Proposed Accounting Standards Update Issued: July 1, 2013 Comments Due: August 23, 2013 Intangibles Goodwill and Other (Topic 350) Accounting for Goodwill a proposal of the Private Company Council This Exposure Draft of a proposed Accounting Standards Update of Topic 350 is issued by the Board for public comment. Comments can be provided using the electronic feedback form available on the FASB website. Written comments should be addressed to: Technical Director File Reference No. PCC-13-01B
The FASB Accounting Standards Codification is the source of authoritative generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. An Accounting Standards Update is not authoritative; rather, it is a document that communicates how the Accounting Standards Codification is being amended. It also provides other information to help a user of GAAP understand how and why GAAP is changing and when the changes will be effective. Notice to Recipients of This Exposure Draft of a Proposed Accounting Standards Update The Board invites comments on all matters in this Exposure Draft and is requesting comments by August 23, 2013. Interested parties may submit comments in one of three ways: Using the electronic feedback form available on the FASB website at Exposure Documents Open for Comment Emailing a written letter to director@fasb.org, File Reference No. PCC- 13-01B Sending written comments to Technical Director, File Reference No. PCC-13-01B, FASB, 401 Merritt 7, PO Box 5116, Norwalk, CT 06856-5116. Do not send responses by fax. All comments received are part of the FASB s public file. The FASB will make all comments publicly available by posting them to the online public reference room portion of its website. An electronic copy of this Exposure Draft is available on the FASB s website. Copyright 2013 by Financial Accounting Foundation. All rights reserved. Permission is granted to make copies of this work provided that such copies are for personal or intraorganizational use only and are not sold or disseminated and provided further that each copy bears the following credit line: Copyright 2013 by Financial Accounting Foundation. All rights reserved. Used by permission. Financial Accounting Standards Board of the Financial Accounting Foundation 401 Merritt 7, PO Box 5116, Norwalk, Connecticut 06856-5116
Proposed Accounting Standards Update Intangibles Goodwill and Other (Topic 350) Accounting for Goodwill July 1, 2013 Comment Deadline: August 23, 2013 CONTENTS Page Numbers Summary and Questions for Respondents... 1 6 Amendments to the FASB Accounting Standards Codification... 7 16 Background Information and Basis for Conclusions... 17 26
Summary and Questions for Respondents Why Is the FASB Issuing This Proposed Accounting Standards Update (Update)? The Private Company Council (PCC) added this issue to its agenda in response to feedback from private company stakeholders through various channels indicating that the benefits of the current accounting for goodwill do not justify the related costs. Outreach with users of private company financial statements illustrated that the current goodwill impairment test provides limited benefits for their decision making because most users of private company financial statements disregard goodwill and goodwill impairment losses in their analysis of a private company s financial condition and operating performance. The PCC also received input through outreach with preparers and public accountants indicating concerns over the recurring cost and complexity of the current goodwill impairment test. Private company stakeholders acknowledged that the FASB s recent introduction of the optional qualitative assessment has provided some cost reduction in testing goodwill for impairment. In addition to addressing concerns about the undue cost and complexity of goodwill accounting, the PCC took on this issue to address the potential followon effect of a separate, but related PCC issue related to recognizing identifiable intangible assets acquired in a business combination. Because goodwill is a residual asset calculated after recognizing other (tangible and intangible) assets acquired in a business combination, any modifications to the initial recognition and measurement guidance for identifiable intangible assets would correspondingly change the goodwill amount recognized in the business combination. The PCC decided therefore that such modifications should be taken into consideration by the PCC in determining how to account for goodwill subsequent to a business combination. Who Would Be Affected by the Amendments in This Proposed Update? The proposed amendments would be available to an entity that recognizes goodwill in a business combination in accordance with Topic 805, Business Combinations, except for a publicly traded company or a not-for-profit entity as defined in the Master Glossary of the FASB Accounting Standards Codification. An entity within the scope of the proposed amendments that elects to apply the accounting alternative in this proposed Update would be subject to all of the related subsequent accounting and disclosure requirements within the accounting alternative. The accounting alternative, if elected, would apply to all existing goodwill and to all new goodwill generated in business combinations entered into after the effective date of this proposed Update. 1
What Are the Main Provisions? The proposed amendments would provide guidance about an accounting alternative for the subsequent measurement of goodwill. An entity within the scope of the proposed amendments that elects the accounting alternative would amortize goodwill on a straight-line basis over the useful life of the primary asset acquired in a business combination, not to exceed 10 years. A primary asset is the long-lived asset that is the most significant asset of the acquired entity. Goodwill would be tested for impairment only when a triggering event occurs that would indicate that the fair value of an entity may be below its carrying amount. Moreover, goodwill would be tested for impairment at the entity-wide level rather than at the reporting unit level. The goodwill impairment loss, if any, would represent the excess of an entity s carrying amount over its fair value. The goodwill impairment loss would not exceed the carrying amount