BC1. The following summarizes the Board’s considerations in reaching the conclusions in this Update. It includes reasons for accepting certain approaches and rejecting others. Individual Board members gave greater weight to some factors than to others.
BC2. On December 21, 2020, the Board issued proposed Accounting Standards Update, Intangibles—Goodwill and Other (Topic 350): Accounting Alternative for Evaluating Triggering Events, for public comment, with comments due on January 20, 2021. The Board received 24 comment letters on the proposed Update. Overall, respondents supported the amendments in the proposed Update. The Board also solicited feedback from the Private Company Council, whose members generally supported the amendments.
BC3. The amendments in this Update simplify the goodwill impairment triggering event evaluation. The amendments allow private companies and not-for-profit entities to perform the goodwill impairment triggering event evaluation as of the end of the reporting period, whether entities report on an interim or annual only basis. Entities electing the amendments are not required to monitor for triggering events throughout the reporting period. Instead, they should assess the facts and circumstances as of the end of the reporting period to determine whether there has been a triggering event and whether it is more likely than not that goodwill is impaired.
BC4. The amendments in this Update do not affect any other aspects of the subsequent measurement of goodwill or the evaluation of triggering events for assets other than goodwill.
BC5. Subtopic 350-20 provides guidance on the accounting for goodwill. Under that Subtopic, there are both general guidance and an accounting alternative (“accounting alternative for amortizing goodwill”) that includes certain provisions that simplify the goodwill impairment test for private companies and not-for-profit entities. Those provisions include the following options:
Amortize goodwill on a straight-line basis over 10 years or a shorter period if an entity determines that another useful life is more appropriate
Forgo performing an annual impairment test and, instead, test goodwill for impairment only when a triggering event occurs
Test goodwill for impairment at the entity or reporting unit level.
Entities that apply the accounting alternative for amortizing goodwill are still required to monitor for and evaluate triggering events throughout the year.
BC6. When a triggering event occurs, under the current guidance in Subtopic 350-20, an entity is required to perform an analysis of whether it is more likely than not that the fair value of a reporting unit (or entity, if an entity has elected the accounting alternative for amortizing goodwill and chosen that option) is less than its carrying value. This is required regardless of whether the entity elects the accounting alternative for amortizing goodwill. If the entity concludes that it is more likely than not that goodwill is impaired, then it must test goodwill for impairment. The triggering event analysis and resulting goodwill impairment test, if any, must be performed on the date that a triggering event occurs.
BC7. During recent stakeholder meetings with the FASB, some stakeholders expressed concern about the cost and complexity for private companies in applying the triggering event analysis (and measuring any resulting impairment) at a date between reporting dates for entities that report only annual financial statements. Those stakeholders explained that this issue had become exacerbated by the effects from the COVID-19 pandemic because of the uncertainty in the economic environment and the significant developments and changes in facts and circumstances that occurred after the initial onset of the pandemic. Additionally, those stakeholders stated that this issue was highlighted by, but not limited to, the current environment with the pandemic because private companies often may perform this analysis as part of their annual financial reporting process. Therefore, it may be difficult for them to determine whether there was a triggering event during the year and, if so, the precise date on which the triggering event occurred.
BC8. Those stakeholders also asserted that performing a goodwill impairment evaluation on the date that a triggering event occurs may not provide users of private company financial statements with useful information. As an example, those stakeholders noted that if a private company that reports only on an annual basis determines that it has a goodwill impairment triggering event on an interim date but the facts and circumstances that led to the triggering event have changed as of the end of the annual reporting period, an impairment charge estimated as of the date of the triggering event may not provide users of financial statements with meaningful information if the entity reports results only at year-end.
BC9. On the basis of those discussions with stakeholders, the Board added a project to its agenda to consider offering an accounting alternative that would allow private companies and not-for-profit entities to align evaluation of goodwill impairment triggering events with the end of the reporting period.
