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In accordance with ASC 350-20-15-4, a private company/not-for-profit (NFP) entity may elect an alternative that simplifies the accounting for goodwill (the “goodwill alternative”). Application of the goodwill alternative is optional, and a private company/NFP entity can continue to follow the existing goodwill accounting guidance. An eligible company that elects the goodwill alternative will be able to apply a simplified impairment test but also will be required to amortize goodwill. Private companies/ NFP entities have a one-time option to elect to adopt the alternative at any time without an assessment of preferability.
Only private companies/NFP entities are eligible to elect the goodwill alternative. See Question 9-30 for factors to consider when making this election. Companies considering adoption should carefully review the definition of a public business entity. A company that meets the definition of a public business entity is not eligible to apply any of the PCC’s accounting alternatives in its financial statements. Additionally, employee benefit plans are not eligible to adopt the PCC’s accounting alternatives.

Excerpt from ASC Master Glossary

Public business entity: A public business entity is a business entity meeting any one of the criteria below. Neither a not-for profit entity nor an employee benefit plan is a business entity.
  1. It is required by the U.S. Securities and Exchange Commission (SEC) to file or furnish financial statements, or does file or furnish financial statements (including voluntary filers), with the SEC (including other entities whose financial statements or financial information are required to be or are included in a filing).
  2. It is required by the Securities Exchange Act of 1934 (the Act), as amended, or rules or regulations promulgated under the Act, to file or furnish financial statements with a regulatory agency other than the SEC.
  3. It is required to file or furnish financial statements with a foreign or domestic regulatory agency in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer.
  4. It has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market.
  5. It has one or more securities that are not subject to contractual restrictions on transfer, and it is required by law, contract, or regulation to prepare U.S. GAAP financial statements (including notes) and make them publicly available on a periodic basis (for example, interim or annual periods). An entity must meet both of these conditions to meet this criterion.
An entity may meet the definition of a public business entity solely because its financial statements or financial information is included in another entity’s filing with the SEC. In that case, the entity is only a public business entity for purposes of financial statements that are filed or furnished with the SEC.

Question BCG 9-31 considers factors a private company should evaluate when deciding whether it should adopt the goodwill alternative.
Question BCG 9-31
What factors should a private company consider before deciding whether it will adopt the goodwill alternative?
PwC response
A company should carefully consider whether it currently meets the definition of a public business entity and whether it expects to meet that definition in the future. If a company that is private today later meets the definition of a public business entity (for example, due to a public offering of the company’s securities), it will no longer be eligible to apply the goodwill alternative and will be required to retrospectively adjust its historical financial statements to apply the requirements of the existing goodwill accounting guidance.
In addition to determining whether it is eligible to adopt the goodwill alternative, a company should also assess the impact a transition to the goodwill alternative will have on its key financial metrics, particularly those affecting its debt covenant compliance. While a company’s EBITDA will not likely be impacted by adoption of the goodwill alternative, other key measures of performance such as net income, operating income, net assets and retained earnings will be affected.

Key differences between entities that adopt the goodwill alternative guidance and those that do not are summarized in Figure BCG 9-9.
Figure BCG 9-9
Key differences between entities that adopt the goodwill alternative guidance and those that do not
Entities that adopt the goodwill alternative guidance
All other entities
Amortization
Requires goodwill to be amortized on a straight-line basis over a period of ten years, or less in certain circumstances
Does not allow goodwill to be amortized
Level of testing for impairment assessment
Either entity-wide or reporting unit (policy election upon adoption of the accounting alternative)
Reporting unit
Frequency of impairment assessment
Upon occurrence of a triggering event
At least annually, and between annual tests whenever a triggering event occurs
Measurement of impairment
Single step test, which compares the fair value of the entity (or reporting unit) to its carrying amount
Two-step test prior to the adoption of ASU 2017-04: In the first step, the fair value of each reporting unit is compared to its carrying amount. If the fair value of the reporting unit is less than its carrying amount, a second step is used to measure any impairment. This second step requires the preparation of a hypothetical purchase price allocation to determine the implied fair value of goodwill. The impairment, if any, is the amount by which the carrying amount of the reporting unit’s goodwill exceeds its implied fair value
Allocation of impairment
Impairment charge allocated to separate amortizable units of goodwill using either a pro rata allocation based on relative carrying amounts of goodwill or another reasonable and rational basis
Impairment charge allocated at the reporting unit level
Disposal of business that constitutes a portion of an entity (or reporting unit)
Goodwill attributed to disposed business using a reasonable and rational approach
Goodwill attributed based on the relative fair value of the business disposed of to the portion of the reporting unit being retained

