On the Radar
Goodwill
ASC 350-20 addresses the accounting for goodwill after its initial recognition. While
entities have been required to test goodwill for impairment for many years, the
current goodwill accounting model has evolved significantly from the model that the
FASB originally introduced in 2001. The FASB has issued numerous Accounting
Standards Updates (ASUs) on this topic, which were generally intended to simplify or
reduce the cost and complexity of performing goodwill impairment testing. As a
result of those updates, ASC 350-20 now provides two accounting models used in the
subsequent accounting for goodwill; the “general goodwill” model and the “goodwill
accounting alternatives.” The table below outlines the significant differences
between the two accounting models.
Accounting for Goodwill Under ASC 350-20
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Significant Differences
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General Goodwill Model
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Goodwill Accounting Alternatives
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Scope
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Required for public business entities (PBEs) and may be
applied by private companies and not-for-profit entities
(NFPs)
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Accounting policy elections available to private companies
and NFPs
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Amortization
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Goodwill is not amortized
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Goodwill is amortized over a useful life of 10 years or
less
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Impairment testing
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Goodwill is tested for impairment annually, or between annual
tests if an impairment indicator exists (i.e., a triggering
event)
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Goodwill is tested for impairment only when an impairment
indicator exists
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Unit of account
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Goodwill is tested for impairment at the reporting unit
level
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An entity elects to test goodwill at either the entity level
or the reporting unit level
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Monitoring for triggering events
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An entity must monitor for goodwill triggering events
throughout the reporting period
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An entity may elect to only assess goodwill for triggering
events at the end of each interim or annual reporting
period
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Considerations Related to Applying the General Goodwill Model
The sections below describe some issues entities should consider as they account
for goodwill under the general goodwill model.
Changing Lanes
ASU 2017-04, which was
issued in 2017, simplified the accounting for goodwill by eliminating
the requirement for entities to calculate the implied fair value of
goodwill whenever the carrying amount of a reporting unit exceeded its
fair value (i.e., step 2 of the goodwill impairment test). The
amendments made by ASU 2017-04 are now effective for all entities.
Selection of an Annual Testing Date
The goodwill in each reporting unit must be tested for
impairment at least annually. An entity may select any date throughout the
year on which to perform its annual impairment test as long as this
selection is applied consistently each year. An entity can elect different
annual testing dates for different reporting units. However, we observe that
entities often select the same date for all of their reporting units.
When selecting an annual assessment date, entities should be
mindful of quarterly reporting requirements and filing deadlines to ensure
that they have enough time to complete the testing before the financial
statements are issued. For this reason, entities often avoid choosing the
end of an annual or quarterly reporting period. Public companies often
select the first day of their fourth quarter as their annual testing date
since (1) they will have the carrying amounts from the last day of the prior
quarter available, (2) they have the entire quarter to perform the necessary
valuation work, and (3) this timing is often aligned with the timing of the
preparation of their budgets and forecasts for the next year. Another common
date is the first day of the second month of the fourth quarter (i.e.,
November 1 for calendar-year-end companies) since that date may be even
better aligned with preparation of budgets and forecasts and yet still give
the entity enough time to complete testing before the financial statements
are issued.
Changing the Date of the Annual Goodwill Impairment Test
An entity is permitted to change the date of its annual goodwill impairment
test. An entity that wants to change its goodwill impairment testing date
must (1) account for the change as a change in accounting principle under
ASC 250-10, (2) determine that the change is preferable, (3) ensure that no
more than 12 months elapse between the tests, and (4) ensure that the change
is not made with the intent of delaying or accelerating a goodwill
impairment charge.
Typically, we observe that entities often apply a change in goodwill testing
date prospectively rather than retrospectively because either (1) they
determine that retrospective application would be impracticable on the basis
of the guidance in ASC 250-10 or (2) the change does not have a material
effect on the financial statements given the existing requirements in ASC
350-20 to assess goodwill for impairment between annual tests upon the
occurrence of a triggering event.