of goodwill. How Would the Main Provisions Differ from Current U.S. Generally Accepted Accounting Principles (GAAP) and Why Would They Improve U.S. GAAP for Private Company Stakeholders? Currently, U.S. GAAP requires goodwill of a reporting unit to be tested for impairment at least annually or more frequently if certain conditions exist. An entity can choose to first perform a qualitative assessment to determine if it is more likely than not that a reporting unit s fair value is less than its carrying value, or it can bypass the qualitative assessment and proceed directly to step one and compare the carrying value of the reporting unit with its fair value. If the carrying value exceeds fair value, step two must be performed to determine the extent of goodwill impairment. Step two compares the implied fair value of the reporting unit s goodwill with its carrying value. This necessitates performing a hypothetical application of the acquisition method (purchase price allocation) to determine the implied fair value of goodwill after measuring the reporting unit s identifiable assets and liabilities in accordance with Topic 805. Under the proposed amendments, an entity that elects the accounting alternative within U.S. GAAP would amortize goodwill on a straight-line basis over the useful life of the primary asset acquired in a business combination, not to exceed 10 years. Goodwill would be tested for impairment only when a triggering event occurs that would indicate that the fair value of an entity may be below its carrying amount. Further, goodwill would be tested for impairment at the entitywide level rather than at the reporting unit level. The PCC further simplified goodwill impairment by eliminating step two of the current impairment test, which requires the application of a hypothetical purchase price allocation to calculate the goodwill impairment amount. The goodwill impairment amount would represent the excess of the entity s carrying amount over its fair value. 2
The PCC believes that the proposed accounting alternative, when elected, would continue to provide decision-useful information to users of private company financial statements, while reducing the cost and complexity associated with the current goodwill impairment test. The PCC received input indicating that most users of private company financial statements disregard goodwill and goodwill impairment losses in their analysis of a private company s financial condition and operating performance. Accordingly, the PCC believes that the proposed amendments would result in minimal loss of relevant information for users of private company financial statements. The PCC believes that the proposed amendments would reduce the costs and complexity of accounting for goodwill and, therefore, would reduce the cost and complexity of preparing financial statements. The amortization method and the relief from the requirement to test goodwill for impairment at least annually would result in significant cost savings for many private companies that carry goodwill on their balance sheet, because amortization would reduce the likelihood of impairments, and companies would be required to test goodwill for impairment only when a triggering event occurs. Testing goodwill for impairment on an entitywide basis would further reduce cost and complexity. Moreover, even if goodwill is impaired, determining the amount of the impairment under the accounting alternative would not involve the application of a hypothetical purchase price allocation, which is costly and complicated but, instead, would be determined as the amount by which the carrying amount of the entity exceeds its fair value. Overall, the PCC believes that the accounting alternative for goodwill is responsive to the unique needs of private companies and their stakeholders. The PCC believes that the accounting alternative for goodwill would continue to provide decision-useful information to users of private company financial statements, while providing a reduction in the cost and complexity associated with the current goodwill impairment test. Therefore, the PCC believes that the proposed amendments meet the overall objective of the proposed Private Company Decision-Making Framework for addressing the unique needs of private company stakeholders. When Would the Amendments Be Effective? The accounting alternative for goodwill would be applied prospectively for all existing goodwill and for all new goodwill generated in business combinations after the effective date. The effective date will be determined after the PCC considers stakeholder feedback on this proposed Update. Questions for Respondents The Board and the PCC invite individuals and organizations to comment on all matters in this proposed Update, particularly on the issues and questions below. 3
While certain questions are addressed to specific types of stakeholders, respondents are welcome to respond to any of the questions. Comments are requested from those who agree with the proposed guidance as well as from those who do not agree. Comments are most helpful if they identify and clearly explain the issue or question to which they relate. Those who disagree with the proposed guidance are asked to describe their suggested alternatives, supported by specific reasoning. Question 1: Please describe the entity or individual responding to this request. For example: Please indicate whether you primarily are a preparer, user, or public accountant. If other, please specify. a. If you are a preparer of financial statements, please indicate whether your entity is privately held or publicly held and describe your primary business and its size (in terms of annual revenue, the number of employees, or other relevant metric). b. If you are a public accountant, please describe the size of your firm (in terms of number of partners or other relevant metric) and indicate whether your practice focuses primarily on public entities, private entities, or both. c. If you are a user of financial statements, please indicate in what capacity (for example, lender, investor, analyst, or rating agency) and whether you primarily use financial statements of private entities or those of both private entities and public entities. Question 2: Should any types of entities in the proposed scope be