What to know about goodwill accounting under ASC 350-20 has been saved
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What to know about goodwill accounting under ASC 350-20
On the Radar: Accounting for goodwill
In efforts to reduce the cost and complexity of goodwill impairment testing, the accounting models for goodwill have changed significantly from the model that the Financial Accounting Standards Board (FASB) first introduced in 2001. This Roadmap provides insights into—and interpretations of—the two current goodwill accounting models as outlined under the guidance of ASC 350-20.
How goodwill accounting has evolved
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.
On the Radar: Accounting for goodwill
Accounting for Goodwill Under ASC 350-20
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General Goodwill Model
- Scope – Required for public business entities (PBEs) and may be applied by private companies and not-for-profit entities (NFPs)
- Amortization – Goodwill is not amortized
- Impairment testing – Goodwill is tested for impairment annually, or between annual tests if an impairment indicator exists (i.e., a triggering event)
- Unit of account – Goodwill is tested for impairment at the reporting unit level
- Monitoring for triggering events – An entity must monitor for goodwill triggering events throughout the reporting period
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Goodwill Accounting Alternatives
- Scope – Accounting policy elections available to private companies and NFPs
- Amortization – Goodwill is amortized over a useful life of 10 years or less
- Impairment testing – Goodwill is tested for impairment only when an impairment indicator exists
- Unit of account – An entity elects to test goodwill at either the entity level or the reporting unit level
- Monitoring for triggering events – 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.
Considerations before adoption of the goodwill accounting alternatives
While the FASB provided private companies and not-for-profits 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 public business entity (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.
Continue your goodwill accounting learning
Deloitte's Roadmap Goodwill provides Deloitte's insights and interpretations of the guidance in ASC 350-20.
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