The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2021-03, Intangibles – Goodwill and Other (Topic 350): Accounting Alternative for Evaluating Triggering Events in March 2021.
This ASU adds an accounting alternative for goodwill impairment triggering event evaluation to the previously available accounting alternative for goodwill amortization. Electing one of the accounting alternatives does not require or preclude an entity from electing the other accounting alternative.
If an entity elects the new accounting alternative for goodwill impairment triggering event evaluation, it shall be applied to existing goodwill and all additions to goodwill in future transactions within the scope of the new accounting alternative.
Prior to the issuance of this ASU, entities were required to identify and evaluate goodwill triggering events when triggering events occur. An entity that elects the new accounting alternative for goodwill impairment triggering event evaluation will perform an evaluation of the facts and circumstances as of the end of each reporting period where GAAP compliant financial statements are issued* to determine if triggering events exist. If triggering events are identified, the entity will evaluate whether it is more likely than not that goodwill is impaired. If it is more likely than not that goodwill is impaired, the entity will follow the goodwill impairment testing model that applies to them based on their previous elections.
Privately held companies and not-for-profit entities are currently allowed to account for goodwill under any one of three different models for goodwill impairment:
If an entity elects the accounting alternative for amortization of goodwill (model 3 above) and the new accounting alternative for goodwill impairment triggering event evaluation, the goodwill triggering event evaluation shall only be performed as of each reporting date.
Entities that have not elected the accounting alternative for amortizing goodwill (models 1 and 2 above) are required to test goodwill for impairment annually. Some entities elect to perform their goodwill impairment test as of a date other than the annual reporting date. This option remains available under ASU 2021-03, but if an entity elects the new accounting alternative for goodwill impairment triggering event evaluation, the entity’s evaluation of impairment between the annual goodwill impairment test shall only be performed as of the end of a reporting period.
*The new accounting alternative requires the triggering event evaluation to be performed as of each reporting date. In their basis for conclusion, FASB acknowledged that an entity may be required to provide financial information to users more frequently than annually and that such requirements may indicate that financial information is in compliance with GAAP; however, for purposes of this standard, the FASB did not address or define what constitutes GAAP compliant financial information.
Here, we’ll look at an example to demonstrate the new accounting alternative compared to historical GAAP.
In a prior year, ABC Company adopted the accounting alternative for amortizing goodwill and elected to perform its goodwill impairment test at the entity level upon the occurrence of a triggering event only. ABC Company only has an annual reporting period which ends on December 31. On May 5, ABC Company lost a significant customer. During the remainder of the reporting period, ABC Company was able to replace the customer and by year-end ABC Company’s operations had returned to the budgeted amounts.
Under historical GAAP, ABC Company had a triggering event on May 5 and is required to perform additional analysis to determine whether it is more likely than not that goodwill is impaired. ABC would conduct this assessment without the use of hindsight, so it would only consider the facts and circumstances as of May 5. If it is more likely than not that goodwill is impaired, the entity will continue to test the amount of the goodwill impairment.
Using the same fact pattern as above, except that ABC Company adopted the new accounting alternative for goodwill impairment triggering event evaluation, as allowed for under ASU 2021-03.
Under the new accounting alternative, since ABC Company only reports annually, as of and for the year ended December 31, it would evaluate the facts and circumstances as of December 31. Based on the consideration that the loss of the significant customer did not significantly affect its operations for the year and it was able to meet its budgeted amounts, ABC Company may be able to conclude that there isn’t a triggering event as of December 31 and no additional goodwill impairment evaluation or testing would be needed.
If ABC Company reports quarterly instead of annually, it would evaluate the facts and circumstances as of the end of each quarter. As such, the loss of the significant customer may be deemed to be a goodwill triggering event for the quarter ending June 30, if operations had not rebounded by that reporting date.
One topic that is discussed in the new ASU is the impact on other Topics within the Codification. The new accounting alternative for goodwill impairment triggering event evaluation is only allowed to be applied to evaluations within Topic 350-20, Intangibles – Goodwill and Other. Analogizing the new accounting alternative to the evaluations of long-lived assets and other intangibles is prohibited.
Another topic that is discussed in the ASU and where the accounting guidance remains the same under the new accounting alternative is that the order of evaluating triggering events within GAAP was not modified by ASU 2021-03. The order of evaluation under GAAP is (1) indefinite-lived assets, (2) long-lived assets and (3) goodwill. If an entity elects the new accounting alternative for goodwill impairment triggering event evaluation and the impairment test related to other assets would have resulted in a goodwill impairment triggering event, the entity should consider the results of the impairment test related to the other assets in connection with its goodwill impairment test. Note that assets to consider are only those occurred as of the annual goodwill impairment testing date and the reporting date, whether that date is an interim or annual reporting date.
Additionally, although the change in the point in time that an entity is required to evaluate triggering events changes under the new accounting alternative (change from when they occur to as of the end of the reporting period), the new accounting alternative does not change the overall impairment evaluation. If an entity identifies triggering events and determines it is more likely than not that goodwill is impaired, they need to perform an assessment under their applicable goodwill impairment testing model.
An entity that elects the new accounting alternative is required to disclose the use of the new accounting alternative for goodwill impairment triggering event evaluation as a significant accounting policy. An entity is not required to assess or disclose preferability, as would normally be required under ASC 250, Accounting Changes and Error Corrections.
If an entity elects to use the new accounting alternative, they should apply it on a prospective basis for fiscal years beginning after December 15, 2019, but they should not retroactively adopt the amendments in this update for interim financial statements already issued in the year of adoption.
Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance as of March 30, 2021.
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