The Financial Accounting Standards Board (FASB) has issued Accounting Standards Update (ASU) 2021-03, Intangibles—Goodwill and Other (Topic 350): Accounting Alternative for Evaluating Triggering Events, which provides a new goodwill impairment alternative for private companies and not-for-profit entities (both as defined in the Master Glossary of the FASB’s Accounting Standards Codification [ASC] and collectively referred to as the eligible entities). The new alternative allows eligible entities to perform the goodwill impairment triggering event analysis (and any resulting impairment test) required by ASC 350-20, “Intangibles—Goodwill and Other – Goodwill,” as of the end of each reporting period, whether an interim or annual reporting period, instead of performing that analysis throughout the reporting period and any resulting impairment test as of the date during the reporting period on which a triggering event occurred.
While the FASB did not include any guidance in the ASC on what constitutes a reporting period, or how the nature of the information reported by the eligible entity (certain financial information that would be affected by a goodwill impairment [e.g., goodwill, total assets, net income] or a full set of financial statements including footnotes) affects the way the alternative is applied, they did include the following in the ASU’s basis for conclusions:
- In paragraph BC28, an acknowledgment that many entities report some level of financial information with an indication that it complies with the recognition and measurement principles under U.S. GAAP on an interim basis for various reasons (e.g., debt covenant compliance, regulatory requirements).
- In paragraphs BC29 and BC30, observations that any time an entity reports in compliance with U.S. GAAP, it should be following the guidance in ASC 350-20, which requires the evaluation of interim goodwill impairment triggering events when interim financial information is reported.
- In paragraph BC30, an indication “…that it would be misleading to allow entities that provide interim financial information to delay evaluating goodwill for impairment until the end of the annual reporting period.”
During the Private Company Council meeting on April 20, 2021, the FASB staff clarified the following related to ASU 2021-03:
- The ASU does not define reporting date, nor is it a term already defined in U.S. GAAP.
- Management should continue to determine the entity’s reporting date(s) based on when it reports under U.S. GAAP. In other words, this is not a new determination, and the preexisting determination made by management is not affected by the ASU.
- Reporting under U.S. GAAP encompasses more than just issuing a complete set of financial statements (including the notes to the financial statements). For example, issuing only a balance sheet prepared in accordance with U.S. GAAP should be considered reporting under U.S. GAAP for purposes of the ASU.
Based on the totality of guidance included in the ASU and the FASB staff’s clarifications on April 20, 2021, we believe the implications of an eligible entity electing the new alternative are as follows:
- If the entity reports financial information on an interim basis that would be affected by goodwill impairment (e.g., goodwill, total assets, net income), and that financial information is in compliance with the recognition and measurement principles under U.S. GAAP, it would perform its goodwill impairment triggering event analysis (and any resulting impairment test) as of the interim reporting date. In other words, the entity would not be allowed to wait and perform its goodwill impairment triggering event analysis (and any resulting impairment test) as of its annual reporting date. The benefit of the new alternative in this situation is that the entity is able to perform the goodwill impairment triggering event analysis (and any resulting impairment test) as of the interim reporting date instead of performing that analysis throughout the interim reporting period and any resulting impairment test as of the date during the interim reporting period on which a triggering event occurred.
- If the entity only reports financial information under U.S. GAAP on an annual basis, it would perform its goodwill impairment triggering event analysis (and any resulting impairment test) as of its annual reporting date. The benefit of the new alternative in this situation is that the entity is able to perform the goodwill impairment triggering event analysis (and any resulting impairment test) as of the annual reporting date instead of performing the analysis throughout the annual reporting period and any resulting impairment test as of the date or dates during the annual reporting period on which triggering event(s) occurred.
Given the implications to the benefits provided from electing the new alternative, an eligible entity should carefully consider whether the financial information it reports on an interim basis is prepared in accordance with U.S. GAAP.
Goodwill accounted for in accordance with ASC 350-20, which is the goodwill to which the new alternative applies, includes goodwill recognized in the accounting for a business combination, as well as the excess reorganization value recognized as goodwill by entities that adopt fresh-start reporting under ASC 852, “Reorganizations,” but does not include goodwill related to applying the equity method of accounting under ASC 323, “Investments—Equity Method and Joint Ventures.”
If a private company or not-for-profit entity elects the alternative, that election should be disclosed under ASC 235, “Notes to Financial Statements,” in addition to the information otherwise required to be disclosed by ASC 350-20.
The effective date for the new alternative is fiscal years beginning after December 15, 2019, with early adoption permitted in both interim and annual financial statements provided those financial statements have not been issued or made available for issuance as of March 30, 2021 (the date the ASU was issued). If an entity does not adopt the new alternative by the effective date, the ASU provides an unconditional one-time election of the alternative prospectively after its effective date without assessing preferability under ASC 250, “Accounting Changes and Error Corrections.”
While the new alternative should be applied prospectively, it should be applied as of the beginning of the interim or annual period for financial statements that have not yet been issued or made available for issuance in the year of adoption. Conversely, the new alternative should not be applied as of the beginning of the year of adoption if financial statements for interim periods within that year have already been issued or made available for issuance.
The following are examples of how the effective date and transition guidance should be applied by an eligible entity that has elected the preexisting goodwill alternative (and, therefore, only tests goodwill for impairment upon the occurrence of a triggering event):
- The entity has a calendar year end and reports under U.S. GAAP to its lender on a quarterly basis. The entity elects the alternative for its December 31, 2020 annual financial statements because it has not yet issued those financial statements, nor made them available for issuance, as of March 30, 2021. If the entity issued a complete set of interim financial statements (which includes the notes to the financial statements) each time it reported to the bank on a quarterly basis, it does not reperform its goodwill impairment triggering event analyses (and any resulting impairment tests) for the first, second or third quarters as of the end of those quarters, but does perform its goodwill impairment triggering event analysis (and any resulting impairment test) for the fourth quarter as of December 31, 2020. Conversely, if the entity did not issue a complete set of interim financial statements each time it reported to the bank on a quarterly basis, it does reperform its goodwill impairment triggering event analyses (and any resulting impairment tests) for the first, second and third quarters as of the end of those quarters, and also performs its goodwill impairment triggering event analysis (and resulting impairment test) for the fourth quarter as of December 31, 2020.
- The entity has a calendar year end and does not report under U.S. GAAP except on an annual basis. The entity elects the alternative for its December 31, 2020 annual financial statements because it has not yet issued those financial statements, nor made them available for issuance, as of March 30, 2021. Because the entity has not reported under U.S. GAAP on an interim basis during 2020, it performs the goodwill impairment triggering event analysis (and any resulting impairment test) for the 2020 annual reporting period as of December 31, 2020.
When deciding whether to elect the new alternative provided by ASU 2021-03, an eligible entity should carefully consider the possibility of it becoming or being acquired by a public business entity, which would require the entity to unwind its application of the alternative. The difficulty that may be encountered in unwinding the application of the new alternative would be particularly pronounced if the entity previously only reported under U.S. GAAP on an annual basis.
