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by Scott Riggs - Senior Accountant

  Print Version

One of the many topics we discuss with clients is the topic of accounting for goodwill. The Financial Accounting Standards Board (FASB) has also been discussing the topic and has been contemplating altering the accounting for goodwill measurement for public business entities and not-for-profits. Through our various discussions with clients, applying the appropriate accounting measurement for goodwill, subsequent to its acquisition, continues to add an element of accounting complexity that many may refrain from addressing.

What is goodwill for not-for-profits? Goodwill is recognized in an acquisition by not-for-profits only if the operations of the acquired are not expected to be predominantly supported by contributions and returns on investments. Once goodwill is recognized as an asset, the not-for-profit entity has the option of either assessing relevant events and circumstances (qualitative factors) that could affect the fair value of the reporting unit in determining if it is more likely than not that goodwill is impaired or the entity can bypass the qualitative impairment test option and go directly to the two-step impairment process (FASB Accounting Standards Update No. 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment). If an entity determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the two-step impairment test, recognized within FASB ASC 350-20, is used to identify potential goodwill impairment and measure the amount of a goodwill impairment loss to be recognized (if any). The two-step impairment test consists of step one: comparing the fair value of the asset to its carrying amount and then step two: applying a hypothetical purchase price allocation to calculate the goodwill impairment amount.

In late 2013, the FASB decided to endorse the Private Company Council (PCC) decision to give private companies (wherein company shares are privately held and not traded to the general public on the stock market exchanges like those of publicly held businesses) an alternative to amortize goodwill and simplify the impairment test. A private company can now elect to amortize goodwill over 10 years or a period of less than 10 years, if it demonstrates another useful life is more appropriate. Under this alternative, a private company is given the option to test goodwill for impairment at the entity level or the reporting unit level. Either way, goodwill should be tested for impairment if there is a triggering event that indicates that the carrying value of the entity may be less than its fair value (or the carrying value of the reporting unit may be less than the fair value of the reporting unit). Under this accounting alternative, the goodwill impairment amount now represents the excess of the entity’s carrying amount over its fair value as calculated in step one of the original two step impairment test. Goodwill would not be reduced below zero. Impairment charges would be allocated to individual amortizable units of goodwill pro-rata using their relative carrying amounts or could be allocated using another reasonable and rational approach.

This accounting alternative, although not currently available for not-for-profit entities, would considerably ease the concerns related to the cost of time and complexity of the currently practiced goodwill impairment test. The FASB is still in discussion at this time concerning this topic.



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