Last November, the Financial Accounting Standards Board endorsed simplifying the accounting standards that private companies use in measuring and reporting goodwill, and FASB is currently looking into the possibility of changing the standards for public companies too.
The changes came in response to recommendations from FASB’s sister organization, the Private Company Council. Under the changes approved last November, the standard for Accounting for Goodwill Subsequent to a Business Combination permits a private company to apply a simplified impairment model to goodwill and to amortize goodwill over a period of 10 years, or less under some circumstances (see FASB Endorses Changes in Accounting Standards for Goodwill and Interest Rate Swaps).
Those changes are prompting a re-examination of how the rules can be simplified for public companies as well. At a meeting last month, FASB’s board members directed the staff to carry out additional research on two methods that public companies might use: a one-step impairment test that would simplify the current two-step test, and a direct write-off of goodwill.
“FASB went through a pretty long deliberation and elected not to adopt the Private Company Council’s GAAP exceptions for public companies,” said Greg Franceschi, managing director at the financial advisory and investment banking firm Duff & Phelps, who is global leader of the firm's Financial Reporting Valuation Advisory practice and co-chairman of the AICPA's Goodwill Impairment Task Force. “They looked at a number of different options, and the FASB has recommended additional research into two possible options for public companies. One would be a simplification of the step 1 process when you actually have an impairment. The second would be a direct write-off of goodwill from day 1 of an acquisition.”
Franceschi sees more support for one-step impairment test approach. “Over the past several years both the FASB and the AICPA have gone through various options and given preparers and users of financial information—the public companies themselves—tools to ease the cost of applying step 1 of their annual test,” he said. “And those would be the qualitative option that was part of the ASU[Accounting Standards Update], 2011-8, where you are not required to do a full quantitative step 1 analysis. Then, also very recently, the AICPA issued a robust and comprehensive practice aid. While it’s not authoritative, it has proven to be very useful to preparers and companies with the step 1 impairment models, with guidelines, best practices and suggestions for both a full step 1 analysis, as well as the qualitative option. So there have been a lot of developments that have eased the cost of the step 1 for the annual test.”
Franceschi thinks the two-step analysis provides better information, but he sees merit in a one-step approach.
“We still believe that a full two-step analysis in actually determining an impairment charge probably provides the most robust information, but recognize that if you are attempting to simplify the impairment calculation itself, that a one-step test makes sense and we would be supportive of that option,” he said. “You are still reporting a tremendous amount of useful information, but also attempting to deal with some of the costs.”
However, he does not support the direct write-off approach. “I think there is a tremendous of pushback from companies and users of financial information,” he said of that approach. “Essentially, a great deal of information is disappearing from day 1. There is no continual information that is provided on how acquisitions are performing or underperforming. So, from a transparency perspective, you’re losing a lot of transparency into useful information. And at the actual companies themselves, there has been pushback. That implies that they essentially overpaid on day 1, which is not something that a lot of companies believe is an appropriate way to present value that they believe that they paid for on day 1. So I think generally there is not a tremendous amount of support for direct write-off. There is really no basis for it in the accounting world to do that.”
Franceschi believes the traditional way of dealing with goodwill impairments over the past eight years or so has been beneficial to users and has provided more transparency. He is not sure what the prospects are for FASB and the International Accounting Standards Board to agree on an approach for simplifying the standards, but he pointed out that the one-step impairment test would be consistent with the current International Financial Reporting Standards. “
As far as convergence, it’s still up in the air these days about how big of an issue or focus point that is for the two governing bodies,” he said. “But certainly, if FASB adopted a one-step approach, that would be consistent with reducing cost to GAAP preparers and be consistent with IFRS.”
He expects to see a decision from FASB in the next few months, although the staff has already recommended the one-step approach. “The FASB said that they want to go out for some additional research,” he said. “The staff recommendation to the board was to go with a simplified one-step test, but the board would simply like to have some more research on how it will be simplified versus the direct write-off approach.”