excluded? Should any types of transactions or accounts be excluded, or are there any other types of transactions or accounts that should be included in the scope? Question 3: Should the Board consider expanding the scope of the accounting alternative to other entities, such as publicly traded companies or not-for-profit entities? If the scope is expanded to other entities, what changes, if any, should the Board consider to the accounting alternative for the subsequent measurement of goodwill? If the scope is expanded to public companies or notfor-profit entities, should the accounting alternative continue to be elective? Question 4: Would the proposed amendments reduce overall costs and complexity compared with existing guidance? If not, please explain why. Question 5: Do you agree that the accounting alternative for goodwill would provide relevant and decision-useful information to users of private company financial statements? If not, what accounting alternative, if any, would provide relevant information to users? 4
Question 6: Do you agree with the PCC s decision to amortize goodwill on a straight-line basis over the life of the primary asset acquired in a business combination, not to exceed 10 years? If not, please tell us what alternative approach or useful life you would prefer? Question 7: Do you agree that goodwill accounted for under this alternative should be tested for impairment at the entity-wide level? If not, should an entity be either required or given an option to test goodwill at the reporting unit level? What issues, if any, arise from amortizing goodwill at the individual acquired goodwill level while testing for goodwill impairment at the entity-wide level? Question 8: Do you agree that goodwill accounted for under this alternative should be tested for impairment only upon the occurrence of a triggering event that would indicate that the fair value of the entity may be below its carrying amount? If not, when should goodwill be tested for impairment? Should there be an annual requirement to test goodwill? Question 9: In the proposed amendments, an entity would consider the same examples of events and circumstances for the assessment of triggering events as those considered for the qualitative assessment. However, the PCC intends the nature and extent of those two assessments to be different. The assessment of triggering events would be similar to the current practice of how an entity evaluates goodwill impairment between annual tests. In contrast, the optional qualitative assessment would be part of an entity s goodwill impairment test, requiring a positive assertion, consistent with current practice, about its conclusion reached and the events and circumstances taken into consideration. Should the assessment of triggering events be performed consistently with how entities currently assess for goodwill impairment between annual tests? If not, how should an entity assess for triggering events? Do you agree that there should be a difference in how an entity would perform its assessment of triggering events and how it would perform the qualitative assessment? Question 10: Do you agree with the alternative one-step method of calculating goodwill impairment loss as the excess of the carrying amount of the entity over its fair value? Why or why not? Question 11: Do you agree with the disclosure requirements of the proposed Update, which largely are consistent with the current disclosure requirements in Topic 350? Do you agree that an entity within the scope of the proposed amendments should provide a rollforward schedule of the aggregate goodwill amount between periods? If not, what disclosures should be required or not required, and please explain why. Question 12: Do you agree that the proposed Update should be applied on a prospective basis for all existing goodwill and for all new goodwill generated in business combinations after the effective date? Should retrospective application be permitted? 5
Question 13: Do you agree that goodwill existing as of the effective date should be amortized on a straight-line basis prospectively over its remaining useful life not to exceed 10 years (as determined on the basis of the useful life of the primary asset of the reporting unit to which goodwill is assigned) or 10 years if the remaining useful life cannot be reliably estimated? Why or why not? Question 14: When should the alternative accounting method be effective? Should early application be permitted? Question 15: For preparers and auditors, how much effort would be needed to implement and audit the proposed amendments? Question 16: For users, would the proposed amendments result in less relevant information in your analyses of private companies? Question 17: If an entity elects the accounting alternative in the amendments in this proposed Update, do you think that entity also should be required to apply the PCC s proposed accounting alternative for recognition, measurement, and disclosure of identifiable intangible assets acquired in a business combination (in Topic 805)? Alternatively, if an entity elects the accounting alternative in Topic 805, should that entity also be required to adopt the proposed accounting alternative? (No decisions have been reached by the Board and the PCC about this question.) Question 18: The scope of this proposed Update uses the term publicly traded company from an existing definition in the Master Glossary. In a separate project about the definition of a nonpublic entity, the Board is deliberating which types of business entities would be considered public and would not be included within the scope of the Private Company Decision-Making Framework. The Board and PCC expect that the final definition of a public business entity resulting from that project would be added to the Master Glossary and would amend the scope of this proposed Update. The Board has tentatively decided that a public business entity would be defined as a business entity meeting any one of the following criteria: a. It is required to file or furnish financial statements with the Securities and Exchange Commission. b. It is required to file or furnish financial statements with a regulatory agency in preparation for the sale of securities or for purposes of issuing securities. c. It has issued (or is a conduit bond obligor) for unrestricted securities that can be traded on an exchange or an over-the-counter market. d. Its securities are unrestricted, and it is required to provide U.S. GAAP financial statements to be made publicly available on a periodic basis pursuant to a legal or regulatory requirement. Do you agree with the Board s tentative decisions reached about the definition of a public business entity? If not, please explain why. 6
