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20.5 Post-acquisition accounting for goodwill
Publication date: 19 Jan 2024
us Utilities guide
Goodwill often results from a business combination. ASC 980 specifically addresses the accounting for goodwill by a regulated utility.
Topic 350 states that goodwill shall not be amortized and shall be tested for impairment in accordance with that Subtopic. For rate-making purposes, a regulator may permit an entity to amortize purchased goodwill over a specified period. In other cases, a regulator may direct an entity not to amortize goodwill or to write off goodwill.
If the regulator permits all or a portion of goodwill to be amortized over a specific time period as an allowable cost for rate-making purposes, the regulator’s action provides reasonable assurance of the existence of a regulatory asset (see paragraph 980-340-25-1). That regulatory asset would then be amortized for financial reporting purposes over the period during which it will be allowed for rate-making purposes. Otherwise, goodwill shall not be amortized and shall be accounted for in accordance with Topic 350.
If a regulator allows rate recovery of any amount that would otherwise be recorded as goodwill, consistent with this guidance, such amount should be accounted for and recorded as a regulatory asset. Subsequent measurement of the goodwill-related regulatory asset should follow the guidance in ASC 980-350. For example, if the regulator subsequently disallows the goodwill, or the regulated utility ceases to apply ASC 980, the regulatory asset should be written off.
Separately, it should be noted that ASC 740-10-25-3(d) only exempts nondeductible goodwill amortization from deferred income tax accounting. Deferred income taxes should be recognized for goodwill that is being accounted for as a regulatory asset and amortized.
Question UP 20-4
Goodwill that is allowable for rate-making purposes is not an incurred cost. Why is it accounted for and recorded as a regulatory asset?
Goodwill that is allowable for rate-making purposes is not an incurred cost. Why is it accounted for and recorded as a regulatory asset?
PwC response
Although goodwill is not an incurred cost, ASC 980-350-35-2 specifically states that if goodwill is allowed for rate-making purposes, it should be accounted for as a regulatory asset. The FASB intended that a goodwill-related regulatory asset should be reported and accounted for in the same manner as other regulatory assets. Therefore, goodwill allowed for rate-making purposes should be classified on the balance sheet as a regulatory asset and amortized over the rate-recovery period. Further, subsequent measurement should follow the overall guidance for regulatory assets in ASC 980.
20.5.1 Goodwill impairment
Notwithstanding the guidance provided by ASC 980-350-35-1 and 35-2, regulated utilities are generally not provided with rate recovery of goodwill arising in a business combination. As such, a question may arise as to whether any goodwill recorded in the acquisition is automatically impaired under ASC 350. Impairment of goodwill should be evaluated by each reporting entity based on its specific facts and circumstances. However, in general, we believe that the lack of specific rate recovery does not result in automatic impairment of goodwill, because the goodwill did not arise from a specific regulatory recovery mechanism but rather relates to the economic prospects for the acquiree and other factors.
To test goodwill for impairment, a reporting entity should follow the guidance in ASC 350. ASC 350 requires that an entity assign its goodwill to reporting units and test each reporting unit’s goodwill for impairment at least on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The fair value of the reporting unit may differ from its regulated value (amount allowed for recovery by the regulator). Factors that may contribute to the difference between the two values include the regulated utility’s regulated return as compared to the return provided by the market, operating synergies, the value of unregulated assets and operations, and the value of other intangible assets.
See BCG 9.2 and BCG 9.3 and 9.4 for further discussion of the identification of reporting units and the allocation of goodwill to those reporting units. See BCG 9.9.4.3 and BCG 9.9.4.4 for further discussion of impairment testing of goodwill for separate subsidiary financial statements.
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