present value or other valuation technique, or a combination thereof)
- Subparagraph superseded by Accounting Standards Update No. 2017-04.
Under ASC 350-20-50-2, entities must disclose, for each goodwill
impairment loss recognized, a “description of the facts and circumstances leading to
the impairment” and the “amount of the impairment loss and the method of determining
the fair value of the associated reporting unit.” The information about goodwill
impairment losses should continue to be disclosed in the footnotes until the
impairment loss is no longer presented in the income statement. For example, if an
entity presents two years of balance sheets and three years of income statements and
statements of cash flows, the entity’s disclosures about goodwill impairment losses
must remain in the notes to the financial statements for three years.
5.2.6 Disclosures About Fair Value Measurements
ASC 350-20
50-3 The quantitative disclosures
about significant unobservable inputs used in fair value
measurements categorized within Level 3 of the fair value
hierarchy required by paragraph 820-10-50-2(bbb) are not
required for fair value measurements related to the
financial accounting and reporting for goodwill after its
initial recognition in a business combination.
As discussed in Section 2.4.1, the fair value of a reporting
unit is determined in accordance with ASC 820. Accordingly, an entity must provide
the disclosures required by ASC 820-10-50 about its fair value measurements. The
level of disclosure required by ASC 820-10-50 varies, however, depending on whether
the fair value measurement is considered recurring or nonrecurring. ASC
820-10-50-2(a) defines recurring and nonrecurring as
follows:
Recurring fair value measurements of assets or liabilities are those
that other [Codification topics] require or permit in the statement of financial
position at the end of each reporting period. Nonrecurring fair value
measurements of assets or liabilities are those that other [Codification topics]
require or permit in the statement of financial position in particular
circumstances (for example, when a reporting entity measures a long-lived asset
or disposal group classified as held for sale at fair value less costs to sell
in accordance with Topic 360 because the asset’s fair value less costs to sell
is lower than its carrying amount). For nonrecurring measurements estimated at a
date during the reporting period other than the end of the reporting period, a
reporting entity shall clearly indicate that the fair value information
presented is not as of the period’s end as well as the date or period that the
measurement was taken.
In other words, assets and liabilities measured at fair value on a recurring basis
are those that are remeasured at fair value, after initial recognition, in each
financial reporting period. Assets and liabilities measured at fair value on a
nonrecurring basis are those that, because of a specific event or circumstance, must
be remeasured after initial recognition at fair value in accordance with other
Codification topics. As a result, goodwill impairment fair value measurements are
generally considered nonrecurring. This distinction is important because the
disclosure requirements in ASC 820-10-50 for nonrecurring fair value measurements
are less extensive than those for recurring fair value measurements.
In addition to the disclosure requirements of ASC 820-10-50, entities should note the
following goodwillrelated fair value disclosure provisions in ASC 350:
- The incremental requirement in ASC 350-20-50-2(b), under which an entity must disclose “the method of determining the fair value of the associated reporting unit (whether based on quoted market prices, prices of comparable businesses or nonprofit activities, a present value or other valuation technique, or a combination thereof).”
- The fair value disclosure exception in ASC 350-20-50-3, which states that the “quantitative disclosures about significant unobservable inputs used in fair value measurements categorized within Level 3 of the fair value hierarchy required by paragraph 820-10-50-2(bbb) are not required for fair value measurements related to the financial accounting and reporting for goodwill after its initial recognition in a business combination.”
See Deloitte’s Roadmap Fair Value Measurements and
Disclosures (Including the Fair Value Option) for more
information about fair value disclosure requirements.
5.2.7 Disclosure of Risks and Uncertainties Under ASC 275
ASC 275-10-50 requires disclosure of certain risks and
uncertainties. For example, ASC 275-10-50-1 requires disclosures about the “[u]se of
estimates in the preparation of financial statements” and “[c]ertain significant
estimates.” Similarly, under ASC 275-10-50-8, an entity must disclose an estimate
when “[i]t is at least reasonably possible that the estimate of the effect on the
financial statements of a condition, situation, or set of circumstances that existed
at the date of the financial statements will change in the near term due to one or
more future confirming events” and the “effect of the change would be material to
the financial statements.” Therefore, even if an impairment loss was not recognized
in the reporting period, disclosures may be required if it is reasonably possible
that one or more reporting units might experience an impairment loss in the future
(e.g., the fair value of a reporting unit was only marginally higher than its
carrying amount as of the date of the last quantitative impairment test, and it is
at least reasonably possible that its fair value may continue to decline so a
material impairment may be recognized in a future period).
5.2.8 Disclosure of a Change in Annual Goodwill Impairment Testing Date
A change in the date of a reporting unit’s annual goodwill impairment test represents
a change in accounting principle (see Section 2.5.4).
Therefore, if an entity changes the testing date of one or more of its reporting
units, it must provide the disclosures required by ASC 250-10-50, including the
nature of and reason for the change in accounting principle as well as an
explanation of why the new testing date is preferable.
SEC Considerations
As discussed in Section 2.5.4, even if a registrant
determines that it is unnecessary to obtain and file a preferability letter
related to a change in the annual impairment test date because the change is
immaterial, the SEC staff would still expect the registrant to prominently
disclose the change.
5.2.9 Disclosures in Interim Financial Statements
We believe that a material goodwill impairment loss should be disclosed in interim
periods in accordance with ASC 270-10-45-11A, which states, in part, that “events
that are material with respect to the operating results of the interim period shall
be reported separately.”
ASC 270-10-45-2 states, in part, that, “[i]n general, the results for each interim
period shall be based on the accounting principles and practices used by an entity
in the preparation of its latest annual financial statements unless a change in an
accounting practice or policy has been adopted in the current year.” Thus, an entity
is not required to disclose its accounting policies in interim financial statements
unless a change occurs.
See Section
5.2.3 for more information about disclosing the goodwill rollforward
in interim periods.
5.2.10 Example of Required Goodwill Disclosures
The example below, which is reproduced from ASC 350-20-55-24, illustrates application
of the required goodwill disclosures.
ASC 350-20
Example 3: Illustration of Disclosures
55-24 In
accordance with paragraphs 350-20-50-1 through 50-2, the
following disclosures would be made by Theta Entity in its
December 31, 20X3 financial statements relating to
goodwill.
Theta Entity has three reporting units
with goodwill — Software, Electronics, and Communications —
and two reportable segments — Technology and Communications.
The Electronics reporting unit has a negative carrying
amount.
Note C: Goodwill
The changes in the carrying amount of
goodwill for the year ended December 31, 20X3, are as
follows.
The Communications segment is tested for
impairment in the third quarter, after the annual
forecasting process. Due to an increase in competition in
the Texas and Louisiana cable industry, operating profits
and cash flows were lower than expected in the fourth
quarter of 20X2 and the first and second quarters of 20X3.
Based on that trend, the earnings forecast for the next five
years was revised. In September 20X3, a goodwill impairment
loss of $46 was recognized in the Communications reporting
unit. The fair value of that reporting unit was estimated
using the expected present value of future cash flows.
The Electronics reporting unit to which
$498 of goodwill is allocated had a negative carrying amount
on December 31, 20X3, and 20X2. This reporting unit is part
of the Technology segment.