9.11.1 Amortization of goodwill (private companies/NFPs)

If elected, a company may amortize goodwill on a straight-line basis over ten years, or less than ten years if the company demonstrates that another useful life is more appropriate in accordance with ASC 350-20-35-63. The amortization guidance applies to existing goodwill, whether it resulted from a business combination or application of fresh-start reporting, at the adoption date as well as any new goodwill arising subsequent to adoption.
Upon adoption, a company should assign a useful life to its existing amortizable units of goodwill as of the beginning of the period of adoption and begin amortizing the goodwill on a straight-line basis from the beginning of the period. Assigning a remaining useful life of ten years to all existing goodwill on the adoption date, unless a shorter useful life is more appropriate, is intended to simplify the accounting. In no circumstances is a company permitted to assign a useful life in excess of ten years to its goodwill.

9.11.2 Amortization of goodwill after adoption (private companies/NFPs)

A company should assign a useful life to new goodwill arising after initial adoption on an acquisition-by-acquisition basis, thus creating separate amortizable units of goodwill. A useful life of ten years can be assigned to a new amortizable unit of goodwill as a practical expedient. As with existing goodwill on the adoption date, a company has the option to assign a shorter useful life to a new amortizable unit of goodwill if it demonstrates that the goodwill has a shorter useful life. The determination of the useful life of goodwill should be made separately for each amortizable unit of goodwill.
A company may revise the remaining useful life of each of its amortizable units of goodwill upon the occurrence of an event or change in circumstance that could indicate a different remaining useful life is more appropriate. The cumulative amortization period of any single amortizable unit of goodwill cannot exceed ten years. Therefore, if an individual amortizable unit of goodwill is initially assigned a useful life of ten years, it may be appropriate in certain circumstances to subsequently shorten the life, but in no circumstances should the useful life be extended beyond a total life of ten years. If the estimated remaining useful life of an amortizable unit of goodwill is adjusted, the change would be treated as a change in accounting estimate, and thus applied on a prospective basis from the date the useful life is adjusted in accordance with ASC 350-20-35-64.

9.11.3 Goodwill impairment model (private companies/NFPs)

The goodwill alternative simplifies many aspects of the goodwill impairment model for private companies/NFP entities by changing the level at which the impairment assessment is performed, when the test is performed, and how an impairment charge is calculated. The goodwill alternative does not change the order in which goodwill is assessed for impairment. The order of impairment testing is described in PPE 5.2.2 and PPE 5.3.2.

9.11.4 Level to test goodwill for impairment (private companies/NFPs)

Goodwill may be assessed for impairment at the entity-wide level or at the reporting unit level. The level at which to test goodwill for impairment is a policy election that is required to be made on the date the goodwill alternative is adopted. If a company elects to assess goodwill for impairment at the reporting unit level, it will continue to follow the existing goodwill model to determine its reporting units, assign assets and liabilities to its reporting units, and attribute goodwill to its reporting units. See BCG 9.2, BCG 9.3 and BCG 9.4 for more information about these topics. If a company elects to assess goodwill for impairment at the entity-wide level, a determination of the company’s reporting units is not necessary.

9.11.5 Frequency of goodwill impairment testing (private companies/NFPs)

The impairment assessment is a trigger-based assessment, whereby a company is only required to test goodwill for impairment if an event occurs or circumstances change that indicate that the fair value of the entity may be below its carrying amount or the fair value of a reporting unit may be below its carrying amount depending on the level at which the test is performed based on the accounting policy adopted. A company is no longer required to assess goodwill for impairment on an annual basis.
The goodwill alternative does not change the examples of events and circumstances, identified in BCG 9.6, that indicate that the fair value of the entity (or reporting unit) may be below its carrying amount. However, those examples are not meant to be all-inclusive. As part of its analysis of potential triggering events, a company should consider other factors that could impact the fair value of the entity (or reporting unit), the extent to which each of the identified adverse events or circumstances impact the entity’s (or reporting unit’s) fair value, the presence of any positive or mitigating factors that impact fair value, and, if applicable, the results of any recent fair value calculations in accordance with ASC 350-20-35-68.