Benefits and Costs
BC10. The objective of financial reporting is to provide information that is useful to present and potential investors, creditors, donors, and other capital market participants in making rational investment, credit, and similar resource allocation decisions. However, the benefits of providing information for that purpose should justify the related costs. Present and potential investors, creditors, donors, and other users of financial information benefit from improvements in financial reporting, while the costs to implement new guidance are borne primarily by present investors. The Board’s assessment of the costs and benefits of issuing new guidance is unavoidably more qualitative than quantitative because there is no method to objectively measure the costs to implement new guidance or to quantify the value of improved information in financial statements.
BC11. While stakeholders raised this issue in the context of the uncertain economic environment resulting from the COVID-19 pandemic, the fundamental issue being highlighted is not solely related to the pandemic. The issue relates to the cost and complexity of applying existing accounting guidance in an area where the Board received consistent user feedback that there is limited relevance to the users of financial statements for certain entities.
BC12. The Board does not anticipate a loss of decision-useful information for users because feedback indicated that users of private company and not-for-profit financial statements do not place a significant value on noncash charges like goodwill impairment. The staff performed supplemental outreach for this project with users of private company and not-for-profit financial information as well as analyzed the extensive feedback received as part of the 2019 FASB Invitation to Comment, Identifiable Intangible Assets and Subsequent Accounting for Goodwill, and Accounting Standards Updates No. 2014-02, Intangibles—Goodwill and Other (Topic 350): Accounting for Goodwill, and No. 2019-06, Intangibles—Goodwill and Other (Topic 350), Business Combinations (Topic 805), and Not-for-Profit Entities (Topic 958): Extending the Private Company Accounting Alternatives on Goodwill and Certain Identifiable Intangible Assets to Not-for-Profit Entities. Those stakeholders stated that users of private company and not-for-profit financial statements focus on cash flows and liquidity and solvency metrics, while users of not-for-profit financial statements also focus on the organization’s service efforts and whether the organization is achieving its mission. Additionally, aligning the triggering event assessment date for goodwill impairment with the reporting date may be more relevant for users because it reflects the facts and circumstances as of that reporting date.
BC13. The Board anticipates that the amendments in this Update will reduce costs for those entities that elect to apply them. The amendments provide the benefit of simplifying the triggering event evaluation by providing private companies and not-for-profit entities with an accounting alternative by aligning the goodwill triggering event evaluation date with the reporting date, whether that date is an interim or annual reporting date consistent with the existing pattern of entities’ external financial reporting. That will allow those entities to align the goodwill triggering event evaluation with their other reporting processes, such as calculating debt covenants. The amendments do not create new accounting requirements and are optional.
Basis for Conclusions
BC14. The amendments in this Update provide a private company or not-for-profit entity with an accounting alternative to perform the identification and evaluation of a triggering event for goodwill impairment as of the end of the reporting period, whether that reporting period is an interim or annual period.
BC15. The Board considered what entities and accounts should be within the scope of the amendments and how the amendments would interact with existing guidance. The Board decided that the amendments in this Update should apply to private companies and not-for-profit entities and should not be limited to those entities that also have elected the accounting alternative for amortizing goodwill.
Private Company Decision-Making Framework
BC16. The Private Company Decision-Making Framework allows the Board to create accounting alternatives for private companies when information is not relevant to users or when it is relevant but overly costly or complex for preparers to provide. The Board concluded that the amendments in this Update are an accounting alternative rather than a practical expedient because the accounting result of applying the amendments does not achieve the same or similar reporting objective of applying existing GAAP.
BC17. The Board reviewed the Private Company Decision-Making Framework to determine whether this issue meets the criteria for providing a private company accounting alternative.
BC18. The Board determined that relief from monitoring for triggering events at a date other than the reporting date and, therefore, from performing goodwill impairment testing during the reporting period, will significantly reduce cost for entities because the impairment testing process between reporting dates may require that entities develop interim balance sheets and cash flow forecasts.
BC19. The Board learned through outreach that users of private company financial information are generally lenders that focus on liquidity and tangible net worth as opposed to noncash charges such as goodwill impairment. Therefore, the timing of when the goodwill impairment triggering event evaluation is performed, as long as it is completed as of the reporting date, may be irrelevant for users of entities within the scope of the alternative.
