FASB goodwill impairment simplification proves to be popular

At least one of the Financial Accounting Standards Board’s simplification initiatives is proving to be so popular that some companies want to adopt it as of yesterday.

It involves eliminating an extra step for goodwill impairment tests. Late last month, FASB released a new standard to simplify the goodwill impairment test, allowing many companies that don’t already apply the private company accounting alternative for goodwill to skip the extra step (see FASB updates goodwill impairment standard).

Brian Marshall, a partner in RSM’s National Accounting Standards Group, has found some of his business clients are eager to take advantage of the change. “With goodwill impairment today, you’ve got your two-step model,” he said. “This is basically taking out the second step. Companies really like that. Basically you’re taking out step 2, which was a hypothetical business combination, and companies generally don’t have an issue not having to do that.”

Companies are in a hurry to adopt the new standard, even if it means adopting it as of last year.

Courtesy of GASB

“That one can be adopted early, but it can’t be adopted in 2016,” Marshall explained. “They made it for periods. If you want to adopt it early, you can do it in 2017. When that was on the drawing board, we had a lot of client companies asking, ‘Oh, can we adopt this right away, or for 2016 financial statements?’ But they didn’t allow that. There’s not many times when you have companies saying, ‘Yes, we really want to adopt a standard early, oh, let us adopt it.’ But on the simplification ones, those are standards that they are looking to adopt early.”

He noted that the simplification was also popular when FASB allowed it for private companies, and many of them wanted to adopt it early as well. “A few years back with the private company alternatives, those could be adopted early,” said Marshall. “A lot of clients did adopt those alternatives with goodwill impairment, the single step, as well as the intangible asset alternative where you subsumed certain intangibles into goodwill. Those were pretty popular with companies, but not necessarily all. Some of them were met with different degrees of whether companies want to adopt them early.”

Marshall has also been helping companies adjust to another recent FASB standard on business combinations (see FASB clarifies business definition). “Based on the new guidance there are probably going to be more situations where these things will be classified as asset acquisitions,” he said. “There are a couple of differences there between how you treat a business because someone will say, ‘Oh, why do I care if it’s a business combination vs. an asset acquisition?’ There’s different guidance for each of those, and in at least a couple of different areas differences between accounting for transaction costs with asset acquisitions, which is part of what’s capitalized for what you acquire, versus business combinations where you just expense it as you incur it.”

Another area where there might not be goodwill is in an asset acquisition. “In a business combination, you would potentially have goodwill for any residual amounts,” said Marshall. “I think IP R&D, in-process research and development, are items that you would have different accounting for as well. I think it’s going to impact real estate entities more than other entities because you have a lot of situations today where there might be a building with an attached lease. Under the new guidance you’d look at that and potentially are likely to say it’s going to be an asset acquisition instead.”