Amendments to the FASB Accounting Standards Codification Summary of Proposed Amendments to the Accounting Standards Codification Introduction 1. The Accounting Standards Codification is amended as described in paragraphs 2 10. In some cases, to put the change in context, not only are the amended paragraphs shown but also the preceding and following paragraphs. Terms from the Master Glossary are in bold type. Added text is underlined, and deleted text is struck out. Amendments to Master Glossary 2. Add the existing Master Glossary term Publicly Traded Company to Subtopic 350-20 as follows: Publicly Traded Company A business entity that has any of the following characteristics: a. Whose securities are traded in a public market on a domestic stock exchange or in the domestic over-the-counter market (including securities quoted only locally or regionally) b. That is a conduit bond obligor for conduit debt securities that are traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local or regional markets) c. Whose financial statements are filed with a regulatory agency in preparation for the sale of any class of securities in a domestic market. Amendments to Subtopic 350-20 3. Add paragraphs 350-20-05-4 through 05-5 and the new Subsection title, with a link to transition paragraph 350-20-65-2, as follows: 7
Intangibles Goodwill and Other Goodwill Overview and Background General 350-20-05-1 This Subtopic addresses financial accounting and reporting for goodwill subsequent to its acquisition and for the cost of internally developing goodwill. 350-20-05-2 Subtopic 805-30 provides guidance on recognition and initial measurement of goodwill acquired in a business combination. Subtopic 958-805 provides guidance on recognition and initial measurement of goodwill acquired in an acquisition by a not-for-profit entity. 350-20-05-3 While goodwill is an intangible asset, the term intangible asset is used in this Subtopic to refer to an intangible asset other than goodwill. 350-20-05-4 The guidance in this Subtopic is presented in the following two Subsections: a. General b. Accounting Alternative. Accounting Alternative 350-20-05-5 The Accounting Alternative Subsections of this Subtopic provide guidance to an entity within the scope of paragraph 350-20-15-4 that elects the accounting alternative for goodwill. 4. Add paragraphs 350-20-15-4 through 15-5 and the new Subsection title, with a link to transition paragraph 350-20-65-2, as follows: Scope and Scope Exceptions Accounting Alternative 350-20-15-4 The guidance in the Accounting Alternative Subsections of this Subtopic applies to the subsequent measurement, derecognition, and disclosure of amounts recognized as goodwill as a result of a business combination in accordance with Topic 805. The guidance also applies to amounts recognized as goodwill resulting from the excess reorganization value upon adopting fresh-start reporting in accordance with Topic 852 on reorganizations. An entity may elect to apply this accounting alternative except for a publicly traded company or a notfor-profit entity. 8
350-20-15-5 An entity within the scope of the preceding paragraph that elects the accounting alternative shall apply all of the related subsequent measurement and disclosure requirements upon election. The accounting alternative, once elected, shall be applied to existing goodwill and to all new goodwill generated in future business combinations. 5. Add paragraphs 350-20-35-62 through 35-76 and the new Subsection title and related headings, with a link to transition paragraph 350-20-65-2, as follows: Subsequent Measurement Accounting Alternative 350-20-35-62 The following guidance for goodwill applies to entities within the scope of paragraph 350-20-15-4 that elect the accounting alternative for the subsequent measurement of goodwill. > Amortization of Goodwill 350-20-35-63 Goodwill relating to each business combination or reorganization (amortizable unit of goodwill) shall be amortized on a straight-line basis over its useful life not to exceed 10 years. Useful life shall be based on the remaining useful life of the primary asset acquired in a business combination. Goodwill with similar remaining useful lives can be grouped together for amortization purposes. For purposes of this Subsection, the primary asset is the principal identifiable long-lived tangible or intangible asset that is the most significant asset from which the acquired business derives its cash-flow-generating capacity. 350-20-35-64 An entity shall evaluate the remaining useful life of goodwill upon the occurrence of events and changes in circumstances that warrant a revision to the remaining period of amortization. If the estimate of goodwill s remaining life is changed, the remaining carrying amount of goodwill shall be amortized prospectively on a straight-line basis over that revised remaining useful life. > Recognition and Measurement of a Goodwill Impairment Loss > > When to Test Goodwill for Impairment 350-20-35-65 Goodwill of an entity shall be tested for impairment if an event occurs or circumstances change that would indicate that the fair value of the entity may be below its carrying amount (a triggering event). If an entity determines that there are no triggering events, then further testing is unnecessary. Paragraph 350-20-35-3C(a) through (g) includes examples of those events or circumstances. 9
