FASB Proposes New Guidance on Goodwill Accounting for Nonprofits
posted Jan 31, 2019 by Sandy Ross, CPA, CFE in the Mission Matters Blog
The Financial Accounting Standards Board (FASB) has proposed an accounting standards update (ASU) intended to simplify goodwill accounting for nonprofits. FASB has set a February 18, 2019 deadline for comments on the proposed update. Learn more about what it entails here.
What is goodwill?
Goodwill is an intangible asset which most commonly arises when a company acquires another entire existing business (called a business combination). Goodwill is recorded when the purchase price of the company is greater than the combination or sum of…
1) The fair value of all identifiable tangible (land, vehicles, equipment, etc.) and intangible assets (nonphysical items like patents, trademarks, copyrights) purchased in the acquisition less
2) The liabilities assumed in the process.
Some examples of goodwill include the value of a company’s brand name, customer base, customer relations, and any patents or proprietary technology.
What is the goodwill impairment test?
In order to accurately report goodwill’s value from year to year, companies conduct what’s called the impairment test. When the value of goodwill in financial statements is higher than the fair market value or appraised value, companies must record a goodwill impairment to reduce the value of goodwill. U.S. accounting principles require companies to review their goodwill for impairment annually.
In response to concerns expressed by private companies and their stakeholders about the complexity of the goodwill impairment test and the accounting for certain identifiable intangible assets, FASB issued ASU 2014-02 in 2014. ASU 2014-02’s main purpose was to simplify accounting for goodwill and for certain intangible assets in a business combination. It contains two private company alternatives to the traditional method of goodwill accounting:
- A private company can amortize goodwill on a straight-line basis over a period of 10 years, or
- A private company can apply a simplified impairment model to goodwill.
How does this impact nonprofits?
ASU 2014-02 was originally meant to benefit private companies but after hearing from stakeholders that this simplification would also benefit nonprofits, FASB extended the scope of the private company alternatives to include nonprofits. This will enable them to recognize fewer items as separate intangible assets in acquisitions and to account for goodwill in a more cost-effective way.
Instead of requiring organizations to test goodwill for impairment annually at the reporting unit level, the ASU would allow nonprofits to:
- Amortize goodwill on a straight-line basis over 10 years or less,
- Test for impairment upon a triggering event,
- Have the option to elect to test for impairment at the entity level