FASB Provides Private Companies and Not-for-Profit Entities With an Accounting Alternative for Evaluating Goodwill Impairment Triggering Events
Background
In March 2021, the FASB issued ASU 2021-03,1 which allows private companies and not-for-profit entities (NFPs) to use
an accounting alternative for performing the goodwill impairment triggering
event evaluation (the “goodwill impairment triggering event alternative”).
Specifically, the ASU gives a private company or NFP the option to perform the
goodwill impairment triggering event evaluation required by ASC 350-20,2 as well as any resulting goodwill impairment test, as of the end of the
entity’s interim or annual reporting period, as applicable.
The current guidance in ASC 350-20 requires an entity to monitor
goodwill for triggering events during the reporting period. If it is more likely
than not that goodwill is impaired, the entity must then test goodwill for
impairment. ASU 2021-03 is intended to address stakeholders’ concerns related to
the costs and complexity of monitoring goodwill for triggering events, and
possibly performing goodwill impairment tests, during the reporting period
rather than at the end of that period. The option provided by the ASU 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.
Key Provisions of the ASU
ASU 2021-03 provides 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 have elected the alternative for amortizing goodwill and elect the
goodwill impairment triggering event alternative would only evaluate goodwill
for impairment as of each reporting date. However, entities that elect the
goodwill impairment triggering event alternative are not required to, or
precluded from, adopting the alternative for amortizing goodwill (and vice
versa). As a result, if an entity has not elected the alternative for amortizing
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.
The ASU provides the following example to illustrate the application of the
goodwill impairment 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.
In addition, the ASU requires no incremental disclosures beyond the existing
requirements in ASC 350-20 and ASC 235, the latter of which requires an entity
to disclose its significant accounting policies.
Entities That May Become Public Business Entities
When a private entity becomes a public business entity (PBE), the entity is
required to reverse the effect of any private-company accounting alternatives in
its historical financial statements. Therefore, private companies that may later
become PBEs should consider the potential future costs before electing the
goodwill impairment triggering event alternative in ASU 2021-03 or any other
private-company accounting alternative, as noted in paragraph BC32 of the ASU:
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.
Effective Date and Transition
ASU 2021-03 is effective for private companies and NFPs for fiscal years
beginning after December 15, 2019. Entities may early adopt the ASU’s provisions
for interim and annual financial statements that have not yet been issued or
made available for issuance as of March 30, 2021. Entities may not retroactively
adopt the ASU’s amendments for interim financial statements that have already
been issued.
Entities must apply the ASU’s provisions prospectively. Further, they have an
unconditional one-time option to adopt the goodwill impairment triggering event
alternative prospectively after the ASU’s effective date without assessing
preferability under ASC 250.
Footnotes
1
FASB Accounting Standards Update (ASU) No. 2021-03, Accounting
Alternative for Evaluating Triggering Events.
2
For titles of FASB Accounting Standards Codification (ASC)
references, see Deloitte’s “Titles of Topics and Subtopics in the FASB Accounting Standards
Codification.”