An SEC registrant that voluntarily changes an accounting principle is
generally required to include a preferability letter issued by its
independent registered public accounting firm as Exhibit 18 to its first
periodic report filed after the accounting change. However, in the case of a
change in the goodwill assessment date, an SEC registrant is only required
to obtain and file a preferability letter with the Commission when the
registrant determines that a reported change in the date of the annual
impairment test is material. However, even if a registrant determines that
it is unnecessary to obtain and file a preferability letter related to a
change in the annual impairment testing date because the change is
immaterial, the staff would still expect the registrant to prominently
disclose the change within the applicable filing (e.g., Form 10-K, Form
10-Q).
Market Capitalization Reconciliation
While not required to do so by ASC 350-20, a publicly traded
entity often compares its market capitalization with the aggregate of the
fair values of all of its reporting units when testing goodwill for
impairment, because such a comparison can yield useful information about the
reasonableness of the fair value measurements. Entities must use judgment
when reviewing the comparison for factors that may indicate appropriate
differences between the market capitalization and the aggregate sum of the
fair value of the reporting units.
The SEC staff frequently refers to an entity’s market capitalization when
commenting on the entity’s testing of goodwill for impairment. When an
entity’s book value is greater than its market capitalization, questions may
be raised about whether goodwill should be tested for impairment or, if
goodwill was tested, whether goodwill at one or more reporting units is
impaired. Entities should be able to explain how having a greater book value
than market capitalization affected their judgments regarding the testing of
goodwill for impairment.
Early-Warning Disclosures
In addition to the requirements in ASC 275-10-50 to disclose certain risks in
the financial statements, SEC Regulation S-K, Item 303(b)(2), requires
registrants to discuss in MD&A a known uncertainty — specifically, to
disclose the potential for a material impairment charge — in light of
potential impairment triggers (i.e., whether the registrant should have
provided early-warning disclosures about the possibility of an impairment
charge in future periods to help financial statement users understand these
risks and how they could potentially affect the financial statements). The
SEC staff expects a registrant that has recorded, or is at risk for
recording, an impairment charge to disclose the following:
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The adequacy and frequency of the registrant’s goodwill impairment tests, including the date of its most recent test.
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The factors or indicators (or both) used by management to evaluate whether the carrying value of other long-lived assets may not be recoverable.
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The methods and assumptions used in goodwill impairment tests, including how assumptions compare with recent operating performance, the amount of uncertainty associated with the assumptions, and the sensitivity of the estimate of the fair value of the assets to changes in the assumptions.
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The timing of the impairment, especially if events that could result in an impairment had occurred in periods before the registrant recorded the impairment.
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The types of events that could result in impairments.
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In the critical accounting estimates section of MD&A, the registrant’s process for assessing impairments.
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The facts and circumstances that led to the impairments. A registrant should also consider disclosing in MD&A risks and uncertainties associated with the recoverability of assets in the periods before an impairment charge is recorded. For example, even if an impairment charge is not required, a reassessment of the useful life over which depreciation or amortization is being recognized may be appropriate.
In addition, the staff may use hindsight, after an impairment or charge is
reported (e.g., a material goodwill impairment charge), to inquire why the
registrant did not include any early-warning disclosures in prior periods
leading up to the reporting of such impairment. Such disclosures alert
investors to the underlying conditions and risks that the company faces
before a material charge or decline in performance is reported.
Considerations Before Adoption of the Goodwill Accounting Alternatives
While the FASB provided private companies and NFPs with the option of adopting a
simplified goodwill accounting model, 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.
Deloitte’s Roadmap Goodwill provides Deloitte’s
insights into and interpretations of the guidance in ASC
350-20.
Contacts
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Matt Himmelman
Audit & Assurance
Partner
Deloitte & Touche LLP
+1 714 436 7277
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If you are interested in Deloitte’s goodwill
accounting service offerings, please contact:
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Jamie Davis
Audit & Assurance
Partner
Deloitte & Touche LLP
+1 312 486 0303
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