![]() ![]() Overview of ASU 2021-03 - Intangibles - Goodwill and Other Measure goodwill for impairment by comparing the entity’s or reporting unit’s fair value with its carrying value (rather than using the two-step goodwill impairment test described above).Test goodwill for impairment not annually (as required previously) but whenever an entity or reporting unit experiences an event or a change in circumstances-known as a “triggering event”-that indicates a likelihood of its fair value being below its carrying amount.(Previously, all testing was at the reporting unit level only.) Test goodwill at either the entity level or the reporting unit level.(Prior to ASU 2014-02, there was no amortization of goodwill, although an impairment write-down was possible.) Amortize goodwill on a straight-line basis over 10 years-or less, if the entity demonstrates that a shorter useful life is more appropriate.Private companies that elect the accounting alternative adhere to the following procedures: In January 2014, the Financial Accounting Standards Board (FASB) passed Accounting Standards Update (ASU) 2014-02 Intangibles – Goodwill and Other, allowing private companies to elect an accounting alternative to the traditional GAAP standards for goodwill. ![]() Introducing a Goodwill Accounting Alternative If impairment is indicated, that value is adjusted downward on the financial statements. Once adjusted, the residual value of the reporting unit (i.e., goodwill) is compared with the recorded goodwill value. In order to determine the implied fair value of the acquired goodwill, all assets are appraised and, where appropriate, any identified indefinite and long-lived assets are adjusted to their fair value. If the analysts (typically external valuation professionals) conclude that the reporting unit’s fair value is less than its carrying value, including goodwill, then the company must proceed to Step 2. Step 1 – Determine the fair value of the reporting unit. ![]() If a company determined it was more likely than not that the fair value of goodwill was less than its carrying value (i.e., book value), then it had to perform a quantitative two-step impairment test: Under ASC 350, for each reporting unit, goodwill was tested for impairment at least annually (or more frequently if certain conditions existed). In fact, most users of private company financial statements generally disregard goodwill and goodwill impairment losses in their analysis of a private company’s financial condition and operating performance. Furthermore, from the perspective of those who prepare and rely on the financial statements of private companies, the goodwill impairment test performed under GAAP provides only limited information for making useful decisions. Yet private company executives had long contended that this traditional way of accounting for goodwill justifies neither the related costs nor the complex requirements to do so. GAAP standards traditionally have required companies to carry goodwill on their financial statements at its initial value. Until recently, private companies were required to work within the confines of generally accepted accounting principles (GAAP)-in particular, under Accounting Standards Codification (ASC) 350 Intangibles – Goodwill and Other. Goodwill is defined as the residual amount recognized in a business combination after all identifiable assets acquired and liabilities assumed have been recognized at fair value-in other words, your company’s non-quantifiable assets, such as brand reputation and customer loyalty. To determine the most appropriate alternative for your unique situation, you must carefully assess your company’s future plans-and be sure you understand all the alternatives.Īccounting for Goodwill: Streamlined Standards for Private Companies As a private business, your company has the option to elect an accounting alternative for the reporting of goodwill, but that doesn’t necessarily mean it should. ![]()
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