Accounting Changes for Goodwill
by Dwayne Murphy
The Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2014-02 is giving private companies another option when it comes to accounting for goodwill. Effective for new goodwill recognized in annual periods beginning after December 31, 2014 (early adoption is permitted). Private companies will be able to subsequently amortize goodwill on a straight-line basis over a period of ten years, or less if the company is able to demonstrate that a lower useful life is better suited. Before this update U.S. GAAP did not allow any amortization of goodwill.
FASB Accounting Standards Update (ASU) 2014-02 also permits private companies to use a simplified impairment model, which allows them to test for impairment only when a triggering event occurs that would indicate that the fair value of a company (or a reporting unit) may have fallen below its carrying amount. If the accounting alternative election is made, an additional election of whether to test goodwill for impairment at either the company level or the reporting unit level must be made. Before this update U.S. GAAP required that testing of impairment be done at least annually and in some cases more frequently if certain conditions were met.
These changes should be beneficial to private companies as it allows for amortization expense and it lessens the burden of not having to test for impairment every year.
For public companies and not-for-profit companies the FASB is still considering the following alternatives for goodwill accounting at their last meeting on March 26, 2014:
- Same alternative as listed above for private companies.
- Amortize goodwill with impairment tests over its useful life, not to exceed a maximum number of years.
- The direct write-off of goodwill at the acquisition date.
- A nonamortization approach that uses a simplified impairment test.
Dwayne Murphy ([email protected]) is a Senior Accountant with Langdon & Company LLP. He specializes in audit, serving a wide variety of nonprofit organizations.