BC20. The Board concluded that there could be a significant cost for entities within the scope of this alternative to perform a triggering event analysis during the reporting period that may not provide relevant information at the reporting date if the facts and circumstances surrounding the triggering event change.
BC21. The Board determined that the Private Company Decision-Making Framework supports providing an accounting alternative for the timing of assessing goodwill impairment triggering events because the relevance to users is low, the cost to preparers of providing the information is high, and there is no practical expedient available. The Board notes that this position is supported by the existence of other accounting alternatives on initial and subsequent measurement of goodwill that have previously been extended to the same population of entities on the basis of the lack of usefulness and the cost and complexity of providing information related to goodwill.
BC22. In 2019, the Board extended the accounting alternative for amortizing goodwill to not-for-profit entities. The Board determined that users of not-for-profit financial statements typically do not find goodwill impairment to be relevant or provide decision-useful information. Feedback received during that project indicated that, instead, users of not-for-profit financial statements focus on cash flows, liquidity and solvency metrics, as well as the organization’s service efforts and whether it is achieving its mission.
BC23. Update 2019-06 included not-for-profit entities that are conduit bond obligors or that otherwise meet the definition of a public entity in the scope expansion. Those entities were included because despite the fact that they file publicly available data, the needs of their users are aligned with other not-for-profit entities, and the Board noted that the lack of relevance of the information outweighed the fact that it was made publicly available. The Board applied the same reasoning to the scope of the amendments in this Update.
Entities within Scope
BC24. The scope of the amendments in the proposed Update was limited to private companies and not-for-profit entities that report goodwill subsequently accounted for under Subtopic 350-20, or any line item that is affected by a goodwill impairment (in-scope financial information), on an annual basis only. The proposed scope was based on feedback indicating that those entities face the greatest cost and complexity in performing interim triggering event evaluations. Some entities that report on an annual basis delay preparing their goodwill analyses until they prepare their annual financial statements, which may be long after the triggering event occurs. Those entities may have difficulty in preparing an interim balance sheet and estimates without the use of hindsight. The proposed scope also aligned with feedback that users requiring financial information on an annual basis only would see improved usefulness and relevance in aligning the goodwill impairment triggering event analysis with year-end rather than an interim date.
BC25. The scope of the guidance in the amendments in the proposed Update excluded entities that report in-scope financial information more frequently than on an annual basis. The Board believed that the challenges of performing a goodwill impairment triggering event analysis between reporting dates for those entities may be fewer because the time between reporting periods is shorter and, therefore, the challenges related to hindsight are less prevalent for those entities. Therefore, the Board expected that entities reporting on an interim basis would derive less benefit from reduced costs from the proposed alternative. The Board also initially considered that a user requiring an entity to report in-scope financial information more frequently than annually may have greater informational needs associated with interim impairment information than a user who requires the same information to be reported on an annual basis only.
BC26. Respondents to the proposed Update indicated that a majority of private and not-for-profit entities report some form of financial information on a more frequent than annual basis and that the scope of the accounting alternative in the proposed Update would cause it to be available to a more limited number of entities. Respondents also noted that preparing the necessary estimates and financial statement balances as of a triggering event date between reporting dates may be difficult for all entities to do without using hindsight, including those that report interim financial information. Additionally, feedback indicated that many entities already do not perform a triggering event evaluation other than as of the end of the reporting period, whether the reporting period is an interim or annual period, because there is still complexity in preparing financial statements if the triggering event occurs on a date other than the end of the reporting period.
BC27. Respondents to the proposed Update also indicated that entities may have difficulty determining whether their interim reporting practices exclude them from the scope of the proposed alternative. Those respondents expressed concern about connecting the frequency of reporting to the scope of the proposed alternative and requested that the Board clarify the scope including what would constitute GAAP-compliant financial information.
BC28. As a result of the feedback, the Board decided to expand the scope of the accounting alternative to all private companies and not-for-profit entities, regardless of frequency and type of reporting. The Board decided that a private company or not-for-profit entity may elect an accounting alternative to perform its goodwill impairment triggering event evaluation only as of the end of each reporting period, whether the reporting period is an interim or annual period. The Board acknowledges that many entities provide users of their financial statements (for example, lenders, regulators, and investors) with some level of financial information more frequently than annually that indicates that it complies with the recognition and measurement principles of GAAP. The Board concluded that this expanded scope would allow more entities to apply the alternative. The Board also concluded that it would benefit users by aligning the goodwill impairment triggering evaluation and the reported financial information for both interim and annual periods.
