AICPA questions goodwill impairment model in letter to FASB

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The American Institute of CPAs’ Financial Reporting Committee has sent a letter to the Financial Accounting Standards Board questioning the costs and benefits of FASB’s current goodwill impairment model.

The letter, which the AICPA’s FinREC group sent last week to FASB, comes in response to an invitation to comment from FASB. FASB had asked whether the benefits of the information provided by the current goodwill impairment model justify the cost of providing that information? In response, FinREC questioned whether the benefits of the information provided by the current goodwill impairment model justify the costs.

“FinREC believes that while in some cases impairments can confirm the existence of an underperforming acquisition, in other cases it may not be the case due to integration of reporting units and the shielding effect due to other assets included in a reporting unit’s fair value,” said the letter, signed by FinREC chair Angela J. Newell and ITC Comment Letter Task Force chair Michael Cheng. “For example, a reporting unit’s unrecorded fair value gains from holding property or the existence of unrecognized intangible assets such as a brand may mask a decline in the implied value of goodwill.”

On a cost-benefit basis, FinREC said it generally supports goodwill amortization with impairment testing. However, it also recommended making certain changes to the goodwill impairment test to reduce its costs, such as making it a trigger-based test, provided the amortization period is fairly short, and elevating it from the reporting unit level to the operating segment level. FinREC also cautioned that the cost savings from introducing goodwill amortization may not materialize if the amortization model is overly complex.

“FinREC is supportive of goodwill amortization for simplification and cost reduction purposes,” said Yelena Mishkevich, AICPA senior manager of accounting standards – public practice, in an interview with Accounting Today. “They do believe that the goodwill impairment test should be retained but recommend certain changes to it. In terms of disclosures, we feel like FASB first needs to decide on the recognition and measurement model before we can really have the disclosures.”

FASB’s invitation to comment also asks about intangible assets, asking whether to modify the recognition of intangible assets in a business combination. In its letter FinREC said it doesn’t support subsuming into goodwill intangible assets such as patents, technology and trademarks that have their own unique useful lives, can be separately licensed, and their continued use may not be correlated to the amortization period of goodwill.

“One of the questions lists various approaches to accounting for intangible assets acquired in a business combination,” said Mishkevich. “With respect to intangible assets, FinREC believes intangible assets should not be subsumed into goodwill, and the current guidance should be retained of recognizing intangible assets in business combinations.”

FinREC offered some advice to FASB on the approach it should take. “Among the approaches that FASB listed in question 17, one is to apply a principles-based criteria for intangible assets. For that one, we basically said that it’s a broader-scope project,” said Mishkevich. “We were responding to questions about intangible assets with a focus on goodwill impairment. If the sole purpose of this ITC is to simplify the goodwill impairment test, they shouldn’t embark on a broader-scope intangible-related project. Potentially, some of the FinREC members could see changing the guidance for intangibles, but it’s separate and apart from the goodwill impairment test.”

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