9.11.6 Goodwill impairment test (private companies/NFPs)

Based on the occurrence of an event or a change in circumstances, a company is permitted to first assess qualitative factors to determine whether it is more likely than not that the fair value of the entity (or the reporting unit) is less than its carrying amount, including goodwill. The qualitative assessment, commonly referred to as “step zero,” applied in the goodwill alternative is the same as the qualitative assessment. See BCG 9.6 for a discussion of how to apply the qualitative impairment test. An entity is also permitted to bypass the qualitative assessment and proceed directly to the quantitative test. If a company elects to bypass the qualitative assessment, or, after performing the qualitative assessment concludes that it is more likely than not that the fair value of the entity (or reporting unit) is less than its carrying amount, it should proceed to a quantitative impairment test.
Similar to step one for public business entities, a company should compare the fair value of the entity (or reporting unit) to its carrying amount, which includes goodwill. If the fair value exceeds the carrying value, no impairment loss exists. If the fair value is less than the carrying amount, a goodwill impairment loss is measured and recorded.
Consistent with the goodwill impairment guidance for public business entities, when determining the fair value of the entity (or reporting unit), a company will need to determine whether the entity (or reporting unit) would be bought or sold in a taxable or nontaxable transaction. However, when performing the single step impairment test, a company should include its deferred income taxes in the carrying amount of the entity (or reporting unit), regardless of how the fair value of the entity (or reporting unit) is determined (i.e., whether the entity (reporting unit) would be bought or sold in a taxable or nontaxable transaction) in accordance with ASC 350-20-35-76.

9.11.7 Measurement of an impairment loss (private companies/NFPs)

A goodwill impairment loss is measured as the amount by which the carrying amount of the entity (or reporting unit) exceeds its fair value. However, the impairment loss cannot exceed the entity’s (or reporting unit’s) carrying amount of goodwill in accordance with ASC 350-20-35-73.
Question BCG 9-32 clarifies goodwill attribution when a company elects to continue to assess goodwill for impairment at the reporting unit level and measures an impairment loss that exceeds the carrying amount of that reporting unit’s goodwill.
Question BCG 9-32
A company elects to continue to assess goodwill for impairment at the reporting unit level and measures an impairment loss in one reporting unit that exceeds the carrying amount of that reporting unit’s goodwill. Should the company attribute the excess amount to the goodwill in its other reporting units?
PwC response
No. For a company that assesses for impairment at the reporting unit level, the measurement of any impairment loss is limited to the carrying amount of goodwill in that reporting unit. Therefore, if the calculated impairment loss for any single reporting unit is greater than the carrying amount of the reporting unit’s goodwill, the company should not attribute the remaining difference to its other reporting units. Separately, the company should assess its long-lived assets for impairment before assessing goodwill for impairment.

Example BCG 9-30 demonstrates measurement of an impairment loss under the goodwill alternative.
EXAMPLE BCG 9-30
Measurement of an impairment loss under the goodwill accounting alternative
Company A has elected to assess its goodwill for impairment at the entity-wide level. During 20x1, Company A experiences a decline in its consolidated earnings and operating cash flows, and on June 30, 20x1, concludes that it is more likely than not that the fair value of the entity has fallen below its carrying amount. Before assessing its goodwill for impairment, Company A assessed its long-lived assets and determined there were no impairments. On June 30, 20X1, the carrying amount of Company A’s consolidated net assets is $950, which includes goodwill of $200.
How would Company A measure and record an impairment loss?
Analysis
Company A is required to assess its goodwill for impairment on June 30, 20x1, the date it has determined that the fair value of the entity may be below its carrying amount. On that date, Company A should determine the fair value of the consolidated entity using the same measurement principles described in ASC 350-20-35-22 through ASC 350-20-35-27 (i.e., the guidance for determining the fair value of a reporting unit). Company A concludes that its fair value is $800. Therefore, Company A’s carrying amount exceeds its fair value by $150. Company A should recognize a goodwill impairment loss of $150, thus reducing the carrying amount of its goodwill to $50.
Alternatively, if the carrying amount of Company A’s goodwill was $100 on June 30, 20x1, the impairment loss would be limited to $100 because the total impairment loss cannot exceed the carrying amount of goodwill.