BC29. The Board decided not to further define what constitutes GAAP-compliant financial information. The Board concluded that entities should already be applying the provisions of Subtopic 350-20 anytime they report in compliance with GAAP; therefore, the amendments in this Update merely shift the timing of when to perform the goodwill impairment triggering event evaluation to the end of the reporting period. Therefore, guidance on when to apply the accounting alternative, or the range of financial information that constitutes GAAP-compliant financial information, is not within the scope of this Update. However, the Board does not expect the provisions of this Update to change an entity’s understanding of when it reports financial information.
BC30. Some respondents requested that the Board allow an entity that files GAAP-compliant financial information on an interim basis to delay evaluating goodwill impairment triggering events to the annual reporting date. The Board concluded that it would be misleading to allow entities that provide interim financial information to delay evaluating goodwill for impairment until the end of the annual reporting period. The Board notes that if an entity determines that it is required to report interim financial information, Topic 350-20 requires that interim financial information include an evaluation of interim triggering events.
Private Companies Intending to Become Public Business Entities
BC31. Private company accounting alternatives apply only to private companies (and not-for-profit entities, when the Board includes those entities within the scope as permitted by the Private Company Decision-Making Framework). Private companies are required to present historical interim and annual financial statements as part of a public offering or whenever they meet the definition of a public business entity as defined in the Master Glossary of the Codification. An entity that becomes a public business entity is required to reverse the effect of any private company accounting alternatives recognized in its historical financial statements. Stakeholder feedback had indicated that considerable time and effort are needed for private companies wishing to go public to reverse the existing accounting alternative for amortizing goodwill.
BC32. The Board acknowledges that reversing the accounting alternative would pose a challenge if a private company adopting the alternative wished to become a public business entity. To reverse the effects, an entity would need to go back to the date of adoption of the accounting alternative and evaluate (without hindsight) whether there were triggering events during the reporting period, including interim reporting periods, that would have resulted in a goodwill impairment and, if so, measure that impairment. However, those burdens are likely no more significant than would be the case for a private company that elected the alternative to amortize goodwill that subsequently elected to go public. The Board cautions entities that may eventually become public business entities to consider the potential future costs before electing this or any other alternative.
Accounts within Scope
BC33. The Board considered whether to expand the alternative to other assets such as long-lived assets and other intangibles, which are tested for impairment when a triggering event occurs.
BC34. The Board considered the differences in the nature of goodwill and long-lived assets and other intangibles and the effort required to test those assets for impairment. The Board determined that users of private company and not-for-profit entity financial statements find information about those types of intangibles assets and long-lived assets to be of greater relevance than that of goodwill. For example, property, plant, and equipment are included in the calculation of tangible net worth, whereas goodwill is generally excluded.
BC35. The Board also determined that the carrying value and fair value of other long-lived assets and intangibles are less costly to assess than goodwill. That is because those assets or asset groups are more discrete and information about their carrying value between reporting dates is readily available, whereas calculating the carrying value of a reporting unit generally requires that an interim balance sheet be prepared. Similarly, the future cash flows from an asset or asset group are usually easier to identify and less time consuming and costly to assess than the future cash flows of a reporting unit (or an entity, for those entities that have elected the accounting alternative for amortizing goodwill and chosen that option).
BC36. Because information about impairment of other types of long-lived assets is relevant to users, and less costly and complex for preparers, the Board concluded that it would not extend a similar accounting alternative for those assets as a part of this Update. Therefore, the Board decided to limit the alternative only to the goodwill impairment triggering event evaluation. Furthermore, the Board decided to explicitly prohibit analogizing to this accounting alternative for long-lived assets and other intangibles.
