Koch’s Corner delivers concise, “need to know” summaries of important updates on accounting and assurance issues for privately-held companies.
By Richard Koch, CPA
Director of Quality Control at Gray, Gray & Gray
In March 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2021-03, “Intangibles – Goodwill and Other (Topic 350) – Accounting Alternative for Evaluating Triggering Events.”
This update is particularly timely given the pandemic-related economic upheaval of the past 16 months.
Certain situations, called triggering events, may cause a decrease in the fair value of an asset. Some of the triggering event examples provided by the Center for Audit Quality include:
- Macroeconomic conditions, such as a deterioration in general economic conditions, limitations on accessing capital, fluctuations in foreign exchange rates, or other developments in equity and credit markets.
- Industry and market considerations, such as a deterioration in the environment in which an entity operates, an increased competitive environment, a decline in market-dependent multiples or metrics (consider in both absolute terms and relative to peers), a change in the market for an entity’s products or services, or a regulatory or political development.
- Cost factors such as increases in raw materials, labor, or other costs that have a negative effect on earnings and cash flows.
- Overall financial performance, such as negative or declining cash flows or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods.
- Other relevant entity-specific events such as changes in management, key personnel, strategy, or customers; contemplation of bankruptcy; or litigation.
- Events affecting a reporting unit such as a change in the composition or carrying amount of its net assets, a more-likely-than-not expectation of selling or disposing of all, or a portion, of a reporting unit, the testing for recoverability of a significant asset group within a reporting unit, or recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit.
- If applicable, a sustained decrease in share price (consider in both absolute terms and relative to peers).
If the entity concludes that it is more likely than not that the fair value of the reporting unit is less than its carrying value, then the entity must test goodwill for impairment. Goodwill impairment may be triggered when an event occurs that causes the value of an asset to decline.
Under the current guidance an entity is required to monitor and evaluate goodwill impairment triggering events throughout the reporting period. The triggering event analysis and resulting goodwill impairment test, if any, are required to be performed without the use of hindsight, or the use of known changes to facts and circumstances that occurred after the triggering event date.
The FASB decided to amend the guidance in response to concerns about (1) the cost and complexity of performing a goodwill triggering event evaluation during the reporting period, rather than completing the analysis as of the end of the reporting period, and (2) the relevance of the triggering event evaluation with the financial information reported to and used by stakeholders.
The amendments provide an alternative to perform the goodwill impairment analysis at the end of the reporting period, whether the reporting period is an interim or annual period. An entity that elects this alternative is not required to monitor for goodwill impairment triggering events during the reporting period but, instead, should evaluate the facts and circumstances as of the end of each reporting period to determine whether a triggering event occurred, and whether goodwill is impaired.
The amendments in this Update apply to private companies and not-for-profit entities that elect the accounting alternative, and do not require incremental disclosures beyond the existing requirements in Topic 235, “Notes to Financial Statements” and Subtopic 350-20. The amendments in this Update also include an unconditional one-time option for entities to adopt the alternative prospectively after its effective date without assessing preferability under Topic 250, “Accounting Changes and Error Corrections.”
The amendments in this update are effective on a prospective basis for fiscal years beginning after December 15, 2019. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance as of March 30, 2021.
If you have questions regarding the early adoption of ASU No. 2021-03, please contact me at (781) 407-0300, or via e-mail at firstname.lastname@example.org.