> > The Goodwill Impairment Test 350-20-35-66 Upon the occurrence of a triggering event, an entity may assess first qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of the entity is less than its carrying amount, including goodwill. Paragraph 350-20-35-3C(a) through (g) includes examples of those qualitative factors. Paragraph 350-20-35-3F through 35-3G describes the process for making the qualitative assessment. 350-20-35-67 An entity has an unconditional option to bypass the qualitative assessment described in the preceding paragraph and proceed directly to the calculation and the comparison of the entity s fair value and its carrying amount. An entity may resume performing the qualitative assessment upon the occurrence of any subsequent triggering events. 350-20-35-68 If after qualitatively assessing the totality of events or circumstances an entity determines that it is not more likely than not that the fair value of the entity is less than its carrying amount, then further testing is unnecessary. 350-20-35-69 If after assessing the totality of events or circumstances, such as those described in paragraph 350-20-35-3C(a) through (g), an entity determines that it is more likely than not that the fair value of the entity is less than its carrying amount, the entity shall estimate the fair value of the entity and compare the fair value of the entity with its carrying amount, including goodwill. A goodwill impairment loss shall be recognized if the carrying amount of the entity exceeds its fair value. 350-20-35-70 A goodwill impairment loss, if any, shall be measured as the amount by which the carrying amount of an entity exceeds its fair value. A goodwill impairment loss shall not exceed the carrying amount of goodwill. 350-20-35-71 The guidance in paragraphs 350-20-35-22 through 35-27 shall be considered in determining the fair value of the entity. 350-20-35-72 In determining the carrying amount of an entity, deferred income taxes shall be included in the carrying amount of the entity, regardless of whether the fair value of the entity is determined assuming it would be bought or sold in a taxable or nontaxable transaction. 350-20-35-73 The goodwill impairment loss shall be allocated to individual amortizable units of goodwill on a reasonable and rational basis. If such a basis cannot be determined, the impairment loss shall be allocated to individual amortizable units of goodwill on a pro rata basis using their relative carrying amounts. 350-20-35-74 After a goodwill impairment loss is recognized, the adjusted carrying amount of goodwill shall be its new accounting basis, which shall be 10
amortized over the remaining useful life of goodwill. Subsequent reversal of a previously recognized goodwill impairment loss is prohibited. > > Interaction of the Impairment Tests for Goodwill and Other Assets (or Asset Groups) 350-20-35-75 If goodwill and another asset (or asset group) of the entity are tested for impairment at the same time, the other asset (or asset group) shall be tested for impairment before goodwill. For example, if a significant asset group is to be tested for impairment under the Impairment or Disposal of Long-Lived Assets Subsections of Subtopic 360-10 on property, plant, and equipment (thus potentially requiring a goodwill impairment test), the impairment test for the significant asset group would be performed before the goodwill impairment test. If the asset group was impaired, the impairment loss would be recognized (thus, the carrying amount of the entity would be reduced) before goodwill being tested for impairment. 350-20-35-76 The requirement in the preceding paragraph applies to all assets that are tested for impairment or subject to other measurement adjustments according to other Topics, not just those included in the scope of the Impairment or Disposal of Long-Lived Assets Subsections of Subtopic 360-10. 6. Add paragraphs 350-20-40-8 through 40-11 and the new Subsection title and related heading, with a link to transition paragraph 350-20-65-2, as follows: Derecognition Accounting Alternative 350-20-40-8 The following guidance for goodwill applies to entities within the scope of paragraph 350-20-15-4 that elect the accounting alternative for the subsequent measurement of goodwill. An entity that elects the accounting alternative shall also follow the additional guidance in paragraphs 350-20-40-4 through 40-7. > Disposal of All or a Portion of an Entity 350-20-40-9 When an entity is to be disposed of in its entirety, goodwill of that entity shall be included in the carrying amount of the entity in determining the gain or loss on disposal. 350-20-40-10 When a portion of an entity that constitutes a business is to be disposed of, goodwill associated with that business shall be included in the carrying amount of the business in determining the gain or loss on disposal. 350-20-40-11 The amount of goodwill to be included in that carrying amount shall be based on the relative fair value of the business to be disposed of and the fair value of the portions of the entity that will be retained for which goodwill previously has been recognized. 11
7. Add paragraphs 350-20-45-4 through 45-7 and the new Subsection title, with a link to transition paragraph 350-20-65-2, as follows: Other Presentation Matters Accounting Alternative 350-20-45-4 The following guidance for goodwill applies to entities within the scope of paragraph 350-20-15-4 that elect the accounting alternative for the subsequent measurement of goodwill. 350-20-45-5 The aggregate amount of goodwill net of accumulated amortization shall be presented as a separate line item in the statement of financial position. 350-20-45-6 The amortization and impairment of goodwill shall be presented in income statement line items within continuing operations as deemed appropriate for each entity. 350-20-45-7 The amortization and impairment of goodwill associated with a discontinued operation shall be included (on a net-of-tax basis) within the results of discontinued operations. 8. Add paragraphs 350-20-50-4 through 50-8 and the new Subsection title and related headings, with a link to transition paragraph 350-20-65-2, as follows: Disclosure Accounting Alternative 350-20-50-4 An entity within the scope of paragraph 350-20-15-4 that elects to apply the accounting alternative for goodwill shall apply the guidance in paragraphs 350-20-50-5 through 50-8. > Disclosures in the Period of the Business Combination 350-20-50-5 For goodwill recognized, the following information shall be disclosed in the notes to financial statements in the period of the business combination in addition to the disclosures required in Topic 805 on business combinations: a. The amount assigned to goodwill, in total, by major business combination or by reorganization event resulting in fresh start accounting b. The weighted-average amortization period in total and by major business combination or by reorganization event resulting in fresh start accounting 12
