Thanks to a new FASB standard, another albatross has been lifted from the necks of private companies. You can now amortize goodwill of a private company (defined as “all entities except for public business entities and not-for-profit entities…and employee benefit plans”).
The new FASB standard (ASU 2014–02; Intangibles – Goodwill and Other) has two main points:
- You can amortize goodwill over its useful life, not to exceed ten years
- You can test for impairment at the entity level or at the reporting unit level
Amortization of Goodwill
Goodwill should be amortized on a straight-line basis over its useful life not to exceed ten years. If–at later date–you need to revise the original amortization period, do so prospectively on a straight-line basis over the remaining useful life.
If a triggering event occurs–an event or conditions that appear to impair goodwill–you should test goodwill for impairment.
Once the triggering event occurs:
Qualitative factors can be assessed to see if impairment has occurred. The qualitative factors are used to determine whether there is more than a 50% chance that goodwill is impaired. If there is (and only if), then compute fair value.
You have the option to bypass the qualitative test and perform a quantitative test for impairment.
The calculation–whether you bypass the qualitative test or not–is compared to the carrying value of goodwill. If the computed amount is less than carrying amount, then you will decrease the carrying amount to fair value–the calculated amount.
To use the alternative standard, an accounting policy election must be made to test for impairment at the entity level or the reporting unit level.
Goodwill should be shown as a separate line on the balance sheet, net of amortization.
The amortization or impairment expense should be recognized in continuing operations, unless such expenses are related to a discontinuance of operations–then recognize those expenses within discontinued operations.
Below are a few of the required disclosures (there are others not listed; see the standard for all required disclosures).
The following information shall be disclosed in the financial statements or the notes to the financial statements for each period for which a statement of financial position is presented:
- The gross carrying amounts of goodwill, accumulated amortization, and accumulated impairment loss
- The aggregate amortization expense for the period
For each goodwill impairment loss recognized, 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 entity or the reporting unit (whether based on prices of comparable businesses, a present value or other valuation technique, or a combination of those methods)
- The caption in the income statement in which the impairment loss is included
The accounting alternative, if elected, should be applied prospectively to goodwill existing as of the beginning of the period of adoption and new goodwill recognized in annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015.
Early application is permitted, including application to any period for which the entity’s annual or interim financial statements have not yet been made available for issuance.
The picture above is courtesy of istockphoto.