FASB Looks to Cut Goodwill Valuation Costs

Companies wouldn’t have to calculate the assets and liabilities of acquired units, according to FASB’s goodwill proposal.
David KatzMay 19, 2016

To cut the cost of calculating goodwill impairment after a merger, the Financial Accounting Standards Board is proposing to remove a key step in how public companies gauge the fair value of an acquired unit.

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Under a proposed accounting standard update issued last week, FASB would eliminate the second of two steps companies must now take to figure out if the fair value of an acquisition has been impaired — and if so, by how much.

According to previous FASB guidance, companies have the option to perform a qualitative assessment of a reporting unit to assess whether a quantitative impairment test is needed. If it is, companies must as a first step test goodwill for impairment at least once a year by comparing the fair value of a reporting unit with its carrying amount, including goodwill.

If the fair value of a reporting unit is less than its carrying amount, then the second step of the test must be performed to measure the amount of the impairment loss. In computing the fair value of goodwill, companies must calculate the fair value of the unit’s assets and liabilities.

Determining the fair value of all the assets and liabilities each year after a merger can be a costly and time-consuming process. Often requiring the use of valuation specialists, the process can last for many hours. “The FASB initially took up the issue based on concerns from private companies and their stakeholders about the cost and complexity of the current goodwill impairment test,” Christine L. Klimek, a FASB spokesperson, told CFO.

Under the amendments in the update, an entity isn’t required to calculate the fair value of a reporting unit. Instead the company would determine the fair value and carrying amount of the reporting unit, and then, to the extent the carrying amount is higher than the fair value, it would recognize impairment for that difference.

FASB recently amended its standards to allow private companies an alternative accounting treatment for measuring goodwill after a merger. “Based on what it learned during the process of developing and finalizing that amendment, the FASB then added a project to its agenda to determine whether similar amendments should be considered for other organizations, including public companies and not-for-profit organizations,” according to Klimek. 

The new accountings standards update proposal is part of the first phase of this two-part project. In the future, Klimek says, FASB will consider whether to make further changes to the accounting for goodwill after a merger.

One of the changes it will consider is whether to permit or require the amortization of goodwill. Advocates of allowing companies to amortize the recognition of goodwill in the years following a merger argue that it would free companies of a burden that has no limits.

Currently, annual goodwill analysis and reporting never ends for a company after it has acquired another entity. If companies were able to amortize goodwill, then at, some point, it would vanish from their books and they wouldn’t have to report it.

Comments to FASB on the proposal must be submitted by July 11.