c. A description of the primary asset used to determine the useful life by major business combination. > Information for Each Period for Which a Statement of Financial Position Is Presented 350-20-50-6 The changes in the carrying amount of goodwill during the period shall be disclosed in aggregate, showing the following separately: a. The gross carrying amount of goodwill, accumulated amortization, and accumulated impairment loss at the beginning of the period b. Additional goodwill recognized during the period c. Goodwill included in a disposal group classified as held for sale in accordance with paragraph 360-10-45-9 and goodwill derecognized during the period without having previously been reported in a disposal group classified as held for sale d. The aggregate impairment loss for the period e. The aggregate amortization expense for the period f. Any other changes in the carrying amount of goodwill during the period g. The gross carrying amount, accumulated amortization, and accumulated impairment loss at the end of the period. > Goodwill Impairment Loss 350-20-50-7 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. A description of the facts and circumstances leading to the impairment b. The amount of the impairment loss and the method of determining the fair value of the entity (whether based on prices of comparable businesses, a present value or other valuation technique, or a combination thereof) c. The caption in the income statement or the statement of activities in which the impairment loss is aggregated d. The method of allocating impairment loss to the individual amortizable units of goodwill. 350-20-50-8 The quantitative disclosures about significant unobservable inputs used in fair value measurements categorized within Level 3 of the fair value hierarchy required by paragraph 820-10-50-2(bbb) are not required for fair value measurements related to the financial accounting and reporting for goodwill after its initial recognition in a business combination. 9. Add paragraph 350-20-55-26 and the new Subsection title and related heading, with a link to transition paragraph 350-20-65-2, as follows: 13
Implementation Guidance and Illustrations Accounting Alternative > Implementation Guidance 350-20-55-26 The following flowchart provides an overview of the accounting alternative for entities within the scope of paragraph 350-20-15-4. 14
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Note 1: An entity has the unconditional option to skip the qualitative assessment and proceed directly to calculating the fair value of the entity and comparing that value with the carrying amount, including goodwill. 10. Add paragraph 350-20-65-2 and its related heading as follows: > Transition Related to Accounting Standards Update No. 2013-XX, Intangibles Goodwill and Other (Topic 350): Accounting for Goodwill 350-10-65-2 The following represents the transition and effective date information related to Accounting Standards Update No. 2013-XX, Intangibles Goodwill and Other (Topic 350): Accounting for Goodwill: a. The pending content that links to this paragraph shall be effective prospectively for goodwill generated in business combinations entered into during fiscal years and interim periods within those years, beginning after [date to be inserted after exposure]. b. Goodwill existing as of the effective date shall be amortized prospectively over its remaining useful life (as determined based on the useful life of the primary asset of the reporting unit to which goodwill is allocated), not to exceed 10 years, or shall be amortized over 10 years if the remaining useful life cannot be reliably estimated. c. Early application is permitted. The amendments in this proposed Update were endorsed and approved for publication by the unanimous vote of the seven members of the Financial Accounting Standards Board: Leslie F. Seidman, Chairman Daryl E. Buck Russell G. Golden Thomas J. Linsmeier R. Harold Schroeder Marc A. Siegel Lawrence W. Smith 16
Background Information and Basis for Conclusions Introduction BC1. The following summarizes the PCC s considerations in reaching the conclusions in this proposed Update. It includes the Board s basis for endorsing the PCC s conclusions when needed to supplement the PCC s considerations. It also includes reasons for accepting certain approaches and rejecting others. Individual PCC members and Board members gave greater weight to some factors than to others. BC2. On February 12, 2013, based on input received through outreach with users, preparers, and public accountants of private company financial statements and based on feedback received in various other forums, the PCC decided to add to its agenda a project that would explore potential alternatives to the current accounting for identifiable intangible assets acquired in a business combination. In addition, the PCC decided to add to its agenda a separate but related project on accounting for goodwill subsequent to a business combination. On May 7, 2013, the PCC reached decisions to provide an elective accounting alternative for private companies to account for identifiable intangible assets acquired in a business combination and to account for goodwill subsequent to a business combination. On June 10, 2013, the Board endorsed the decisions of the PCC, leading to the issuance of the amendments in this proposed Update. BC3. The proposed amendments would provide guidance about an accounting alternative for the subsequent measurement of goodwill. An entity within the scope of the proposed amendments that elects the accounting alternative within U.S. GAAP would amortize goodwill on a straight-line basis over the useful life of the primary asset acquired in a business combination, not to exceed 10 years. The primary asset is the long-lived asset that is the most significant asset of the acquired entity. The PCC also decided that goodwill would be tested for impairment only when a triggering event occurs that would indicate that the fair value of an entity may be below its carrying amount. Moreover, goodwill would be tested for impairment at the entity-wide level rather than at the reporting unit level. An entity would continue to follow the applicable requirements in Topic 350 for other accounting and reporting matters related to goodwill that are not specifically mentioned in the proposed amendments. 17
