New Accounting Alternative for Evaluating Goodwill Impairment Triggering Events

Private companies and not-for-profit entities have a new optional accounting alternative for evaluating goodwill impairment triggering events. The accounting alternative is intended to simplify and eliminate the requirement to monitor for triggering events throughout the reporting period that would cause an entity to perform a test for goodwill impairment. Rather than performing a continuous assessment of triggering events, an entity electing the alternative would evaluate the existence of a goodwill impairment triggering event as of an interim or annual reporting date. The new alternative is available for private companies and not-for-profit entities that account for goodwill as an indefinite-lived asset as well as private companies and not-for-profit entities that have elected to amortize goodwill. It is available for entities that have not yet issued their Dec. 31, 2020 financial statements and could cause some entities that experienced significant, but short-lived impacts from COVID-19 to forgo performing a test of goodwill impairment during 2020.  The policy election to apply the alternative can also be made at a future date.

The new alternative does not apply to and has no effect on the accounting for other types of intangible assets and long-lived assets, such as trade names, customer relationship, and property, plant and equipment.

Goodwill Impairment Triggering Events

Private companies and not-for-profit entities may account for goodwill by amortizing the goodwill or as an indefinite-lived asset. Those entities that amortize goodwill test for goodwill impairment only upon the occurrence of a triggering event, whereas entities that account for goodwill as indefinite-lived test for impairment on an annual basis and upon the occurrence of a triggering event.

For both amortizing and indefinite-lived goodwill accounted for in Subtopic 350-20 Intangibles-Goodwill and Other-Goodwill, an entity evaluates whether any factors indicate that goodwill is impaired (i.e. a triggering event). Such factors may include:

  • Macroeconomic conditions
  • Industry and market considerations
  • Cost Factors
  • Stock Prices
  • Restructuring

Under the standard impairment model, the evaluation of triggering events for both amortizing and indefinite-lived goodwill is continuous throughout the entire financial statement period.

A Closer Look at Goodwill Impairment Accounting: An Example Scenario

For example, assume an entity that reports financial statements on a calendar year end 2020 basis experiences a government mandated indefinite plant shutdown that has a significant negative impact on its business on June 9, 2020. When performing its evaluation of triggering events, it would assess on June 9 that a triggering event occurred. The entity would then perform the goodwill impairment test (qualitative assessment, quantitative assessment, etc.) as of June 9 using the best information known or knowable as of that date.

It’s worth noting that unexpected events occurring subsequent to June 9 are excluded from the impairment test, even if they result in future recovery. After performing the impairment test on June 9, the entity would continue to assess for additional triggering events and would perform additional impairment tests for each triggering event that occurs subsequent to June 9, 2020.

Now, using the same scenario, assume an entity accounts for goodwill as an indefinite lived intangible asset. An impairment test would be required on June 9, the date of the triggering event occurrence. The entity would also perform an annual impairment test. Therefore, if the entity has indefinite-lived goodwill and an accounting policy that it performs an annual test of goodwill impairment on an interim date, such as Oct. 31, 2020, it would still perform the annual test on October 31, and continue to monitor for additional goodwill impairment triggering events through Dec. 31, 2020, even though it had an earlier triggering event.

Applying the Accounting Alternative to Our Example

The accounting alternative under Accounting Standards Update 2021-03, Intangibles—Goodwill and Other (Topic 350): Accounting Alternative for Evaluating Triggering Events (ASU 2021-03) permits a private company or not-for-profit entity to evaluate the facts and circumstances for the existence of a triggering event as of the end of each interim or annual reporting period for which it reports U.S. GAAP compliant financial information that relates to goodwill.

Using the same example above, if the entity only reported U.S. GAAP financial information related to goodwill on an annual basis, the entity would assess  as of Dec. 31, 2020, if a triggering event exists. Under the accounting alternative, the assessment of the triggering event and the impairment test, if required, would only consider conditions as of Dec. 31, 2020. Even if the entity’s plant was shut down on June 9, 2020, if the entity’s plant had reopened and experienced a substantial recovery in operations by Dec 31, 2020, it may be able to conclude that no triggering event exists at Dec. 31, 2020.

If the entity had indefinite-lived goodwill and an accounting policy to perform their annual test of goodwill impairment on an interim date, such as Oct. 31, 2020, the entity would perform its annual test of goodwill impairment on October 31, and subsequently perform an evaluation of the existence of a goodwill triggering event as of Dec. 31, 2020.

The bottom line is that under the accounting alternative, a calendar year end entity that has indefinite-lived goodwill only reports on an annual basis, and performs its annual test of goodwill impairment as of December 31 would not need to assess the existence of triggering events.

Interim Financial Information

Under the accounting alternative, an assessment of goodwill impairment triggering events is performed whenever an entity reports U.S GAAP compliant financial information related to goodwill. The FASB decided to not provide additional clarification of what constitutes reporting U.S. GAAP compliant financial information. Therefore, determining when goodwill triggering events are required to be assessed under the accounting alternative (i.e. when U.S. GAAP compliant financial information related to goodwill has been reported) will require judgement. The assessment will include identifying when financial information related to goodwill is reported and whether the financial information is in compliance with U.S. GAAP.

