The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2021-03 (ASU 2021-03) detailing amendments to the rules for private companies and not-for-profit (NFP) entities evaluating triggering events, and potentially measuring a goodwill impairment, under Accounting Standards Codification Intangibles—Goodwill and Other – Topic 350 (ASC 350).
Under U.S. GAAP, goodwill must be tested for impairment when a triggering event occurs that indicates that it is more likely than not that the fair value of the reporting unit is below its carrying value. Companies and organizations are required to monitor for and evaluate goodwill triggering events as they occur throughout the year. Triggering events may include deteriorating economic conditions; changes in the market for a company’s products or services; regulatory or political developments; meaningful increases in raw material, labor or other costs; negative or declining cash flows; declining revenue or earnings (actual or planned); changes in relevant parties; or a sustained decrease in share price.
Private companies have raised questions about the value of evaluating a triggering event at an interim date, especially when some private companies only issue GAAP-compliant financial statements on an annual basis. The cost and complexity of preparing interim financial statements and projecting cash flows can be overwhelming to private company accounting departments. Critics of the triggering event requirement note that it can be difficult or impossible to obtain high-quality financial reporting on dates that the books have never before been closed. Private companies also assert that interim impairment testing may not provide meaningful information if the facts and circumstances that led to the interim triggering event no longer exist or are different at year end. Because of these complexities, many private companies have adopted the practice of deferring testing until year end despite the triggering event requirement.
These issues have become more apparent during the COVID-19 pandemic because of the uncertainty in the economic environment and the significant changes in facts and circumstances, quarter over quarter. As a result, in November 2020, the FASB commenced a project aimed at reducing the cost and complexity of private companies and NFPs evaluating triggering events at an interim date when those entities only report annual financial statements. The scope was later expanded to apply to private companies and NFPs on any reporting schedule – meaning any time they report financial information – such as monthly or quarterly financial reporting.
Key Provisions of the ASU
On February 10, 2021, the FASB voted 6 to 1 to finalize the new rules allowing private companies and NFPs to delay the assessment of the goodwill impairment triggering event until the first reporting date after that triggering event, whether that be at an interim financial reporting date or at the end of the year. The rule change is expected to provide cost relief and simplifications for resource-strapped private companies and NFPs. In addition, the change will better align the rules with current practice and improve the quality of financial information provided.
The rules are applicable to fiscal periods after December 15, 2019. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance as of March 30, 2021.
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