The Financial Accounting Standards Board on Wednesday approved a tweak to goodwill accounting rules for private businesses and nonprofits to help them reduce costs and complexity as they continue to weather the coronavirus pandemic.
The move by the U.S. standard setter allows these companies and organizations to assess at a later point in time a situation that might trigger a goodwill impairment.
Companies record goodwill on their balance sheets when they buy a business for more than the value of its hard assets. Under current accounting rules, they must monitor and evaluate so-called triggering events for impairment of the goodwill throughout the year.
Issues such as share price declines or fluctuations in foreign exchange rates can result in or contribute to a triggering event. In case of such an event, companies need to analyze whether it is more likely than not that the fair value of their reporting unit is less than the amount recorded on the books. If that is the case, they are required to perform an impairment test, which could reduce the value of the goodwill.
For private companies, there might be a long lag time between the date they evaluate a triggering event and their next financial filing, given that many of them only produce these statements once a year. That can be a problem when they have to come up with a carrying value to test for goodwill impairment but they haven’t reported financial statements yet.
By the end of the annual reporting period, a company’s financial situation may have changed, potentially resulting in outdated information for investors and other users of financial statements. Private businesses have expressed concerns about the process and the expenses and complexity that go with it, FASB said.
The new standard, which FASB expects to publish in late March, enables private companies and nonprofits to evaluate a triggering event when they report their financial results, either at the end of a quarterly or annual period. Companies that exercise this option don’t have to monitor for triggering events in between reporting periods.
Issues around when to evaluate triggering events have become more apparent during the pandemic because of ongoing economic uncertainty, the board members said. “The current pandemic has shone a bit of a light on this area,” board member Susan Cosper said during the meeting on Wednesday.
The FASB in recent months has advised companies on how to account for the impact of the pandemic, delayed implementation of certain rules by a year and temporarily slowed its pace of standard setting.
The board proposed the new goodwill option in December, initially limiting it to private companies and nonprofits that only produce annual financial statements. The final standard is for all private companies and nonprofits, regardless of how often they report.
The new standard is separate from a larger goodwill project that FASB is working on, in which it is considering a requirement that companies write down a set portion of goodwill each year, instead of testing for potential impairments annually.
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