Assessing goodwill for impairment became more challenging during the COVID-19 pandemic because of significant changes in business operations and overall economic uncertainty. Considering goodwill impairment triggering events between reporting dates in this environment was very difficult for companies already struggling with employees working remotely and keeping daily business activities going. Because impairment indicators that arise during a reporting period could change by the end of that reporting period, performing a goodwill impairment evaluation and potentially recording an impairment charge on the date that a triggering event occurs may not always provide the most useful information for users of financial information.
In March 2021, FASB issued Accounting Standards Update (ASU) No. 2021-03, Intangibles — Goodwill and Other (Topic 350): Accounting Alternative for Evaluating Triggering Events, which provides private companies and not-for-profit entities with an accounting alternative to evaluate goodwill triggering events as of the end of the reporting period. (See the sidebar, "ASU 2021-03 Provisions.") A triggering event is an event or change in circumstances that indicates the fair value of the entity (or the reporting unit) may be below its carrying amount. The intent of this accounting alternative is to reduce the cost and complexity of the evaluation and provide users of financial statements with more relevant information.
WHAT DOES ASU 2021-03 CHANGE?
Under the accounting alternative in ASU 2021-03, private companies and not-for-profit entities can elect to evaluate goodwill impairment triggering events as required in FASB ASC Subtopic 350-20 only at the end of each reporting period (whether interim or annual) instead of monitoring for triggering events and potentially measuring any related impairment between reporting dates.
"ASU 2021-03 allows eligible companies to elect to evaluate whether a triggering event has occurred at a reporting date as opposed to evaluating whether one occurred during any point in a reporting period," said Graham Dyer, CPA, a partner in the accounting principles group at Grant Thornton LLP in Chicago. "That is a big simplification because a complication when applying existing goodwill impairment guidance for a lot of private companies and not-for-profit entities is they may not consider whether triggering events occurred during the year until their auditors ask them at year end to consider whether anything happened during the year and do a retrospective review."
"For private companies issuing quarterly GAAP financial statements, this alternative is not going to help them too much, but those issuing only annual financial statements may be able to defer the impairment test until the year-end date," said Mike Cheng, CPA, partner at Frazier & Deeter in Atlanta.
COVID-19 AND GOODWILL IMPAIRMENT
"There's a good chance many companies experienced a triggering event during 2020 because of the pandemic," Cheng said.
By choosing the accounting alternative for evaluating triggering events, entities that suffered short-term negative impacts from the pandemic in interim periods that subsequently reversed would potentially not have to record goodwill impairment.
Cheng shared this example from Del Taco Restaurants, a public company that could not take advantage of the ASU 2021-03 alternative but whose experience was shared by many private companies. "Due to COVID-19, for their first quarter ended March 24, 2020, same-store sales were down 27%, their stock price was down about 68%, and they recorded an $87 million goodwill impairment charge," he said. "In the second quarter, same-store sales were flat year over year and franchise sales were up, and by September, their stock price was up 13% from December 31, 2019. If this were a private company, financial statement users and investors could be confused by a large goodwill impairment despite the fact the company is performing well by the end of the year."
Cheng also shared the similar experience of Aaron's Company Inc. in Atlanta, which sells and leases furniture, home electronics, and appliances in stores and online. "They determined the need for a goodwill impairment test was triggered because they experienced a significant decline in stock price and market capitalization in March 2020, concluded goodwill was fully impaired, and recorded a $447 million impairment charge in the first quarter of 2020," he said. "But second quarter results exceeded expectations, and the third quarter had record levels of revenues and earnings."
In Cheng's experience, industries that could benefit from the accounting alternative were those that were client-facing and negatively affected by the pandemic but then made changes to rebound and become stronger. These included restaurants that were hurt by fewer dine-in customers but moved to delivery or outdoor dining to grow revenues. "Not as obvious were manufacturers and suppliers to companies that were initially hurt but then did very well, like Zoom or Amazon, software service arrangements, and web-based businesses," he said.
Dyer added: "Grocery stores, residential real estate, and medical service and equipment providers all experienced difficulties at the beginning of the pandemic but then rebounded and even had a banner year in 2020 because of changes in demand, price increases, or government assistance."
GOODWILL AMORTIZATION ELECTION
The alternative in ASU 2021-03 can be elected in addition to the accounting alternative for amortizing goodwill under FASB ASC Subtopic 350-20. "Companies amortizing goodwill over 10 years or less have a lower net book value, so there is a significantly diminished risk of impairment resulting from the carrying value of the entity (or reporting unit) exceeding its fair value," Cheng said.
