January 26, 2017
The Financial Accounting Standards Board has released a new standard that promises to simplify the goodwill impairment test, allowing many companies that don’t already apply the private company accounting alternative for goodwill to skip an extra step.
The new standard requires a one-step impairment test, in which a goodwill impairment loss is measured as the excess of a reporting unit’s carrying amount over its fair value (not to exceed the total goodwill allocated to that reporting unit).
The accounting standards update does away with the second step in the current two-step goodwill impairment test, under which a goodwill impairment loss is measured by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill.
FASB has heard from its stakeholders that the current impairment test leads to unnecessary cost and complexity, but doesn’t add value to the information given to investors and other users of financial statements.
In 2014, FASB amended its accounting standards to give private companies an alternative accounting treatment for subsequently measuring goodwill because of concerns voiced by private companies about the cost and complexity of the goodwill impairment test. At the time, FASB added a project to its agenda to determine whether similar amendments should be considered for other entities, including public companies and not-for-profits.
Subsequently FASB separated the project into two phases. Phase 1 resulted in this update. FASB plans to evaluate the effectiveness of the guidance in the update and monitor the International Accounting Standards Board’s projects on goodwill and impairment before deciding whether additional changes are needed, including permitting or requiring amortization of goodwill or making further changes to the impairment testing methodology. FASB has moved Phase 2, the project on subsequent accounting for goodwill for public business entities and not- for-profit entities, to its research agenda.
Public companies that file their financials with the Securities and Exchange Commission should adopt the new standard for annual or any interim goodwill impairment tests in fiscal years beginning after Dec. 15, 2019. For other public companies, the date is Dec. 15, 2020. For private companies and not-for-profits, the date is Dec. 15, 2021. Early adoption is allowed for interim or annual goodwill impairment tests performed on testing dates after Jan. 1, 2017.