In mid-January 2014, the FASB released Accounting Standard Update 2014-02 Intangibles – Goodwill and Other (Topic 350): Accounting for Goodwill (ASU 2014-02). ASU 2014-02 is the first standard issued by the FASB upon endorsement of a consensus of the Private Company Council that is specifically designed to meet the needs of private companies by providing an alternative within US GAAP. Current accounting standards for goodwill are seen as complex because they require regular impairment testing and do not permit amortization of goodwill.

1. MHMMessenger
January 2014
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M AY E R H O F F M A N M C C A N N P. C . – A N I N D E P E N D E N T C PA F I R M
A publication of the Professional Standards Group
FASB Releases Simplification for the Accounting for Goodwill for
Private Companies
In January 2014, the FASB released Accounting
Standard Update 2014-02 Intangibles – Goodwill
and Other (Topic 350): Accounting for Goodwill (ASU
2014-02). ASU 2014-02 is the first standard issued
by the Financial Accounting Standards Board (FASB)
upon endorsement of a consensus of the Private
Company Council (PCC) that is specifically designed
to meet the needs of private companies by providing
an alternative within US GAAP.
The Issue
Current accounting standards for goodwill are seen
as complex because they require regular impairment
testing and do not permit amortization of goodwill.
Impairment testing must be performed at least
annually or more frequently if certain conditions exist,
and companies have limited flexibility in how the tests
are performed. They can: (a) perform a qualitative
assessment (often known as step zero) to determine
if it is more likely than not that a reporting unit’s fair
value is less than its carrying value, or (b) go straight
to step one of a quantitative two-step impairment test.
In step one, the carrying value of the reporting unit is
compared with its fair value. If the carrying amount
exceeds the fair value, step two must be performed.
In step two, the amount of the goodwill impairment
is determined by comparing the carrying value of the
goodwill with its implied value. When performed at the
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reporting unit level, the implied fair value is based on
a hypothetical application of the acquisition method
that is performed after measuring the fair value of the
identifiable assets and liabilities.
Critics of the current accounting standards say the
standards provide limited benefits to users of private
company financial statements, and they are costly to
apply because they require subjective judgments and
measurements that often require the hiring of thirdparty experts, such as valuation specialists.
The Alternative
ASU 2014-02 permits a private company to elect to
amortize goodwill and requires impairment testing
only upon occurrence of a triggering event. Highlights
of the alternative accounting treatment are as follows:
• A company that elects the accounting alternative
should amortize goodwill on a straight-line basis
over a period of ten years or a shorter period if the
company can demonstrate that another useful life
is more appropriate. In a change from the original
proposal, private companies are permitted to use
a ten-year period as a default without assessing
whether or not a different useful life is more
appropriate.
• Goodwill should still be tested for impairment,
but only when a triggering event occurs. When
a triggering event occurs, private companies will
continue to have the option to perform a step zero
qualitative test. If a quantitative test is required,
a one-step impairment test is performed by
calculating the difference between the carrying
amount of the entity or reporting unit and its fair
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value. Step two of the impairment test is not
performed.
A company would need to make a policy election at the
time it elects the alternative treatment to perform the
impairment testing at either the company-wide level
or the reporting-unit level. The goodwill impairment
amount would represent the excess of the company’s
or unit’s carrying amount over its fair value.
ASU 2014-02 is effective for annual periods beginning
after December 15, 2014 and for interim periods within
annual periods beginning after December 15, 2015.
Early adoption is permitted for any period for which the
company’s annual financial statements have not yet
been made available for issuance. Private companies
that elect this alternative must apply the alternative
on a prospective basis and begin amortizing existing
goodwill as of the beginning of the period of adoption.
The current accounting standards continue to apply to
public business entities, employee benefit plans and
not-for-profit entities.
What should companies do now?
While each company’s situation is unique, here are
some general steps that companies may find helpful
now:
• Private companies should consider whether
they qualify for the alternative approach and,
if so, whether and when they wish to adopt the
accounting alternative in their financial statements.
If considering applying the alternative in your
company’s 2013 financial statements, you may
wish to consult with your accounting firm sooner
rather than later.
• All companies that use private company financial
statements should understand the key provisions
for any new alternative accounting treatments,
so they can analyze the financial statements
effectively. This includes lenders, suppliers to
private companies, and public companies that
may need to include private company financial
information in their SEC filings - either now (if they
have already invested in a private company) or in
the near future (if they are considering acquiring a
private company).
What to watch for in 2014
Looking beyond ASU 2014-02, the FASB has added
a project to its agenda on the accounting for goodwill
for public business entities and not-for-profit entities.
In addition to the PCC’s alternative, the FASB has
asked the staff to conduct research on several other
alternatives, including: (a) amortization of goodwill
over its useful life not to exceed a maximum number
of years, (b) direct write-off of goodwill, and (c) a
simplified impairment test.
If the FASB agrees on a different approach for other
entities, it may reconsider the method described
in ASU 2014-02, and the ASU cautions companies
electing this alternative that they may be subject to
future changes in the way they account for goodwill.
For more information
MHM’s Professional Standards Group will continue
to monitor progress on private company standardsetting, and we are prepared to help our private
company clients with any implementation issues
that may arise. If you have any specific questions,
comments or concerns, please share them with
Ernie Baugh or James Comito of MHM’s Professional
Standards Group or your MHM service professional.
You can reach Ernie at ebaugh@mhm-pc.com or
423.870.0511 and James at jcomito@cbiz.com or
858.795.2029.
The information in this MHM Messenger is a brief summary and may not include all the details relevant to your situation.
Please contact your MHM auditor to further discuss the impact on your audit or audit report.
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