The Financial Accounting Standards Board has decided to set aside a long-running project on goodwill accounting that would have required companies to amortize goodwill on a straight-line basis over 10 to 25 years, removing the project from its technical agenda and deprioritizing it for now.
The project was added to FASB’s technical agenda in 2018 with the goal of revisiting the subsequent accounting for goodwill and identifiable intangible assets broadly for all entities, including how to improve the decision usefulness of the information and rebalancing the cost-benefit factors.
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While improvements have long been needed in the accounting for goodwill, one of the problems has been that the International Accounting Standards Board has also been working on changing the accounting standards for goodwill. Some investors are worried about the amount of goodwill impairment that would suddenly end up on corporate balance sheets and would prefer for FASB and the IASB to take a similar approach, especially when it comes to multinational companies (
“In many projects, this one in particular, it was a converged project and so if I’m not personally convinced that the answer is so superior I think taking some time to pause and say where does the IASB end up on their decisions is also important,” said FASB vice chairman Jim Kroeker.
However, FASB may decide to return to the project eventually, especially when it comes to what happens with goodwill from companies acquired many years ago.
“I say all of that with a big hesitation about the volume of goodwill on balance sheets and the size of goodwill related to certain entities,” said Kroeker. “At what point in time do we have goodwill for individual entities being 70% of their balance sheet and that goodwill lasting for a long time and we can’t identify why it’s there other than transactions that happened decades ago? I think that’s probably going to be harder and harder for us as standard-setters to explain the longer we move forward and don’t reconsider that. I would be fine either taking it off the agenda and maintaining it in research or keeping it on the agenda, but hitting the pause button more indefinitely to see where the IASB ends up. I’d be fine with either of those.”
FASB board member Marsha Hunt concurred with Kroeker. “As I think about this, while I am still very supportive of the leanings for which I have voted, I think those would be improvements for various reasons on the model today,” she said. “I agree with Jim. I do not think that goodwill is an asset that lives indefinitely on the balance sheets. We are now a couple decades from the existing rule. You get two more decades out there and you’re potentially at the 40-year life that no one believed back in the 1980s. I still feel like this is something that will need to get addressed, but I’m not convinced right now that it has to be the the top priority, so I could support, using Jim’s words, ‘taking a pause,’ and maybe doing a little bit more thinking and broadening of our study of the topic to see if there's something we haven't thought about that other parts of the world are considering that could help us refine some of where we’ve gone. I could support that at this time.”
Board member Sue Cosper also weighed in with her thoughts, pointing out that proposed changes stemmed from work done by FASB’s Private Company Council and how there were different priorities for investors in public companies. “I have been concerned about the solution, if you will, in terms of whether we create greater cost and complexity for the system as a whole,” she said. “When I think about this project and about some of the feedback that we heard from investors about using the information on goodwill impairment as a directional barometer for acquisition success, it troubles me that it loses relevance the further away it gets from the acquisition and so the cost associated with that is is pretty high for a company with little benefit for an investor. But at the same time I think way back the catalyst for the project's addition to the agenda was really the PCC's addition of this project to their agenda and at the time an extension of whether or if it should be brought into public companies and, if so, how. I think once the Private Company Council developed the alternative, and the board endorsed it, we then actively started to redeliberate it for public companies. At the time I wasn’t on the board but I thought about it as maybe an additional objective which isn’t so stated in the project.”
Cosper was technical director at FASB before she became a full-fledged member of the board, but she recalled that FASB was working to converge its standards with the IASB at that time. “Do we try to conform the U.S. system or do we try to converge internationally? At the time there was certainly discussion of what the IASB would do,” said Cosper. “The concern I have is we’re not really doing either, and I think we need a stronger case for change.”
FASB chairman Rich Jones weighed in with his thoughts, pointing out that he wasn’t on the board at the time either.
“I wasn’t here for the original agenda decision, but I'm pretty confident to say that if I were, I would have supported adding this project and that’s partially because I think we have a responsibility for the relevance of the entirety of the financial statements, not just an income statement that can be converted to a quasi-statement of cash flows via someone’s adjustments of it," he said. "But I think that people look at different information but the other reason was because I didn't think that our current impairment model reflected the decline in the value that had been assigned to acquired goodwill. We've seen time and again entities where there have been business failures that were preceded by large amounts of goodwill. It was only when the market cap declined significantly that there appeared to be an issue with the goodwill. I find that somewhat surprising. There have been a few high-profile European cases recently. It's been a little while since we’ve had some in the U.S. Watching my stock portfolio, though, my guess is that we will see some of that shortly.”
He sees potential usefulness for the work FASB has done on the standard if the project is revived in the future, but he voted with the rest of the seven members of the board to set aside the project for now.
“I would note that we don’t take information on projects that we've taken off our agenda and throw it out,” said Jones. “To the extent that it becomes relevant in a future period, it’s something we certainly can look at. We do have a research project on intangibles. I have an idea we’ve probably done all the research we could do on this project up to date, but if it ever at a point in time in the future makes sense for us to pursue more in that area, I think that's something that we could certainly consider. I think it’s a good time to pause this project until we learn more or until we see a different case for change.”
