FASB accounting standards and ASB updates: Don’t forget these lesser-known requirements
- Accounting Standards Update (ASU) 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
- ASU 2019-06, Intangibles – Goodwill and Other (Topic 350): Extending the Private Company Accounting Alternative on Goodwill and Certain Identifiable Intangible Assets to Not-for-Profit
- ASU 2021-03, Intangibles – Goodwill and Other (Topic 350): Accounting Alternative for Evaluating Triggering Events
Several lesser-known Financial Accounting Standards Board (FASB) standards and Auditing Standard Board (ASB) pronouncements issued in recent years have received less attention.
Prior to an entity’s adoption of ASU 2017-04, the goodwill impairment quantitative assessment consists of two steps:
- Comparison of the fair value of a reporting unit to its carrying amount. If the carrying amount exceeds the fair value of the reporting unit, then step two of the impairment test is required in order to measure the amount of the impairment loss.
- Calculation of an impairment charge by comparing the implied fair value of goodwill with its carrying amount. This involves assumption of a hypothetical business combination so that the acquisition method in ASC 805, Business Combinations, can be used to determine the implied fair value of goodwill after measuring identifiable assets and liabilities of the reporting unit. Step two of the impairment test has been criticized by stakeholders as being burdensome and complex, and when ASU 2017-04 is adopted, this step will be eliminated.
What will replace it? Step 0, the qualitative assessment, is the implied new starting point where entities must evaluate relevant events or circumstances to determine whether it’s more likely than not that the fair value of the reporting unit is less than the carrying amount. If it is, the goodwill is deemed impaired and an impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized can’t exceed the total amount of goodwill allocated to that reporting unit. As a result, goodwill impairment testing becomes a single-step, rather than a two-step procedure.
The new guidance is required for public business entities and other entities, including not-for-profit entities, that have goodwill reported in their financial statements. Entities should apply the new guidance on a prospective basis.
Implementation dates for ASU 2017-04 have been broken out into three different categories:
- Public business entities that are U.S. Securities and Exchange Commission (SEC) filers, effective for annual or any interim goodwill impairment tests in fiscal years beginning after Dec. 15, 2019
- Public business entities that are not SEC filers, effective for annual or any interim goodwill impairment tests in fiscal years beginning after Dec. 15, 2020
- All other entities, including not-for-profit entities, effective for annual or any interim goodwill impairment tests in fiscal years beginning after Dec. 15, 2021
Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after Jan. 1, 2017.
In May 2019, the FASB issued ASU 2019-06, which extended the private company alternatives to not-for-profit entities. These alternatives include amortizing goodwill on a straight-line basis over 10 years or a period less than 10 years if able to demonstrate that another useful life is more appropriate. In addition, the entity must make an accounting policy election to test goodwill for impairment at either the entity level or the reporting unit level. This election is important as the goodwill of the entity or the reporting unit is tested for impairment if an event occurs or circumstances change indicating that the fair value of the entity (or reporting unit) may be below its carrying value. Annual testing of goodwill for impairment is not required.
A not-for-profit electing the accounting alternative in ASC 805, for transactions occurring after adoption of the alternative, should subsume into goodwill and amortize the following assets:
- Customer-related intangible assets that are not capable of being sold or licensed independently from other assets of a business.
- All acquired noncompete agreements.
An entity electing this alternative is required to adopt the alternative in ASC 350 to amortize goodwill. However, the reverse is not true; that is, an entity electing the accounting alternative in ASC 350 is not required to adopt the accounting alternative in ASC 805. The amendments were effective upon issuance of ASU 2019-06.
An entity should apply the accounting alternative in ASC 350, if elected, prospectively for all existing goodwill and for all new goodwill generated in acquisitions. An entity should apply the accounting alternative in ASC 805, if elected, prospectively upon the occurrence of the first transaction within the scope of the alternative. Customer-related intangibles and noncompete agreements that existed as of the beginning of the period of adoption are not eligible to be submitted into goodwill upon adoption.