Financial information is related to goodwill when it includes amounts that change when goodwill impairment is recognized. Therefore, examples of the types of financial information that are related to goodwill are:

  • Goodwill
  • Impairment loss
  • Total assets
  • Net income
  • Retained earnings, or
  • Total equity.

Evaluating whether the financial information related to goodwill is in compliance with U.S. GAAP is expected to be the more difficult part of the assessment. Based on the FASB’s discussion and the basis of conclusion, examples of when financial information related to goodwill is in compliance with U.S. GAAP are when it is provided to a financial statement user under a contract that requires it to be recognized or measured in accordance with U.S. GAAP, the information is required by regulation to be in compliance with U.S. GAAP, or it has been communicated that the financial information is recognized or measured in accordance with U.S. GAAP.

Take the following example. Entity A reports financial information related to goodwill to a bank on a quarterly basis under a debt agreement that specifies the information must be in compliance with U.S. GAAP. Under the accounting alternative, the interim reporting by Entity A would result in evaluating the existence of goodwill impairment triggering events at the end of each quarter. In contrast, Entity B has a debt covenant that requires the same quarterly financial information but excludes certain year end adjustments, such as the impairment of goodwill. Entity B would not be reporting U.S. GAAP compliance financial information related to goodwill on an interim date. Therefore, under the accounting alternative, Entity B would not be required to evaluate the existence of goodwill impairment triggering events at the end of each quarter.

We believe that the following examples of providing financial information purported to be in compliance with U.S. GAAP to a bank, regulator, donor, or other third parties results in a requirement to perform an evaluation of the existence of goodwill triggering events as of the reporting date:

  • A full set of interim financial statements, including disclosures
  • An interim balance sheet, income statement, or statement of owners’ equity
  • Total assets, equity, or net income such as used to compute financial covenants or included in a regulatory filing

The following examples further illustrate when an entity that issues calendar year end U.S. GAAP basis financial statements and has elected the accounting alternative would be required to perform an assessment for the existence of goodwill triggering events:

Interim Reporting

Assessment

Date of assessment of goodwill triggering events

An entity provides monthly borrowing base certificate to a bank that only includes information about U.S. GAAP amounts of accounts receivable and inventory

The entity does not report financial information on an interim date that include information related to goodwill

December 31

An entity reports to a bank a quarterly internal balance sheet and income statement to comply with a bank covenant. The statements are required to include all account balances to be in compliance with U.S. GAAP.

The entity reports financial information related to goodwill that is in compliance with U.S. GAAP on an interim date

March 31, June 30, September 30, and December 31

An entity reports to a bank a quarterly internal balance sheet and income statement to comply with a bank covenant. The statements omit required year end adjustments, including goodwill impairment.

The entity does not report financial information related to goodwill that is in compliance with U.S. GAAP on an interim date

December 31

An entity provides a full set of U.S. GAAP financial statements to its major suppliers and customers on a monthly basis.

The entity reports financial information related to goodwill that is in compliance with U.S. GAAP on an interim date

Each month end

A bank files a Call Report with the FDIC on a quarterly basis. Among other metrics, the Call Report includes goodwill impairment loss on a U.S. GAAP basis.

The entity reports financial information that is in compliance with U.S. GAAP related to goodwill on an interim date

March 31, June 30, September 30, and December 31

An entity provides monthly financial statements that are purported to be in compliance with U.S. GAAP to its executives, members of its board of directors, and owners that are actively involved in managing the business

The entity does not report interim financial information

December 31

It may be unclear in some cases if financial information reported by an entity is in compliance with U.S. GAAP. In those instances, it may be necessary to clarify with the party to which you are reporting the basis of the financial information. For instance, a debt agreement that requires monthly financial statements, but is silent as to whether those financial statements must comply with U.S. GAAP may need to be clarified. Likewise, when financial information is provided on an interim basis to investors, suppliers, customers or others based on requests of those parties it may be necessary to specify whether the information includes the recognition and measurement of goodwill impairment.

Effective Date and Transition

ASU 2021-03 is effective for fiscal years beginning after Dec. 15, 2019. A private company or not-for-profit entity may elect the accounting alternative prospectively from Jan. 1, 2020, for the calendar year end Dec. 31, 2020, as long as it has not provided a full set of financial statements, including disclosures, for an interim or annual period during the year ended Dec. 31, 2020, prior to the date ASU 2021-03 was issued (March 30, 2021). Entities not electing the accounting alternative for 2020 may make a one-time election to adopt the accounting alternative in a future period without considering whether it is preferable to the standard impairment triggering event model.  

Similar to other private company accounting alternatives, it is expected that a private company that applies this accounting alternative will be required to retroactively apply the standard triggering event model if they become a public business entity. Therefore, private companies that are considering a registration with the SEC should carefully consider the additional cost that may be associated with reversing the application of the accounting alternative prior to registration.

Private companies and not-for-profit entities electing the accounting alternative are required to disclose the adoption and use of the accounting alternative. Other disclosures required under Subtopic 350-20 continue to apply to entities adopting the accounting alternative.

For More Information

To learn more about how the goodwill accounting alternative affects your organization, please contact a member of our team.

Published on April 23, 2021