Accounting for Goodwill

In recent years accounting rules have become more complex and complying with those rules has become more costly, especially to small business owners.  The Financial Accounting Standards Board (FASB), the organization that sets the accounting standards, established a Private Company Council (PCC) to evaluate the existing accounting rules and determine how nonpublic companies can be provided relief.

In 2013, FASB’s PCC proposed a series of changes to simplify the existing accounting rules and reduce the cost of complying with them.  In January 2014, FASB issued the first of these simplified standards in ASU 2014-02 Intangibles—Goodwill and Other (Topic 350): Accounting for Goodwill, a consensus of the Private Company Council making it part of generally accepted accounting principles (GAAP).

ASU 2014-02 was written to provide relief to nonpublic companies that have historically complied with GAAP by recording goodwill on their balance sheets as part of business combinations.  Under the revised rules, non-public companies can opt out of the current requirement to value that goodwill annually.

The new standard allows an election to adopt an alternative accounting method and amortize goodwill over ten years, or a lesser period in certain circumstances.  In subsequent periods after adoption, a company making this election is required to assess whether any triggering events have occurred which result in a greater than 50% likely hood that their goodwill was impaired.  If a triggering event indicates impairment, then a valuation is required to determine if impairment exists.  Triggering events are prescribed indicators that could significantly impact the value of a business.  For example, a large drop in the demand for a company’s product would suggest the value of that company could be impaired.  If no triggering events suggest impairment, no subsequent valuations are required.

Adopting this election can save nonpublic companies thousands of dollars by eliminating the cost of obtaining annual goodwill valuations.  It also provides a way to remove recognized goodwill from a company’s accounting records and de-clutter its balance sheet.

Companies that have not historically complied with the accounting requirements related to goodwill can also find some relief in the new standard.  Because the standard provides a fixed period of time to amortize goodwill, after that period the goodwill is gone and their financial statement will no longer contain a departure from GAAP related to it.

[authorblurb name=”Eric Maneval” image=”8858″ url=”/about/leadership-team/eric-b-maneval/” text=”is an Accounting and Assurance Senior Manager at BeachFleischman PC. He has planned and managed numerous audits and reviews of health care, not-for-profit, and manufacturing organizations.”]