The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2021-03, Accounting Alternative for Evaluating Triggering Events.
The ASU responds to concerns raised about the cost and complexity of private companies evaluating triggering events during the reporting period and provides an accounting alternative that allows certain entities to evaluate goodwill impairment triggering events as of the end of the reporting period—whether the reporting period is an interim or annual period.
The accounting alternative applies to private companies and not-for-profit entities.
Under current generally accepted accounting principles (GAAP), entities are required to monitor and evaluate goodwill impairment triggering events throughout the year. Goodwill must be tested for impairment when a triggering event occurs that indicates it’s more likely than not that the fair value of a reporting unit—or entity if such has been elected under the accounting alternative for amortizing goodwill—is less than its carrying value.
The triggering event analysis and resulting goodwill impairment test are required to be performed on the date the triggering event occurs without the use of hindsight or known changes to facts and circumstances after the triggering event date.
The accounting alternative is intended to address concerns raised about the whether the value and usefulness of evaluating a triggering event and potentially measuring a goodwill impairment during the reporting period for certain entities outweighs the cost and complexity of doing so between reporting periods rather than at the end of an interim or annual reporting period.
These concerns have become more apparent due to economic uncertainty related to the COVID-19 pandemic. The accounting alternative will be available on a permanent basis, however, and isn’t limited to the effects of the COVID-19 pandemic.
The accounting alternative provides private companies and not-for-profit entities with an option to perform the identification and evaluation of a triggering event for goodwill impairment as of the end of each reporting period—whether it’s an interim or annual period.
Entities that elect this alternative wouldn’t be required to monitor for goodwill impairment triggering events during a reporting period and would instead evaluate the facts and circumstances as of the end of each reporting period to determine whether a triggering event exists and if so, whether it’s more likely than not that goodwill is impaired.
Entities that only report annually would evaluate the facts and circumstances as of the annual reporting date. In comparison, entities that report on both an interim basis and an annual basis would evaluate the facts and circumstances as of the end of each interim and annual reporting period.
Many private companies report on an interim basis certain GAAP-based financial information to lenders or others outside of management, including owners and their board of directors. When such reporting includes goodwill, or accounts that would be affected by a goodwill impairment, the entity must evaluate whether goodwill triggering events are present as of those interim reporting period ends.
Entities may apply this accounting alternative either separately from or with the existing accounting alternative for amortizing goodwill.
The accounting alternative is available to private companies and not-for-profit entities.
The accounting alternative is limited to goodwill that’s tested for impairment in accordance with Subtopic 350-20, Goodwill. It doesn’t apply to equity-method goodwill.
Entities are prohibited from analogizing to the accounting alternative for long-lived assets and other indefinite lived intangible assets.
The accounting alternative is effective on a prospective basis for fiscal years beginning after December 15, 2019. Early adoption is allowed for entities’ interim and annual financial statements that haven’t yet issued financial statements or made their financial statements available to be issued as of March 30, 2021.
Entities aren’t permitted to apply the accounting alternative retroactively to interim or annual periods for which financial statements have already been issued or made available for issuance.
The amendments include an unconditional one-time option for entities to adopt the accounting alternative prospectively after its effective date without assessing preferability under ASC 250, Accounting Changes and Error Corrections.
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