Lessons learned during the disruption of 2020 span the gamut. As much as COVID-19 shed light on issues around how we work, it also indicated that how we account for the effect of disruption could use a refresh, too. The short-term disruption experienced from government-mandated shutdowns and market uncertainty following the onset of the global pandemic created triggering events for companies that then required a test for goodwill impairment.
Some private companies and not-for-profit organizations experienced multiple triggering events over the course of the pandemic and therefore had to perform several tests for goodwill impairment throughout the year, and then again at the end of an annual reporting period.
The Financial Accounting Standards Board (FASB) noted the cost and complexity of the goodwill accounting requirements — particularly for private entities that went on to a near full recovery by year-end — and put together an accounting election to make the goodwill impairment evaluation easier. It issued Accounting Standards Update 2021-03, Intangibles—Goodwill and Other (Topic 350): Accounting Alternative for Evaluating Triggering Events on March 31, 2021.
ASU 2021-03 allows private companies and not-for-profit organizations an election to evaluate for goodwill impairment triggering events each time an entity reports U.S. GAAP basis financial information impacted by goodwill impairment rather than each occurrence of a triggering event. Examples of triggering events include deterioration in economic conditions, market or industry conditions, increases in cost factors, decreases in stock prices or occurrence of restructuring. For some private companies, the evaluation of goodwill impairment triggering events will need only occur at the end of the annual period.
Notably, the effective date of the standard permits companies to use it retroactively for financial reporting after Dec. 15, 2019. Private entities can apply the election to 2020 reporting, so long they have not issued 2020 U.S. GAAP financial information related to goodwill as of March 31, 2021. Because the accounting election is only on the table for private entities, if your company is considering a public offering, it would not want to apply ASU 2021-03.
Challenges to Using the Goodwill Impairment Election
While designed to provide entities relief during times when they most need it, the “U.S. GAAP basis financial information” language may make ASU 2021-03’s use and application difficult. U.S. GAAP basis financial information that may change when an entity must recognize goodwill impairment includes goodwill, impairment loss, total assets, net income, retained earnings or total equity. Private companies may report this information on a monthly or quarterly basis as part of a debt agreement. If companies have this situation and want to take the election, they will need to consider whether the debt agreement reporting is recognized or measured in accordance with U.S. GAAP in order to determine how frequently and at which dates an evaluation of a goodwill impairment triggering events is required.
We illuminated examples of the challenge in the goodwill accounting election application in our earlier coverage of ASU 2021-03, which is available here.
The Importance of the Goodwill Impairment Accounting Election
Private entities may find that under the election they can significantly reduce the time and expense of their goodwill impairment analysis. Particularly for organizations that did not have a triggering event present at the end of 2020, or for that matter 2021, consideration of the ASU 2021-03 election may be a worthwhile venture.
For more information on how your company could apply the election, we encourage you to reach out to a member of our team.
Published on January 04, 2022
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