Scope BC4. The PCC decided the scope of this proposed Update should be consistent with the scope of the proposed Private Company Decision-Making Framework that has been exposed for public comment by the Board and the PCC. Therefore, the proposed amendments apply to all entities except for publicly traded companies or not-for-profit entities. The PCC acknowledges that users of financial statements, such as regulators or lenders, may request that an entity not apply the accounting alternative even if the entity is otherwise eligible. BC5. At this stage, the Board has not decided whether the proposed accounting alternative may be appropriate for publicly traded companies and notfor-profit entities. On the basis of the feedback it receives through the comments on the proposed Update and through outreach, the Board will consider whether the scope of the accounting alternative should be expanded to include other entities. BC6. To achieve comparability among entities that elect to apply the accounting alternative, the PCC decided that the proposed subsequent measurement, derecognition, and disclosure requirements should be applied together and not individually. The PCC also decided that the accounting alternative, if elected, should apply to all existing goodwill and all new goodwill recognized in business combinations entered into after the effective date. Background Information BC7. U.S. GAAP requires goodwill of a reporting unit to be tested for impairment at least annually or more frequently if certain conditions exist. An entity can choose to first perform a qualitative assessment to determine if it is more likely than not that a reporting unit s fair value is less than its carrying value, or it can bypass the qualitative assessment and proceed directly to step one and compare the carrying value of the reporting unit with its fair value. If the carrying value exceeds fair value, step two must be performed to determine the extent of the goodwill impairment. Step two compares the implied fair value of the reporting unit s goodwill with its carrying value. This necessitates performing a hypothetical application of the acquisition method (purchase price allocation) to determine the implied fair value of goodwill after measuring the reporting unit s identifiable assets and liabilities in accordance with Topic 805. BC8. The PCC added this issue to its agenda in response to feedback from private company stakeholders through various channels including (a) the nonpublic entity roundtables, (b) written submissions to the Blue-Ribbon Panel on Standards Setting for Private Companies and the Financial Accounting Foundation s Plan to Establish the Private Company Standards Improvement Council, and (c) the Private Company Financial Reporting Committee, indicating that the benefits of the current accounting for goodwill do not justify the related 18
costs. Outreach with users of private company financial statements further illustrated that the current goodwill impairment test provides limited benefits for their decision making because most users of private company financial statements disregard goodwill and goodwill impairment losses in their analysis of a private company s financial condition and operating performance. The PCC also received input through outreach with preparers and public accountants indicating concerns over the recurring cost and complexity of the current goodwill impairment test. Private company stakeholders acknowledged that the FASB s recent introduction of the optional qualitative assessment has provided some cost reduction in testing goodwill for impairment. However, they also stated that the changes have not gone far enough. BC9. Many users of private company financial statements indicated that they disregard noncash goodwill impairment charges from their quantitative analysis of a private company s operating performance because they focus on tangible net assets, cash flows, and/or some form of adjusted EBITDA. Moreover, because the underlying events and conditions leading to goodwill impairment manifest themselves long before the impairment is reported in a private company s financial statements, users indicated that they use other, more realtime information (including information obtained through their access to management) to identify the types of events that can lead to impairment charges. Some users acknowledged that an impairment loss (or lack thereof) within the first few years of an acquisition can validate the success (or failure) of an acquisition; however, they noted that the usefulness of goodwill impairment accounting is diminished because most private companies do not issue interim financial statements, and they generally issue their year-end financial statements later than public companies. Users further stated that the amount of impairment is less relevant than the existence of impairment because the calculation of the impairment amount is not well-understood. BC10. Preparers and public accountants indicated that the costs and complexities associated with goodwill impairment are not limited to the annual qualitative assessment and/or valuation of reporting units but that they also apply to other aspects of the relevant guidance. The accounting process begins with determining (and reassessing as needed) an entity s reporting units, a unit of account concept that requires a private company to apply the current U.S. GAAP guidance on segments, which private company preparers are not familiar with because that guidance is directly applicable to public companies only. After reporting units are determined, goodwill and individual assets and liabilities are assigned to each reporting unit. Allocation of shared assets, allocation of certain common liabilities, for example, debt and pensions, the treatment of intercompany charges, and the accounting for deferred taxes at each reporting unit level can be complex and challenging. Moreover, reporting units and the related allocation of assets and liabilities may have to be adjusted each time there is an internal reorganization, a new acquisition, or sale of a part of an entity. After the allocation process is completed, each reporting unit is assessed 19