"A lot of our private company clients electing ASU 2021-03's alternative are also electing the goodwill amortization alternative, which lets them test goodwill on an entitywide basis rather than at the reporting unit level," Dyer said. "This also makes impairment less likely because you are not limited to looking at the fair value of each reporting unit that has goodwill but are considering the fair value of the entity as a whole."
EXPECTATIONS FOR THE FUTURE
Many companies are still struggling and may be faced with goodwill impairment triggers. "Some are getting hit hard by supply chain shortages, which can negatively impact their sales or ability to obtain financing, while others are raising their prices to pass on the higher costs," Cheng said.
"Although there was a big dip in markets in March 2020, 2020 and 2021 were great years for many companies from a fair value perspective, and there are many companies that are worth more now," Cheng said. "I think of the market like a body of water with boats, and some companies are mega yachts and others are canoes. As the tide rises, most everybody rises."
"As private companies are now in their 2021 year-end reporting season, my sense is that 2021 was not as economically disruptive for our clients as 2020 was," Dyer said. "This standard can be useful any time there is economic disruption, especially if it happens earlier in a reporting period and there is time for recovery. Companies can make an election to initially adopt it in 2022 for 2021 reporting without any preferability assessment, and there is very little downside to electing it."
ASU 2021-03 provisions
- FASB Accounting Standards Update (ASU) No. 2021-03 is effective on a prospective basis for fiscal years beginning after Dec. 15, 2019.
- Entities also have an unconditional one-time option to adopt this accounting alternative prospectively after the ASU 2021-03 effective date without assessing the preferability of making the change under FASB ASC Topic 250, Accounting Changes and Error Corrections.
- If ASU 2021-03 provisions are adopted after its original effective date, they should be applied prospectively as of the beginning of the first reporting period when the accounting alternative is elected.
- 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. An entity should not retroactively adopt ASU 2021-03 for interim financial statements already issued in the year of adoption.
- FASB maintained the requirement that goodwill impairment is not reversible.
- The accounting alternative for a goodwill impairment triggering event evaluation can be elected even if the entity has elected the accounting alternative for amortizing goodwill.
- The only additional disclosure requirement is disclosure of the election of the alternative as a significant accounting policy.
- As this is a private company alternative, any companies contemplating an initial public offering or being acquired in a special-purpose acquisition company transaction would have to retrospectively unwind the accounting, which would mean going back to periods when triggering event assessments were made only at period end and evaluating (without hindsight) whether there were triggering events during the reporting periods, including interim reporting periods, that would have resulted in a goodwill impairment and, if so, measuring that impairment.
- Goodwill impairment guidance for public business entities is not changed. However, FASB has a separate project underway focused on wider improvements to subsequent accounting for goodwill and intangible assets for all entities, including public companies. The board has tentatively determined to require all entities to amortize goodwill on a straight-line basis, generally over a 10-year period. This project may also result in potential changes to the existing goodwill impairment model. Please refer to the FASB website for the latest developments on this project.
- This accounting alternative is applicable only to goodwill and does not change the existing requirements for impairment assessments of other assets (for example, indefinite-lived intangibles and long-lived assets). However, as discussed in the preceding bullet, FASB has a separate project underway that may affect subsequent accounting for intangible assets.
About the author
— Maria L. Murphy, CPA, is a senior content management analyst, Accounting & Auditing Products for Wolters Kluwer Tax & Accounting North America and a freelance writer based in North Carolina. To comment on this article or to suggest an idea for another article, contact Neil Amato at Neil.Amato@aicpa-cima.com.
"FASB Provides Goodwill Triggering Relief for Private Companies, Not-for-Profits," JofA, March 30, 2021
"Assessing Goodwill Impairment Amid COVID-19," JofA, March 2, 2021
"FASB Approves Private Company and NFP Goodwill Triggering Event Alternative," JofA, Feb. 10, 2021
This guide provides practical guidance and illustrations related to the qualitative assessment and the quantitative goodwill impairment test (previously referred to as the first step of the two-step goodwill impairment test).
This course illustrates the application of a goodwill impairment test before and after application of guidance from ASU No. 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This course also includes a real-life disclosure that reflects the application of ASU 2017-04.
A review of accounting for intangible assets and the history of accounting for goodwill, this CPE course addresses the common risks, internal controls, and auditing procedures for intangible assets and goodwill.
For more information or to make a purchase, go to aicpa.org/cpe-learning or call the Institute at 888-777-7077.