Manufacturing and distribution companies are continuing to look for opportunities for growth, which in many cases may come through an acquisition. Upon completing an acquisition, any unallocated acquisition price is presented on the balance sheet as “goodwill.”
What do you think of when you hear goodwill? If your company is subject to a financial statement audit or review, your first thought may be, “Time and money!” While accounting considerations surrounding your most significant accounts – accounts receivable and inventory, for example – can be burdensome enough, goodwill has only added another layer of complexity in recent years. ASU 2014-02, Intangibles – Goodwill and Other (Topic 350): Accounting for Goodwill may provide some relief if elected by your company.
Prior to ASU 2014-02, amortization of goodwill was not permitted. Any goodwill resulting from an acquisition was tested for impairment at least annually. In the event the fair value of an entity (or reporting unit) was deemed to be below its carrying amount, a second step was required to determine the amount of goodwill impairment loss. This second step in many cases can be costly not only in terms of dollars spent to assess and support fair value, but also in terms of time spent by your accounting personnel that could otherwise be spent with opportunities to add greater value to your company.
ASU 2014-02 allows a privately held company to amortize goodwill on a straight-line basis over 10 years, or less than 10 years if the entity demonstrates another useful life is more appropriate. A company electing this accounting alternative is required to make an accounting policy election to test goodwill for impairment at the entity level or the reporting unit level.
Under this alternative, goodwill should be tested for impairment when an event or changes in circumstances occur (a triggering event) that indicates the fair value of the entity (or reporting unit) may be below its carrying amount. Upon such an event or changes in circumstances, a company may assess qualitative factors to determine whether it is more likely than not that the fair value is less than the carrying amount. Further testing is unnecessary when the qualitative assessment indicates it is not more likely than not that goodwill is impaired. Otherwise, a quantitative assessment is required. A company may elect to skip the qualitative assessment and perform the quantitative calculation. A goodwill impairment loss, if any, is recognized for the amount that the carrying amount of the entity (or reporting unit) exceeds the fair value.
By allowing for the amortization of goodwill, ASU 2014-02 is expected to reduce the likelihood of impairments. Additionally, the expectation is that privately held companies will have to test goodwill for impairment less frequently, saving both time and money. While the alternative is expected to be a popular election by many companies, careful consideration should be given to the impact of the financial statements and the users of the financial statements. For example, while a lender may typically ignore any value in goodwill as an intangible, the election to amortize goodwill could have a significant impact of financial statements covenants and the general “feel” of the financial statements.
ASU 2014-02 applies to all privately held companies, as defined, and is effective for annual periods beginning after Dec. 15, 2014, with early adoption permitted. If elected, the accounting alternative should be applied prospectively to goodwill existing as of the beginning of the year of adoption, and any new goodwill recognized in periods beginning after Dec. 15, 2014.