On January 16, 2014, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2014-02, Intangibles—Goodwill and Other (Topic 350): Accounting for Goodwill. This ASU introduced an accounting alternative for private companies that simplifies the accounting for goodwill. The effects of a private company electing the ASU as its accounting policy for goodwill include the following:
- Amortization of goodwill. The ASU allows private companies to amortize goodwill on a straight-line basis over ten years or over a shorter period (if the company demonstrates that another useful life is more appropriate).
- Frequency of the test for impairment. Under the ASU, private companies are required to test for impairment only when there is a triggering event instead of testing it every year.
- Method of impairment testing
- Private companies can choose to test goodwill for impairment at either the entity or reporting unit level (instead of having to test goodwill at the reporting unit level).
- The ASU eliminates Step 2 of the goodwill impairment test. If Step 1 of the test indicates impairment, the amount of impairment would be measured by calculating the difference between the carrying amount of the entity (or reporting unit) and its fair value. A Step 2 hypothetical purchase price allocation is no longer required.
- Other provisions. If ASU 2014-02 is elected, all aspects of it must be elected. In other words, a private company cannot elect to apply the impairment guidance and not elect to apply the amortization guidance.
- Timing. While the ASU is not effective until annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015, early adoption is permitted. Private companies may elect the accounting alternative to account for goodwill in their 2013 financial statements as long as those statements have not yet been made available for issuance.
- Click here for a copy of the ASU.