Goodwill Amortization: A Taste of 'Little GAAP'
After years of listening to complaints from
private firms and their auditors that certain accounting
rules were too costly and complex, the Financial Accounting
Standards Board (FASB) has finally taken action. On January
16, the FASB simplified one of the accounting rules private
firms most loved to hate: FASB Accounting Standards
Codification Topic 350,Intangibles -- Goodwill and Other.
What Is Goodwill?
Goodwill shows up on a company's balance sheet after a
merger or an acquisition. It's what is left over after the
company allocates the purchase price to tangible and
identifiable intangible assets acquired and liabilities
Generally accepted accounting principles (GAAP) requires
goodwill to be tested for impairment at least annually, or
more frequently if certain conditions exist. If impairment
occurs, the company must reduce the carrying value of
goodwill on its balance sheet and report an impairment loss
on its income statement.
The FASB's Change of Heart
When deciding whether to simplify the rules for private
firms that report goodwill, the FASB solicited feedback from
business owners, auditors, lenders and creditors. They
discovered that many financial statement end-users disregard
goodwill and impairment losses in their evaluations of
private companies' financial condition and operating
Because the existing rules provide only limited value to
private company stakeholders, the FASB decided to bend them
prospectively for any new and existing goodwill. Under the
updated standard, private companies can elect to amortize
goodwill on a straight-line basis over 10 years (or less if
the firm can demonstrate that a shorter useful life is more
appropriate). Amortization reduces the likelihood of
impairment, because it's already being written off the books
over ten years (or fewer).
Instead of testing for impairment every year, private
companies only need to test when a "triggering event"
occurs. Examples include:
A significant adverse change in
legal factors or the business
An adverse action or assessment by a
A loss of key personnel
A more-likely-than-not expectation
that the business (or a large
segment) will be sold or otherwise
Recoverability testing of a
significant long-lived asset group
Recognition of a goodwill impairment
loss for a subsidiary
If a triggering event causes the fair value of the
acquired business to fall below its carrying value,
the private company will incur an impairment loss.
This represents a major simplification.
Private firms are no longer expected to reallocate
fair value to all the acquired business's assets and
liabilities, a process that's similar to repeating
the purchase price allocation the firm used when the
businesses originally combined.
The amended standard gives private companies the
option to measure impairment at the entity level.
So, if an acquired division underperforms but the
entity does well overall, the company might not need
to record goodwill impairment.
In light of the simplified standard for private
firms, the FASB added the subsequent accounting for
goodwill for public companies and not-for-profit
organizations to its agenda. So, broader changes
could be in the pipeline eventually.
How Soon Can You Apply the New Rule?
FASB Accounting Standard Update 2014-02 officially
goes into effect for annual periods beginning after
December 15, 2014, and interim periods beginning
after December 15, 2015. But early adoption is
permitted. So contact your accounting firm as soon
as possible to take advantage of the reduced
compliance costs when reporting new and existing
For more detailed information,
please call Robert Puerto at 516-248-7361 or click
here to email Robert Puerto.
He would be happy to address any questions you may
Accounting for Swaps
Some private firms couldn't qualify for low-rate
fixed loans after the recession. Instead, they
turned to interest rate swaps to economically
convert variable rate loans into fixed rate loans.
But they discovered that accounting for interest
rate swaps -- considered derivatives under GAAP --
was confusing and costly.
Old Rules: FASB
Accounting Standards Codification Topic 815, Derivatives
and Hedging, requires companies to recognize
interest rate swaps on the balance sheet as either
assets or liabilities and measure them at fair
Although GAAP permits hedge accounting under certain
conditions, private firms often lack the expertise
to elect the simplified method. This resulted in
significant earnings fluctuations -- and headaches
-- for private firms.
Simpler Alternative: Now
the FASB offers a simplified hedge accounting
approach for private firms (except financial
institutions) that enter into qualifying interest
rate swaps. Under the amended standard, a private
company that uses a "plain-vanilla" interest rate
swap when borrowing money may qualify for hedge
accounting that treats the swap and loan as separate
Essentially, interest expense under the simplified
hedge accounting approach is similar to the amount
that would result if the entity had directly entered
into a fixed-rate loan. On the balance sheet, the
company also can measure the swap at settlement
value, as opposed to fair value, which is harder to
This update reduces compliance costs and income
statement volatility. Private firms can elect to
apply the simplified hedge accounting approach on a
swap-by-swap basis to new or existing swaps that
Like the goodwill standard, this change is effective
for most firms after December 15, 2014, but early
adoption is allowed.