for impairment at least annually and in interim periods when there is a triggering event. Under step one of the goodwill impairment test, an entity is required to calculate the fair value of its reporting units, which generally requires involvement by external valuation professionals. BC11. Valuation of reporting units generally involves significant judgmental inputs, including detailed cash flow projections and market information, for example, discount rates and market peer comparisons. If fair value is less than the carrying amount of a reporting unit, the entity then has to perform a hypothetical purchase price allocation to calculate the fair value of net assets, including identifiable intangibles as if the reporting unit was acquired on the impairment test date (step two). Depending on the materiality of the reporting unit(s) involved, the level of effort needed for step two of the impairment test can be as significant as the initial purchase price allocation. BC12. On the basis of input from users, preparers, and public accountants of private company financial statements, the PCC developed the proposed amendments that introduce an alternative method of accounting for goodwill. The PCC believes that the alternative method, if elected, would reduce the cost and complexity of preparing financial statements while continuing to provide decisionuseful information to users of private company financial statements. The PCC believes that impairments of goodwill under the accounting alternative would still provide confirmatory value to users indicating that the fair value of the entity is below its carrying amount. Subsequent Measurement BC13. The PCC decided that goodwill should be amortized over the useful life of the primary asset acquired in a business combination. For purposes of this proposed Update, a primary asset is consistent with the notion of a primary asset in Topic 360, Property, Plant, and Equipment, which is a long-lived asset that is the most significant asset from which an entity generates its cash-flow generating capacity. The PCC modified the Topic 360 concept such that the primary asset would be determined from the perspective of the acquired business rather than the reporting entity. The PCC decided that the amortization period should not exceed 10 years and that goodwill with similar useful lives would be grouped together for amortization purposes. BC14. Some PCC members believe that an amortization model is conceptually inferior to the current impairment model but noted that users would not be adversely affected by changing to an amortization model because they often disregard goodwill impairment charges in their quantitative analysis of an entity s operating performance. While goodwill amortization expense also would be disregarded, the PCC determined that the simplified approach would reduce cost and complexity in a way that would result in the benefits of the guidance justifying the costs of applying it. The PCC also observed that the amortization-based 20
accounting model for goodwill is consistent with the IFRS for small-to-mediumsized entities (SMEs). BC15. Some PCC members supported the amortization model because they believe that goodwill should be allocated to achieve a proper allocation of its costs to future operations. Those members noted that acquired goodwill is an asset that is consumed and replaced with internally generated goodwill and, therefore, acquired goodwill should be amortized even though the internally generated goodwill that is replacing it cannot be recognized as an asset. Accordingly, these PCC members voted for the amortization model because they believe amortization (with impairment tests, if necessary) is a better representation of the underlying economics of goodwill than the current impairment-only model. BC16. The PCC acknowledged that the useful life of goodwill and the pattern in which it diminishes are difficult to predict, yet amortization depends on such predictions. As a result, the PCC determined that the useful life of goodwill should depend on another asset for which the useful life can be more reliably predicted. The PCC decided that the application of the primary asset concept that is currently used for long-lived asset impairments would be the best benchmark for amortizing goodwill. A primary asset is the long-lived asset that is the most significant asset of the acquired entity. In addition, the PCC decided that the useful life should be limited to 10 years on the basis that generally most of the assets and liabilities acquired and assumed in a business combination to which goodwill can be attributed would be fully used up or satisfied by the tenth year. The PCC also concluded that all goodwill should be amortized on a straight-line basis because of the inherent difficulties in predicting its actual pattern of providing benefits to the entity. The PCC acknowledged that those methods would provide only a rough estimate of the decrease in the acquired goodwill during any period but decided the amortization method would provide the most benefit for the least cost when compared with the current impairment model or direct writeoff of goodwill. BC17. The PCC considered but decided against a method in which goodwill would be written off as an immediate charge to earnings or against equity on the acquisition date. Some private company stakeholders support the writeoff approach because they believe that no cost of subsequent accounting is justifiable if users disregard goodwill and the subsequent impairment/amortization charges. The PCC acknowledged the arguments for writing off goodwill but ultimately rejected the approach because of concerns about taking a potentially large charge into earnings or equity such that in some transactions, equity would become negative. Despite assertions by many users of private company financial statements that goodwill is not a part of their quantitative analysis of an entity s operating performance, the PCC believes that some users may react negatively to any immediate charge to earnings or equity. The PCC also carried forward the Board s previous conclusion that goodwill 21