ASU 2017-04 amends ASC 350-20-35-73 to require a private company/NFP entity following the goodwill alternative accounting to consider the income tax effect from any tax-deductible goodwill on the carrying amount of the entity (or the reporting unit) when measuring the goodwill impairment loss. See BCG 9.9.6.
Question BCG 9-33 considers how a company with a negative carrying amount at the entity (or reporting unit) level should measure a goodwill impairment loss.
Question BCG 9-33
How should a company with a negative carrying amount at the entity (or reporting unit) level measure a goodwill impairment loss?
PwC response
The goodwill alternative does not specifically address how a company should test goodwill for impairment when the goodwill resides within a reporting unit with a negative carrying amount or when the goodwill is being tested for impairment at the entity-wide level and the entity has a negative carrying amount. For areas not addressed in the goodwill alternative, an entity should continue to follow the applicable requirements of the existing goodwill accounting and reporting model in accordance with ASC 350-20-05-6. Therefore, it would appear that in these circumstances, the guidance in ASC 350-20-35-8A should be followed. See BCG 9.6.5 for more discussion of the impairment test for entities (or reporting units) with zero or negative carrying amounts prior to the adoption of ASU 2017-04. See BCG 9.8.1.3 for the accounting for reporting units with zero or negative carrying amounts subsequent to the adoption of ASU 2017-04.
Private companies that have elected the goodwill alternative but not the PCC alternative to subsume certain intangible assets into goodwill (ASU 2014-08) have a one-time election to adopt ASU 2017-04. The accounting policy change from amortizing goodwill to testing goodwill for impairment under the revised guidance would be made prospectively without having to justify preferability. This is a one-time accommodation provided by the FASB in order to make it easier for certain private companies to change from the goodwill alternative to the revised guidance.
Private companies that have elected both the goodwill alternative and the PCC alternative to subsume certain intangibles into goodwill can only adopt the revised guidance retrospectively in accordance with ASC 250-10-45-5 through ASC 250-10-45-8 after they have justified that it is preferable to change the accounting policy.

9.11.8 Allocation of a goodwill impairment loss (private companies/NFPs)

A company should allocate a goodwill impairment loss to individual amortizable units of goodwill of the entity if it tests for goodwill impairment at the entity-wide level, or to amortizable units of goodwill within the impaired reporting unit if it tests for goodwill impairment at the reporting unit level. Therefore, the level at which a company assesses its goodwill for impairment will determine how a goodwill impairment charge is allocated to the separate amortizable units of goodwill. A company is permitted to allocate the impairment loss on a pro rata basis using the relative carrying amounts of its separate amortizable units of goodwill. While a company may allocate the impairment loss using another reasonable and rational basis, entities generally should use the pro rata allocation method unless there is clear evidence supporting a specific identification of the impairment loss to one or more amortizable units of goodwill.
After the goodwill impairment charge is allocated to individual amortizable units of goodwill, the adjusted carrying amounts of the individual units should be amortized over their respective remaining useful lives in accordance with ASC 350-20-35-78.
Example BCG 9-31 demonstrates the allocation of a goodwill impairment loss to amortizable units of goodwill.
EXAMPLE BCG 9-31
Allocating an impairment loss to amortizable units of goodwill on a pro rata basis
Company A assesses goodwill for impairment at the entity-wide level. Upon a triggering event in 20x3, Company A performs the goodwill impairment test and determines that it has a goodwill impairment loss of $100 that it needs to allocate to its three amortizable units of goodwill.
Goodwill origin
Goodwill carrying amount before impairment loss
Remaining useful life at impairment test date
Unit 1
Existing goodwill on adoption date
$300
5 years
Unit 2
20x1 acquisition
$150
8 years
Unit 3
20x2 acquisition
$50
9 years
Total
$500
View table
Company A determines that the impairment loss will be allocated to its three amortizable units of goodwill on a pro rata basis using their relative carrying amounts.
How should Company A allocate the impairment loss to each unit?
Analysis
Unit 1’s goodwill represents 60% of the total ($300 / $500). Unit 2’s goodwill represents 30% of the total ($150 / $500). Unit 3’s goodwill represents 10% of the total ($50 / $500). Using a pro rata allocation, Company A should allocate 60% of the impairment loss ($60) to Unit 1, 30% ($30) to Unit 2, and 10% ($10) to Unit 3. The allocation of the impairment loss will impact the amount of amortization expense that will be recognized in each future period.