BC37. The Board concluded that the alternative should apply to all goodwill that is tested for impairment in accordance with Subtopic 350-20. The alternative does not apply to equity method goodwill because the subsequent measurement of equity method goodwill is accounted for under a separate impairment model than the subsequent measurement of goodwill recognized in a business combination or a reorganization.
Interaction with Other Guidance
BC38. The Board considered limiting the scope of the alternative to entities that had adopted the accounting alternative for amortizing goodwill. The Board noted that allowing an entity to adopt the accounting alternative separately from the existing accounting alternatives would allow a larger population of entities to potentially benefit from the guidance. Therefore, the Board concluded that entities will be able to apply the alternative either separately from the existing accounting alternatives for goodwill or together with the existing accounting alternatives for goodwill.
BC39. Additionally, the Board considered limiting the use of the accounting alternative to entities that had adopted the amendments in Accounting Standards Update No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates Step 2 of the goodwill impairment test. The effective date of the amendments in that Update was delayed by the amendments in Accounting Standards Update No. 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, to allow entities to align the elimination of Step 2 with their adoption of the amendments in the current expected credit losses standard (Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments). However, the Board concluded that there was no reason to require that an entity adopt the amendments in Update 2017-04 to adopt the accounting alternative because the accounting alternative affects the timing of assessing triggering events but does not affect the test itself. The Board notes that the amendments in Update 2017-04 can be early adopted, and it expects that many entities that find themselves in a position to perform an impairment test for the first time since those amendments were issued may choose to early adopt that guidance to further reduce the cost and complexity of impairment testing.
BC40. Other types of long-lived assets and other intangible assets are evaluated for impairment when a triggering event has been identified. Subtopic 350-20 requires those other assets to be assessed for impairment before goodwill and any impairment of those assets to be included in the carrying value that is used in the goodwill impairment test. Therefore, the amendments in this Update do not affect the ordering of impairment testing.
Availability of the Guidance on a Permanent Basis
BC41. Stakeholders raised this issue about the timing of goodwill impairment testing in the context of the macroeconomic effects of the COVID-19 pandemic, which are expected to broadly affect most entities that report financial statements. The Board debated limiting the accounting alternative to triggering events and reporting periods affected by the COVID-19 pandemic or making it available on a permanent basis.
BC42. The Board considered that it would be difficult to determine what periods have been or will be affected by the COVID-19 pandemic because the pandemic has had a large-scale effect on the economy.
BC43. Stakeholders indicated that although the request for relief arose because of the COVID-19 pandemic, the relevance of interim goodwill impairment information for users of private company and not-for-profit financial statements is the same regardless of whether an impairment is associated with the pandemic. Stakeholders also provided feedback that it would be difficult to determine a cut off for when a reporting period is no longer affected by COVID-19 and that the subjectivity and judgment that might be involved with such an assessment would increase cost and complexity.
BC44. The Board decided to provide the accounting alternative on an ongoing basis and not to limit it to reporting periods affected by the pandemic. The Board notes that the criteria in the Private Company Decision-Making Framework are met with respect to cost and complexity and user relevance even when considering this issue beyond the effect of the pandemic and that limiting the availability of the alternative is unnecessary.
BC45. When an entity disposes of part of a reporting unit that constitutes a business, it includes the goodwill associated with that business in the carrying amount used to determine the gain or loss on disposal. Goodwill is allocated on the basis of the relative fair value of the portion of the reporting unit disposed and the portion that is retained. Paragraph 350-20-40-7 requires that an entity test the remaining portion of the goodwill for impairment at the disposal date. The amendments in this Update do not change the timing of, or requirement to, perform that test.
BC46. However, the Board notes that paragraph 350-20-35-3C(f) indicates that “a more-likely-than-not expectation of selling or disposing of all, or a portion, of a reporting unit” could be considered a triggering event. The amendments in this Update allow an entity to evaluate that triggering event as of its next reporting date, regardless of when during the period the disposal became more likely than not, as long as the disposal was not completed during the reporting period.
Annual Goodwill Impairment Testing Not Performed on Annual Reporting Date
BC47. Entities that have not adopted the accounting alternative for amortizing goodwill are required to test goodwill for impairment annually. Some entities perform their annual impairment test at a date other than at the annual reporting date in accordance with paragraph 350-20-35-28. For example, an entity may test for impairment on October 1 for the fiscal year ended December 31. The provisions of this alternative do not preclude entities from continuing to perform their annual impairment tests at a date other than the annual reporting date.
