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In January 2014, the FASB released Accounting Standard Update 2014-02 Intangibles – Goodwill and Other (Topic 350): Accounting for Goodwill (ASU 2014-02). ASU 2014-02 is the first standard issued by the Financial Accounting Standards Board (FASB) upon endorsement of a consensus of the Private Company Council (PCC) that is specifically designed to meet the needs of private companies by providing an alternative within US GAAP.

The Issue

Current accounting standards for goodwill are seen as complex because they require regular impairment testing and do not permit amortization of goodwill.

Impairment testing must be performed at least annually or more frequently if certain conditions exist, and companies have limited flexibility in how the tests are performed. They can: (a) perform a qualitative assessment (often known as step zero) to determine if it is more likely than not that a reporting unit’s fair value is less than its carrying value, or (b) go straight to step one of a quantitative two-step impairment test. In step one, the carrying value of the reporting unit is compared with its fair value. If the carrying amount exceeds the fair value, step two must be performed. In step two, the amount of the goodwill impairment is determined by comparing the carrying value of the goodwill with its implied value. When performed at the

January 2014

FASB Releases Simplification for the Accounting for Goodwill for Private Companies

reporting unit level, the implied fair value is based on a hypothetical application of the acquisition method that is performed after measuring the fair value of the identifiable assets and liabilities.

Critics of the current accounting standards say the standards provide limited benefits to users of private company financial statements, and they are costly to apply because they require subjective judgments and measurements that often require the hiring of third-party experts, such as valuation specialists.

The Alternative

ASU 2014-02 permits a private company to elect to amortize goodwill and requires impairment testing only upon occurrence of a triggering event. Highlights of the alternative accounting treatment are as follows:

• A company that elects the accounting alternative should amortize goodwill on a straight-line basis over a period of ten years or a shorter period if the company can demonstrate that another useful life is more appropriate. In a change from the original proposal, private companies are permitted to use a ten-year period as a default without assessing whether or not a different useful life is more appropriate.

• Goodwill should still be tested for impairment, but only when a triggering event occurs. When a triggering event occurs, private companies will continue to have the option to perform a step zero qualitative test. If a quantitative test is required, a one-step impairment test is performed by calculating the difference between the carrying amount of the entity or reporting unit and its fair

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The information in this MHM Messenger is a brief summary and may not include all the details relevant to your situation. Please contact your MHM auditor to further discuss the impact on your audit or audit report.

value. Step two of the impairment test is not performed.

A company would need to make a policy election at the time it elects the alternative treatment to perform the impairment testing at either the company-wide level or the reporting-unit level. The goodwill impairment amount would represent the excess of the company’s or unit’s carrying amount over its fair value.

ASU 2014-02 is effective for annual periods beginning after December 15, 2014 and for interim periods within annual periods beginning after December 15, 2015. Early adoption is permitted for any period for which the company’s annual financial statements have not yet been made available for issuance. Private companies that elect this alternative must apply the alternative on a prospective basis and begin amortizing existing goodwill as of the beginning of the period of adoption.

The current accounting standards continue to apply to public business entities, employee benefit plans and not-for-profit entities.

What should companies do now?

While each company’s situation is unique, here are some general steps that companies may find helpful now:

• Private companies should consider whether they qualify for the alternative approach and, if so, whether and when they wish to adopt the accounting alternative in their financial statements. If considering applying the alternative in your company’s 2013 financial statements, you may wish to consult with your accounting firm sooner rather than later.

• All companies that use private company financial statements should understand the key provisions for any new alternative accounting treatments,

so they can analyze the financial statements effectively. This includes lenders, suppliers to private companies, and public companies that may need to include private company financial information in their SEC filings - either now (if they have already invested in a private company) or in the near future (if they are considering acquiring a private company).

What to watch for in 2014

Looking beyond ASU 2014-02, the FASB has added a project to its agenda on the accounting for goodwill for public business entities and not-for-profit entities.

In addition to the PCC’s alternative, the FASB has asked the staff to conduct research on several other alternatives, including: (a) amortization of goodwill over its useful life not to exceed a maximum number of years, (b) direct write-off of goodwill, and (c) a simplified impairment test.

If the FASB agrees on a different approach for other entities, it may reconsider the method described in ASU 2014-02, and the ASU cautions companies electing this alternative that they may be subject to future changes in the way they account for goodwill.

For more information

MHM’s Professional Standards Group will continue to monitor progress on private company standard-setting, and we are prepared to help our private company clients with any implementation issues that may arise. If you have any specific questions, comments or concerns, please share them with Ernie Baugh or James Comito of MHM’s Professional Standards Group or your MHM service professional. You can reach Ernie at ebaugh@mhm-pc.com or 423.870.0511 and James at jcomito@cbiz.com or 858.795.2029.