9.11.9 Disposal considerations (private companies/NFPs)

When a company disposes of a business that is part of an entity (or reporting unit), the goodwill associated with that business should be included in the carrying amount of the business in determining the gain or loss on disposal in accordance with ASC 350-20-40-9.
The amount of goodwill to attribute to a disposed business should be determined using a reasonable and rational approach. A relative fair value approach would generally be considered a reasonable and rational approach. Other approaches may be considered reasonable and rational, depending on a company’s specific facts and circumstances.
Under the existing guidance, the amount of goodwill to attributed to the business to be disposed of is determined based on the relative fair values of (1) the business being sold and (2) the portion of the reporting unit that will be retained unless the business to be disposed of was never integrated into the reporting unit (see BCG 9.10). In most cases it is difficult to establish that the benefits of the acquired goodwill were never realized by the rest of the reporting unit. Therefore, the relative fair value approach generally will be the most appropriate method of attributing goodwill to a disposed business for companies adopting the goodwill alternative.

9.11.10 Goodwill presentation and disclosures (private companies/NFPs)

ASC 350-20-45 and ASC 350-20-50 describe the presentation and disclosure requirements under the goodwill alternative, which are generally consistent with the disclosures required under the existing goodwill model. Key differences include the removal of the requirement for a company to disclose a tabular reconciliation of the beginning balance, ending balance, and activity in the goodwill balance from period to period and the addition of requirement to disclose the weighted-average amortization period of goodwill.

ASC 350-20-45-5

The aggregate amount of goodwill net of accumulated amortization and impairment shall be presented as a separate line item in the statement of financial position.

ASC 350-20-45-6

The amortization and aggregate amount of impairment of goodwill shall be presented in income statement or statement of activities line items within continuing operations (or similar caption) unless the amortization or a goodwill impairment loss is associated with a discontinued operation.

ASC 350-20-45-7

The amortization and impairment of goodwill associated with a discontinued operation shall be included (on a net-of-tax basis) within the results of discontinued operations.

ASC 350-20-50-4

The following information shall be disclosed in the notes to financial statements for any additions to goodwill in each period for which a statement of financial position is presented:
a. The amount assigned to goodwill in total and by major business combination, by major acquisition by a not-for-profit entity, or by reorganization event resulting in fresh-start reporting
b. The weighted-average amortization period in total and the amortization period by major business combination, by major acquisition by a not-for-profit entity, or by reorganization event resulting in fresh-start reporting.

ASC 350-20-50-5

The following information shall be disclosed in the financial statements or the notes to the financial statements for each period for which a statement of financial position is presented:
a. The gross carrying amounts of goodwill, accumulated amortization, and accumulated impairment loss
b. The aggregate amortization expense for the period
c. Goodwill included in a disposal group classified as held for sale in accordance with paragraph 360-10-45-9 and goodwill derecognized during the period without having previously been reported in a disposal group classified as held for sale.

ASC 350-20-50-6

For each goodwill impairment loss recognized, the following information shall be disclosed in the notes to the financial statements that include the period in which the impairment loss is recognized:
a. A description of the facts and circumstances leading to the impairment
b. The amount of the impairment loss and the method of determining the fair value of the entity or the reporting unit (whether based on prices of comparable businesses or nonprofit activities, a present value or other valuation technique, or a combination of those methods)
c. The caption in the income statement or statement of activities in which the impairment loss is included
d. The method of allocating the impairment loss to the individual amortizable units of goodwill.

ASC 350-20-50-7

The quantitative disclosures about significant unobservable inputs used in fair value measurements categorized within Level 3 of the fair value hierarchy required by paragraph 820-10-50-2(bbb) are not required for fair value measurements related to the financial accounting and reporting for goodwill after its initial recognition in a business combination or an acquisition by a not-for-profit entity.

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