Prior to the amendments in ASU 2021-03, private and not-for-profit entities were required to monitor and evaluate goodwill impairment triggering events throughout the year. If a triggering event occurred, an entity performed a goodwill impairment test using the triggering event date as the measurement date, without the use of hindsight.
After the amendments, private and not-for-profit entities may elect to evaluate goodwill impairment triggering events only at the end of each reporting period, either on an interim or annual basis. Said differently, an entity would not evaluate goodwill impairment triggering events and measure any related impairment during the reporting period, but rather at the end of each reporting period with the use of facts and circumstances that exist at that date.
While the FASB chose not to define what constitutes a “reporting date” in the Basis for Conclusions to ASU 2021-03, the board observed that many private companies and not-for-profit entities provide some level of financial information that indicates compliance with the recognition and measurement principles in U.S. GAAP — e.g., financial information provided to lenders, other investors, or regulators — more frequently than annually.
The FASB also observed that when entities provide U.S. GAAP-compliant financial information on an interim basis, it would be misleading to allow entities to delay evaluating goodwill for impairment until the end of the annual reporting period. Accordingly, if an entity is required (or elects) to provide financial information in compliance with the recognition and measurement principles of U.S. GAAP on an interim basis, an entity may conclude that it has an interim reporting period.
If a private entity or not-for-profit entity concludes that it has an interim financial reporting date and elects to apply the accounting alternative, it must perform its goodwill triggering event evaluation as of the end of each interim reporting period, in addition to the end of the annual reporting period. This accounting alternative should reduce cost and complexity for preparers by aligning the triggering event evaluation date with the reporting date, whether that date is an interim or annual reporting date. Additionally, the amendments may provide more relevant information for users because the triggering event evaluation will reflect the facts and circumstances present as of the end of the reporting period for which those users receive financial statements.
The amendments are effective on a prospective basis for fiscal years beginning after Dec. 15, 2019. Early adoption is allowed for both interim and annual financial statements that haven’t been issued or made available for issuance as of March 30, 2021.
Entities should not retroactively adopt the amendments for interim financial statements already issued in the year of adoption.
Reference rate reform
Another key accounting standard covered within the HFMA session focused on the topic of reference rate reform. Banks and other financial institutions have been moving away from the London Interbank Offered Rate, or LIBOR, which has been subject in the past to manipulation by bankers and traders in pricing the interest rates on securities, and shifting to newer rates like the Secured Overnight Financing Rate, or SOFR, which are thought to be less prone to manipulation.
The FASB has been working in recent years to set standards to aid this transition as it takes effect in the financial markets as LIBOR is set to sunset between Dec. 31, 2021, and June 30, 2023.
Banks and other financial institutions have been moving away from the London Interbank Offered Rate, or LIBOR.
Under the optional relief provided by the FASB under ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, the contract is not remeasured or reassessed but assumed to be a contract continuation. The guidance is only temporarily available for contracts what have eligible rates affected by reference rate reform.
The relief is currently set to expire Dec. 31, 2022. As noted above, several of the LIBOR settings are set on June 30, 2023, which is six months after the relief expires. As such, the FASB is currently evaluating possible extension of the relief.
Auditor reporting standards
The last portion of the session focused on suite of auditor reporting standards (SAS 134 through SAS 140), which have effective dates for audits of calendar year-ends 2021 financial statements.
The ASB issued SAS 134, Auditor Reporting and Amendments, including amendments addressing disclosures in the audit of financial statements. The goal of the new auditor reporting model is to enhance the overall communitive value of the auditor’s report and communicate more information that’s important to users of the financial statements and auditor’s reports, as well to align generally accepted auditing standards with international and PCAOB auditing standards. After SAS 134 was issued, the auditing standards board issued the series of subsequent conforming and related amendments mentioned above to align with the new reporting model in SAS 134.