BC48. However, if those entities adopt the provisions of this alternative, they will not need to monitor for triggering events before, or after, the annual impairment test, except for as of the end of the next reporting period, whether the reporting period is an interim or annual period.
BC49. The Board considered whether to add additional disclosure requirements for entities that adopt this alternative. The Board considered whether the current disclosures about the adoption of accounting alternatives and application and results of the triggering event evaluation will continue to provide adequate decision-useful information if an entity adopts the alternative.
BC50. The Board decided not to require entities to provide additional disclosures if they adopt this alternative. Paragraph 235-10-50-1 requires that an entity disclose significant accounting policies that it has adopted. The Board determined that the existing disclosure requirements for the application of alternatives are sufficient.
BC51. Under the accounting alternative, an entity reviews the facts and circumstances including the results of operations, significant events, or transactions that occurred during the reporting period to determine whether a triggering event exists as of the end of the reporting period. The Board considered requiring disclosure of potential triggering events that occurred during the reporting period but that based on facts and circumstances as of the end of the reporting period are not considered triggering events. Some user feedback indicated that the triggering event itself has informational value. However, the Board considered that users of financial statements of private companies and not-for-profit entities tend to have greater access to management than users of public company financial statements. Therefore, users of financial statements may have access to information that may indicate that an entity is undergoing operational distress. Additionally, the Board concluded that there are existing disclosure requirements for an impairment event (paragraphs 350-20-50-2 through 50-3 for entities not electing the accounting alternative for amortizing goodwill and paragraphs 350-20-50-6 through 50-7 for entities that do elect the accounting alternative for amortizing goodwill) that require an entity to disclose the facts and circumstances surrounding the impairment. In addition, disclosure of potential triggering events would represent a significant expansion of disclosure requirements for private companies and would represent a disclosure of a potential impairment that has not occurred.
BC52. Certain stakeholders indicated that requiring disclosure of triggering events that are not present as of the end of the reporting period may reduce the relief provided by the alternative because entities would be required to monitor for triggering events during the reporting period even if they are not present or evaluated as of the end of the reporting period, whether the reporting period is an interim or annual period.
Effective Date and Transition
BC53. The Board decided that the amendments in this Update should be effective for annual reporting periods beginning after December 15, 2019.
BC54. The Board decided that the amendments in this Update should be applied on a prospective basis. Retrospective application would potentially result in the reversal of interim impairment charges recognized in prior years if the facts and circumstances that led to those impairment charges had changed by year-end, which may cause additional cost and complexity.
BC55. The Board also decided to allow entities within the scope to early adopt the amendments for interim and annual financial statements not yet issued or made available to be issued as of March 30, 2021. The Board determined that in the year of adoption an entity should apply the amendments prospectively to the reporting period(s) not yet issued, whether the reporting period is an interim or annual period. An entity should not retroactively adjust any period already issued, even if that period is an interim period issued within the year of adoption. The Board concluded that relief from the assessment of goodwill impairment triggering events during the reporting period is an acceptable change that reduces cost and complexity and therefore should be made available to as many entities as possible, including those with non-calendar year-ends or who had not previously issued financial statements for other reasons.
BC56. Like other private company accounting alternatives, the Board decided to provide an unconditional one-time election for entities within the scope of the amendments to elect the accounting alternative on a prospective basis after its effective date without having to apply the guidance in Topic 250. Topic 250 requires an entity electing an accounting alternative after its effective date to
support that the alternative is preferable and to apply the accounting change on a retrospective basis. In Accounting Standards Update No. 2016-03, Intangibles— Goodwill and Other (Topic 350), Business Combinations (Topic 805), Consolidation (Topic 810), Derivatives and Hedging (Topic 815): Effective Date and Transition Guidance, the Board allowed entities that elect private company alternatives existing at that time to adopt on this basis and recommended that the Board consider allowing similar transition provisions when providing future private company accounting alternatives.