Goodwill Impairment Testing: Time to Revisit?

FASB’s invitation to comment on goodwill accounting lays out possible cases for doing away with or improving impairment testing.
Vincent RyanJuly 12, 2019

As far back as the spring of 2016, the Financial Accounting Standards Board was telling CFO that it planned to take another look at goodwill accounting for public companies. At the time, FASB had issued its proposal to change the guidance for goodwill impairment, which later was adopted.

The next step, a FASB spokesperson declared three years ago, was to consider 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,” we wrote at the time.

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That burden, of course, is having to perform annual impairment tests, often requiring hiring outside valuation experts to determine the fair market value of acquired reporting units. As CFO pointed out, “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.”

Fast forward to this week. On July 9, FASB issued an Invitation to Comment (ITC) seeking preparer and investor input on the accounting for certain identifiable intangible assets acquired in a business combination and subsequent accounting for goodwill. FASB also posted a video on YouTube promoting the effort.

ITCs are published, explains supervising project manager Joy Sy, when the FASB board is not leaning one way or another on an issue. Comments on this ITC are due October 7, and after that FASB will host a roundtable. The comments received and the roundtable “may or may not, time will tell, create a project or a direction for the board members to take,” says Sy.

The preliminary outreach is also a result of feedback “indicating that the benefit of certain intangible asset and goodwill impairment information might not justify the cost of preparing and auditing that information,” according to the 38-page document.

But the question of whether goodwill impairment testing is a burden is not that clear-cut for public companies.

Prior to getting a reprieve from FASB, private companies said they really struggled with the cost and complexities of the testing. But when FASB has asked public companies about it, “we have heard very split views, even among the preparer group,” says Sy. “Some very large issuers say they don’t have to dedicate a lot of resources or spend a lot of time on [goodwill] impairment testing, and indicate they would still perform the test if FASB didn’t require it.”

The users of financial statement also don’t agree on the current approach. According to the ITC, the existing impairment model can confirm the existence of an underperforming acquisition. In addition, impairment charges can be “a mechanism for holding management accountable for poor capital allocation decisions.”

But some users don’t think impairment testing provides meaningful information. They think this because, as the ITC lays out, (1) “goodwill impairments are nonrecurring charges and often are removed from investors’ analyses or eliminated through a non-GAAP metric” (2) “impairments to goodwill … are confirmatory, at best, after observing other information, including other parts of the financial statements such as cash flows” and (3) … impairment charges “are generally a lagging indicator of the external and internal economic factors that give rise to goodwill impairment.”

As an alternative, the amortization model would assign a useful life to goodwill and amortize it on a straight-line basis. That useful life could be prescribed by FASB or determined by management’s judgment, which presumably would be based on the weighted average useful life of the assets the company acquired.

In the second instance, instead of a yearly test, the bulk of the work would occur upfront. Instead of having to hire external valuation specialists to generate a fair market value for a reporting unit, the issuer might be able to perform the work in house. There is one caveat: Management could still be required to assess goodwill for impairment – even with amortization. “It won’t be completely set it and forget it,” says Sy.

In addition, some users have indicated that amortization of goodwill would have little to no informational value for investors, especially if the useful life is prescribed.

The paper explores other alternatives to the status quo. For example, the requirement to assess goodwill at least annually could be removed, and the standard could only require that an entity assess goodwill for impairment following a change in circumstances or a “triggering event.”

To obtain user feedback on how the informational value of goodwill impairment testing could be enhanced, the FASB paper raises the possibility of adding quantitative information to the qualitative descriptions of the factors that make up recognized goodwill. This second option, though, seems likely to spark opposition from preparers and issuers.

With the prevalence of mergers and acquisitions as a growth strategy, and the fact that both the goodwill added to U.S. companies’ balance sheets and impairments continue to climb, ($319 billion of goodwill added in 2017, the highest level since 2008, according to Duff & Phelps), it would be wise to ensure the approach to this area of accounting is as effective as possible.